Production Capacity & Efficiency

Productive Capacity Productive capacity measures how much a business can produce during a specific period of time Usually measured in production units (e.g. 1,000 cars per month) Productive capacity can change: E.g. when a machine is having maintenance, capacity is reduced Capacity is linked to labour: e.g. by working more production shifts, capacity can be increased Capacity needs to take account of seasonal or unexpected changes in demand E.g. Chocolate factories need capacity to make Easter Eggs in November and December before shipping them to shops after Christmas E.g. Ice-cream factories in the UK needed to quickly increase capacity during the heat wave of Summer 2003

Ways to Measure Productive Efficiency Productivity Measures the relationship between inputs into the production process and the resultant outputs. Examples: Output per worker or hour of labour Output per hour / day / week Output per machine Unit costs Divide total costs by the number of units produced. A falling ratio would indicate that efficiency was improving Non-productive (“idle”) resources Which resources are used by a business? Are employees often left with nothing to do? Are machines only used for part of available time? Too many idle resources are a common sign of inefficiency in production.

Productive Efficiency Lowest cost per unit at which production can take place Why is this important? A more efficient business will produce lower cost goods than competitors May generate more profit possibly at lower prices Investing in production assets (e.g. equipment, factory buildings) is expensive – a business needs to maximise the return it makes on these assets

More on Productivity What productivity means How measured An important measure of productive efficiency Describes how much input can be turned into products How measured Output per worker, sales per square metre (in a shop) or output per machine E.g. a manufacturer of fridges produces 20,000 fridges this month and has a workforce of 1,000 Productivity = 20,000 divided by 1,000 which equals 20 fridges per person per month

Ways to Improve Productivity Training Improved motivation More capital equipment Better capital equipment Better quality raw materials (reduces amount of time wasted on rejected products) Improved organisation of production (e.g. the way that materials flow through a production line might be changed to reduce wasted journeys)

Stock Levels and Efficiency Business will have a target stock level for finished goods to achieve This is calculated to satisfy demand: Expected by marketing department plans Based on what production department thinks they can produce If stock level falls below this level: Productive efficiency has reduced since output per worker has not met planned requirements

Mass Production and Poor Productivity Mass production is often associated with poor productivity – why? Mass production leads to repetition of work, which can de-motivate workers Breakdown on any part of line can mean a shutdown of whole operation, reducing number of units per hour produced

Methods of Lean Production “Lean production” has become a very popular concept in business Japanese businesses led the way – proving it was possible to produce more goods, of better quality, at lower cost, using lean production techniques Objective of lean production methods: To minimise use of any resource that does not add value to product or service E.g. operating Just-in-time production (where goods are made just in time to meet customer demand, so no stocks held) To make product right first time (not wasting time checking and re-checking)

Lean Production – Main Methods Cell production Kaizen / Quality Circles Just in time (“JIT”)

Cell Production Cell production is where work is organised into teams Teams are given responsibility of doing a part of production process as product moves through assembly line. Cell production often leads to improved productivity due to: Increased motivation (team spirit and added responsibility) Specialisation

Kaizen / Quality Circles Kaizen is a Japanese term which means Continuous Improvement A process where overall improvement and progress comes from small improvements being made all time Management and workers are focused on trying to make small adjustments, even when process/product seems to be working well Kaizen is usually implemented by creating “quality circles” – groups of employees who meet regularly to discuss ways in which production quality can be improved

Just-in-time (“JIT”) Production What is JIT? A concept of lean production first developed at Toyota JIT involves the rearrangement of plant and the re-organisation of procedures so that material required for production arrives exactly at the time it is needed Advantages Reduces costs of holding stock e.g. warehousing No money tied up in stock Disadvantages Needs suppliers and employees to be reliable May find it difficult to meet sudden increase in demand

Technology and Improved Efficiency Investment in technology is one way of improving productive efficiency Speed of production (machine can perform repetitive and complicated tasks more quickly) Increased accuracy therefore less wastage Can work longer hours However – a business needs to be happy that the improved financial returns from better efficiency justify the investment in technology

Economies of Scale What are they? A reduction in long run unit costs which arise from an increase in production Economies of scale occur when larger firms are able to lower their unit costs. This may happen for a variety of reasons A larger firm may be able to buy in bulk It may be able to organise production more efficiently It may be able to raise capital cheaper and more efficiently

Internal Economies of Scale Bulk Buying Economies As businesses grow they need to order larger quantities of production inputs (e.g. raw materials) As the order value increases, a business obtains more bargaining power with suppliers and should be able to get better prices Technical Economies Businesses with large-scale production can use more advanced machinery (or use existing machinery more efficiently); can use mass production techniques and afford to invest more in research and development Financial Economies Larger firms find it easier to find potential lenders and to raise money at lower interest rates Marketing Economies Many marketing costs are fixed costs and so as a business gets larger, it is able to spread the cost of marketing over a wider range of products and sales – cutting the average marketing cost per unit Managerial Economies As a firm grows, there is greater potential for managers to specialise in particular tasks (e.g. marketing & finance). In a small firm, many roles are performed by the same person. This can create inefficiency since they are not as expert or highly qualified in one area.

External Economies of Scale External economies of scale occur when whole industry business is in grows Main kinds are: Transport and communication links improve (Silicon Valley) Training and education becomes more focused on industry (more IT courses at college) Other industries grow to support this industry

Diseconomies of Scale When a business grows very large cost per unit can increase Mainly due to: Poor communication between different departments and along chain of command; Lack of motivation Loss of direction and co-ordination