2 Production

Production
Copyright 2002 by Harcourt, Inc. All rights reserved.
Definition of production
Production takes place when

resources such as raw materials or
components, are changed into
products.
It refers to those activities that bring
a product into being.
PhotoDisc
Production Function
States the relationship between inputs and outputs

Inputs the factors of production classified as:
Land all natural resources of the earth not just solid earth!
Price paid to acquire land = Rent
Labour all physical and mental human effort involved in

production
Price paid to labour = Wages
Capital buildings, machinery and equipment

not used for its own sake but for the contributioit makes to
production
Price paid for capital = Interest
Production Function
Inputs
Land
Labour
Process
Product or
service
generated
value added
Capital
Output
Final Product /
Service
Production Function
There is a production function for every good that
shows the maximum output you can get from any
quantities of inputs. The production function is the
description of the current best technology for
making a good.
Production functions apply to firms.
E.g., Maruti Suzuki has a production function for
producing Swift. GM has a production function for
producing Chevrolets.
Production Function
Mathematical representation
of the relationship:
Q = f (K, L, La)
Output (Q) is dependent upon the amount
of capital (K), Land (L) and Labour (La)
used
Analysis of Production Function:

Short Run
In the short run at least one factor fixed in supply but all other
factors capable of being changed

Reflects ways in which firms respond to changes
in output (demand)
Can increase or decrease output using more or less of some
factors but some likely to be easier
to change than others
Increase in total capacity only possible in the long run

Short Run
In times of rising
sales (demand)
firms can increase
labour and capital
but only up to a
certain level
they will be limited
by the amount of
space. In this
example, land is
the fixed factor
which cannot be
altered in the
short run.

Short Run
If demand slows
down, the firm
can reduce its
variable factors
in this
example it
reduces its
labour and
capital but
again, land is
the factor which
stays fixed.

Short Run
If demand slows
down, the firm can
reduce its variable
factors in this
example, it
reduces its labour
and capital but
again, land is the
factor which stays
fixed.
Analysing the Production

Function: Long Run
The long run is defined as the period of time taken to vary all
factors of production
By doing this, the firm is able to increase its total capacity
not just short term capacity
Associated with a change in the scale of production
The period of time varies according to the firm
and the industry
In electricity supply, the time taken to build new capacity
could be many years; for a market stall holder, the long run
could be as little as a few weeks or months!

Long Run
In the long run, the firm can change all its factors of production thus
increasing its total capacity. In this example it has doubled its capacity.
Scales of production
One-off/Job
Batch
Mass (continuous flow)
One product not a prototype.

From two up to a few hundred thousand.
Hundreds & hundreds of thousands of products.
Characteristics of the different

scales of production
One-off/Job
Labour costs
Batch
Mass (continuous
flow)
High
Medium
Low
Low
Medium/High
High
Specialised
Specialised
High
Medium
Low
Capital
investment
Low
Medium/High
High
Labour
intensity
High
Medium
Low
Efficiency
Tools
Unit costs
General
Three methods of production

Figure:
Methods of production
Job production
Batch production
Flow production
PhotoDisc

It involves the production
Job
Jobproduction
production
of a single product at a
time.
Job production
Advantages:
Able to produce
unique orders to meet
customers individual
needs.
More likely to
motivate workers (see
end results)
Fairly simple way of
production(one a time)
Disadvantages:
Labor intensiveness
and high costs
High selling costs
Not fit for mass
production and large
demand
Job
Jobproduction
production
Batch
Batchproduction
production
This involves dividing the

work into a number of
different operations, or a
method that involves
completing one operation
at a time on all units
before performing the
next.
Batch production
Advantages:
Suitable for a wide
range of similar
products
Reducing the need for
skilled workers
More standardized
products and less
machinery needed
Disadvantages:
Higher unit costs for
small batch
Less motivated
workers for repetitive
one operation
Careful planning
needed to reduce idle
machines or worker
waiting

Job production
Batch production
Flow production
It is a method of large-scale
production of standardized
products, where each
operation on a unit is
performed continuously one
after another, usually on a
production assemble line
It often includes mass,
repetitive and process
production.
PhotoDisc
Flow production
Advantages:
Large scale production
and reduced unit costs
Highly automated and
high efficiency
Able to produce large
quantity of products
Disadvantages:
Very high investment cost
in machinery and
equipment
Limited ability to meet
unique customer needs
Repetitive operation and
less motivation
High costs with the
breakdown of machines
Factors affecting the choice of proper

production methods
The nature of the product

Different products may require a specific production method.
The size of market
A big or small market may require a different production method.
The stage of business development
A start-up firm or large established firm will use different production methods.
The current state of technology
Changes in technology result in firms using new mass production methods.

PhotoDisc
Strategic Importance of the

Production Function
Mass Productionsystem for manufacturing

products in large amounts through effective
combinations of employees with specialized
skills, mechanization, and standardization
Assembly Linemanufacturing technique that

carries the product on a conveyor system past
several workstations where workers perform
specialized tasks.
The Job of Production Managers
Inventory Control
Requires balancing the need to keep stocks on
hand to meet demand against the expenses of

carrying the inventory
Perpetual inventory: system that continuously
monitors the amounts and location of inventory
Vendor-managed inventory: system that hands
over a firms inventory control functions to
suppliers
Implementing the Production Plan
Just-in-Time Systemmanagement
philosophy aimed at improving profits and

return on investment by minimizing costs and
eliminating waste through cutting inventory on
hand.
Implementing the Production Plan
Material Requirement Planning (MRP)
computer-based production planning system by

which a firm can ensure that it has needed parts
and materials available at the right time and
place in the correct amounts.
Controlling the Production Process
Production planningdetermines the amount
of resources (including raw materials and other

components) a firm needs to produce a certain
output
Routingdetermines the sequence of work
throughout the facility and specifies who will
perform each aspect of production at what
location
Schedulingdevelopment of timetables that

specify how long each operation in the
production process takes and when workers
should perform it.
Gantt charttracks projected and actual work
progress over time

PERT (Program Evaluation and Review
Technique)chart which seeks to minimize
delays by coordinating all aspects of the
production process
Critical Pathsequence of operations that requires

the longest time for completion
Sample Gantt Chart
PERT Diagram for Building a Home

2 Production

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Production

Copyright 2002 by Harcourt, Inc. All rights reserved.

Production takes place when

Copyright 2002 by Harcourt, Inc. All rights reserved.

States the relationship between inputs and outputs

Price paid to acquire land = Rent

Labour all physical and mental human effort involved in

Price paid to labour = Wages

Capital buildings, machinery and equipment

Price paid for capital = Interest

Copyright 2002 by Harcourt, Inc. All rights reserved.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Analysis of Production Function:

factors capable of being changed

Copyright 2002 by Harcourt, Inc. All rights reserved.

Analysis of Production Function:

Copyright 2002 by Harcourt, Inc. All rights reserved.

Analysis of Production Function:

Copyright 2002 by Harcourt, Inc. All rights reserved.

Analysis of Production Function:

Copyright 2002 by Harcourt, Inc. All rights reserved.

Analysing the Production

Copyright 2002 by Harcourt, Inc. All rights reserved.

Analysis of Production Function:

Copyright 2002 by Harcourt, Inc. All rights reserved.

Mass (continuous flow)

One product not a prototype.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Characteristics of the different

Copyright 2002 by Harcourt, Inc. All rights reserved.

Three methods of production

Copyright 2002 by Harcourt, Inc. All rights reserved.

Three methods of production

Copyright 2002 by Harcourt, Inc. All rights reserved.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Three methods of production

This involves dividing the

Copyright 2002 by Harcourt, Inc. All rights reserved.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Three methods of production

Copyright 2002 by Harcourt, Inc. All rights reserved.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Factors affecting the choice of proper

The nature of the product

The size of market

A big or small market may require a different production method.

The stage of business development

The current state of technology

Changes in technology result in firms using new mass production methods.

Copyright 2002 by Harcourt, Inc. All rights reserved.

Strategic Importance of the

Mass Productionsystem for manufacturing

Assembly Linemanufacturing technique that

Copyright 2002 by Harcourt, Inc. All rights reserved.

The Job of Production Managers

Requires balancing the need to keep stocks on

hand to meet demand against the expenses of

Copyright 2002 by Harcourt, Inc. All rights reserved.

The Job of Production Managers

Implementing the Production Plan

philosophy aimed at improving profits and