Production Processes: Productivity & Efficiency (Cambridge (CIE) IGCSE Business): Revision Note

Labour productivity

• Production is the act of adding value to the factors of production to create goods and services e.g. using tomatoes and 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

The importance of 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

How to increase efficiency

• Increasing efficiency helps a business reduce costs, save time and improve productivity

Common ways to improve efficiency

1. Increasing automation

• Automation uses machines or robots to carry out tasks that would normally be done by humans.

  • Production is likely to be faster and safer, with fewer errors and lower long-term labour costs

  • For example, car manufacturers use robotic arms for welding and assembling.

2. Introducing technology

• Using new technology, such as computers or specialist software, can improve both manufacturing and service operations.

  • Technology often speeds up processes, reduces paperwork and improves communication and accuracy

  • For example, retailers using barcode scanners and stock management software to track inventory

3. Improving labour skills

• Training employees helps them work more efficiently and safely

  • They produce better quality work, with fewer mistakes and more quickly

  • For example, a café training staff to use a coffee machine correctly to avoid waste.

4. Lean production methods

• Lean production aims to reduce waste while keeping quality high.

  • Techniques include

    • Just-in-time (JIT), which involves holding less inventory to reduce storage costs

    • Kaizen is continuous small improvements made by employees that have an ongoing impact on operational performance

5. Better organisation of resources

• Changing the layout of a factory or office can improve workflow

  • This can save time moving between tasks or departments

  • For example, placing tools close to workers to avoid delays