Production, Productivity & Efficiency (Edexcel A Level Business): Revision Note

Methods of production

• Production is the transformation of resources (e.g. raw materials, components and processes) into finished goods or services

  • Goods are physical products, such as bicycles and T-shirts

  • Services are non-physical items, such as hairdressing, tourism and manicures

• Businesses can organise their production processes in a variety of ways

The main methods of production

• The method of production used by a business will depend on a number of factors, including:

  • The level of output required to be produced

  • The nature of the product

  • Whether the product is standardised or customised

  • The level of automation used in production

Job production

• Producing one item at a time, as ordered by the customer

  • Advantages

    • High-quality product

    • Motivated and highly skilled workers

    • Customised products can be produced

  • Disadvantages

    • Production is slow

    • Labour costs are high

Batch production

• Groups of the same product are produced before moving on to a group of different products

  • Advantages

    • Workers can specialise

    • Production can take place as the previous batch starts running out

  • Disadvantages

    • Requires careful coordination to avoid shortages

    • Money is tied up in stock, as completed products need to be stored

Flow production

• Continuous manufacturing of standardised products, usually on a production line

  • Advantages

    • Low unit costs due to economies of scale

    • Rapid production

    • Usually highly automated (capital-intensive)

  • Disadvantages

    • Customisation is difficult

    • Capital equipment can be expensive to purchase

Cell production

• This involves workers being organised into multi-skilled teams, with each team responsible for a particular part of the production process

  • Advantages

    • Cell production is often more efficient than other methods, as workers share their skills and expertise

    • Motivation is usually high, as employees work as a team

  • Disadvantages

    • Requires extensive reorganisation of production processes

    • Teams' efficiency may be reduced by weaker workers

Calculating productivity

• Productivity is the output per input (person or machine) per hour (e.g. an IKEA worker is able to produce two Poāng chairs per hour)

  • This is not production, which is the total amount of output produced in a time period (e.g. IKEA produced 300 Poāng chairs in February)

Labour productivity

• The labour productivity of a business is a measure of the output per worker during a specified period of time

• Labour productivity is calculated using the formula

Capital productivity

• Capital productivity is a measure of the output of capital employed (e.g. machinery) during a specified period of time

• Capital productivity is calculated using the formula

Factors that influence productivity

• The productivity within a business can often be improved

• When productivity increases, business costs decrease

• When business costs decrease, the firm can either pass on this decrease to consumers in the form of lower prices or maintain the selling prices and enjoy higher profit margins

Factors that influence productivity

The link between productivity and competitiveness

• Competitiveness refers to the ability of a business to maintain or grow its sales and market share, given the presence and actions of rivals

• Businesses that increase their level of productivity (e.g. of workers or capital equipment) are likely to be more competitive

Productivity and competitiveness

• Businesses that are competitive are likely to have the financial resources required to continue investing in improvements to their productivity

Understanding efficiency

• Efficiency refers to the ability of a business to use its production resources as cost-effectively as possible

  • Efficiency is often measured in terms of the average cost per unit

  • The average cost per unit is calculated using the formula

• Maximum efficiency is achieved when the cost per unit is at its lowest

Diagram showing maximum efficiency

• The average cost curve shows that the most efficient level of production is achieved when:

  • Economies of scale are maximised

  • Total costs are spread across an optimum level of output

  • Diseconomies of scale are minimised

Factors that influence efficiency

Factors that can influence business efficiency

Capital-intensive and labour-intensive production

• Labour-intensive production predominantly uses physical labour in the production of goods/services

  • The delivery of services is usually more labour-intensive than manufacturing

  • In countries where labour costs are low (e.g. Bangladesh), labour-intensive production is common

  • Small-scale production is likely to be labour-intensive

  • For example, UK schools are labour-intensive operations, as teachers plan and deliver lessons and provide pastoral support

• Capital-intensive production predominantly uses machinery and technology in the production of goods and services

  • Large-scale production of standardised products is likely to be capital-intensive

  • Manufacturing in developed countries, where labour costs are relatively high, is likely to be capital-intensive

  • For example, automotive manufacturers such as Ford use robots and other production technology to manufacture vehicles, with supervisors overseeing the quality of output

Evaluation of labour-intensive and capital-intensive production