The Meaning of Production (Cambridge (CIE) IGCSE Business): Revision Note

An introduction to production

• Production is the transformation of resources (e.g. raw materials, components and labour) 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

The purpose of production

• The process of transforming inputs into outputs (goods and services) adds value to the raw materials

• Competitive businesses combine these inputs of resources efficiently, making the most of the resources so as to minimise costs and generate a profit

• Operations management focuses on designing, controlling and improving the processes used in the production of goods and services

  • It involves overseeing the entire production process, from acquiring raw materials to delivering the final product/service to customers

  • Its goal is to ensure that the production process is efficient, cost-effective and meets quality standards

The difference between production and productivity

• The terms production and productivity are fundamentally different

• Production is the act of adding value to the factors of production to create goods/services e.g. using tomatoes & basil to create a soup

  • It is the process of converting the factors of production into goods/services

  • It is a measure of output e.g. 3 cans of soup

• Productivity is a measure of efficiency that calculates the amount of outputs produced per unit of input

  • It calculates how efficiently resources are being used in the creation of goods/services and aids comparison of performance e.g. after training, workers proved to be 27% more efficient in their productivity

• Labour productivity is calculated using the formula

Improving productivity 

• Productivity can often be improved so as to reduce costs

• This can be achieved by:

  • Increasing output using the same level of inputs

  • Maintain the level of output but using fewer inputs

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

• Businesses that increase their level of productivity are likely to be more competitive and are more likely to be successful in the long term 

The benefits of increased 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

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

The benefits of improved efficiency

• Businesses that are competitive usually generate more profit

• This provides the financial resources to continue investing in improvements to their productivity

Why businesses hold inventories

• Businesses hold inventories (also called stock) to support smooth operations and avoid disruptions

• Types of inventories include:

  • Raw materials—to keep production running without delays

  • Work-in-progress—partially completed goods between stages of production

  • Finished goods—ready to be sold to meet customer demand promptly

• Reasons for holding inventories include:

  • To prevent stockouts and lost sales

  • To take advantage of bulk purchasing discounts

  • To buffer against supply chain delays

  • To ensure continuous production even when delivery of materials is uncertain

• However, holding too much inventory can increase storage costs and risk of damage or obsolescence, which is why inventory levels must be carefully managed