Operations Management

Production and productivity

Every business takes in resources and turns them into something worth more than the parts. How much it makes is production; how efficiently it makes it is productivity — and the gap between the two is where profit is won or lost.

Production versus productivity

Production is the act of converting inputs — land, labour and capital — into goods and services; it is simply a measure of quantity. A bakery that makes 2,000 loaves a day has a production level of 2,000 loaves. Productivity measures how well resources are used to generate that output. The most common measure at IGCSE is labour productivity, the output produced per worker.

Worked example: a workshop of 8 machinists assembles 4,800 units in a week, so labour productivity = 4,800 ÷ 8 = 600 units per worker — a per-head figure the firm can compare against rivals or last month.

Raising efficiency

Efficiency rises when the same output is produced from fewer inputs, or more output from the same inputs. A business can increase it by investing in automation and technology, by improving labour skills through training, and by reducing idle time on machinery. Higher efficiency lowers the average cost of each unit — the direct link to the costs work below.

Lean production and inventory

Every business takes in resources and turns them into outputs; holding stock along the way is both useful and costly.

Why businesses hold inventory

Inventory (stock) is held at three stages: raw materials waiting to be used, work-in-progress part-way through production, and finished goods waiting to be sold. Businesses hold it to meet customer demand without delay, to keep production running if a delivery is late, and to buy materials in bulk at a discount. But inventory ties up cash, takes up space and can spoil — so holding too much is itself a form of waste.

Lean production

Lean production strips out that waste. Its two most examined techniques are just-in-time and Kaizen. Under JIT, materials arrive from suppliers exactly when the production line needs them, so the business holds almost no inventory and avoids storage cost. Kaizen builds improvement into daily work: workers continually suggest small refinements that, added together, cut waste and raise quality over time. The benefits of lean production are lower costs, less waste, freed-up space and faster response to demand.

Methods of production

How a business organises production depends on what it sells and how much of it. The three methods form a scale from one-off craft work to continuous mass output.

Choosing a method

Job production suits unique, high-value work — a tailored suit, a wedding cake, a bridge. It allows full customisation but is slow and costly per unit. Batch production suits ranges of similar goods made in groups, such as bread in a bakery: flexible, but time is lost switching between batches. Flow production suits standardised goods in high volume, such as bottled drinks: very low unit cost, but inflexible and expensive to set up, and a breakdown can halt the whole line.

A "recommend and justify" question expects you to match the method to the business’s own situation and say why the alternatives fit less well — not just to list features.

Technology in production

Technology has changed how goods are designed as well as how they are made. The syllabus pairs the two deliberately: computers now sit at both ends of the production process.

Design and manufacture

Computer-aided design (CAD) lets a business create and adjust product designs on screen — quick, accurate and cheap to test, because nothing physical is built until the design is right. Computer-aided manufacture (CAM) then uses computers to control the machines that make the product, giving consistent quality and allowing production to run with little direct labour. Used together, CAD and CAM link a design straight to the machinery that produces it.

3D printing and services

3D printing sends a CAD file directly to a printer that builds the object layer by layer — ideal for prototypes and small custom runs. Technology also raises productivity in service businesses: self-checkout tills, online booking systems and automated warehouses let a firm serve more customers with the same staff. In every case the effect is higher output per worker and lower average cost, at the price of a large up-front investment.

Costs and economies of scale

Before a business can judge whether output is worth producing, it must classify its costs. Two rules do most of the work — one splits costs by behaviour, the other reduces them per unit as the firm grows.

Classifying costs

Costs are split into fixed and variable. Fixed costs stay the same whatever the output; variable costs rise and fall with it. Together they give total cost (total fixed costs + total variable costs), and total cost spread over the units made gives the average cost per unit — the figure a business watches most closely.

Economies and diseconomies of scale

As a business expands, its average cost usually falls, because fixed costs are spread over more units and larger operations bring savings. The five economies of scale are purchasing (bulk-buying discounts), marketing (advertising spread over more sales), financial (cheaper borrowing), managerial (affording specialist staff) and technical (using large, efficient machinery). Grow too far, though, and diseconomies set in — poor communication, weak coordination and falling staff commitment push average cost back up.

Break-even analysis

Break-even analysis answers a single, decisive question: how much must a business sell before it stops making a loss? Below that output it loses money; above it, it profits.

The break-even point

Revenue comes from selling units (quantity sold × selling price); costs are the fixed and variable costs. Where the total revenue line crosses the total cost line, the two are equal — that output is the break-even point. Each unit sold above it earns its contribution (selling price minus variable cost per unit) as profit.

Margin of safety

The margin of safety is how far sales can fall before a loss begins: actual output − break-even output. Worked example: a firm with fixed costs of $20,000, a selling price of $50 and a variable cost of $30 has a contribution per unit of $20, so break-even output = 20,000 ÷ 20 = 1,000 units. Producing 1,500 units gives a margin of safety of 500 units — sales could fall by 500 units before a loss.

Using and questioning break-even

Break-even helps with simple decisions — raising the price lifts the revenue line and lowers the break-even output; raising fixed costs pushes it up. But the model assumes everything produced is sold, that price and costs per unit stay constant at all outputs, and that costs split neatly into fixed and variable. In reality discounts, changing costs and unsold stock all break those assumptions, so break-even is a guide, not a guarantee.

Achieving quality

Quality means meeting the standards customers expect, consistently. It matters to every business because poor quality means returns, lost customers and a damaged reputation — the two main approaches differ in when the checking happens.

Control versus assurance

Quality control checks only at the end of production: simple to run and needs less staff training, and it catches faults before they ship — but waste is only found after it is made. Quality assurance checks at every stage: it prevents faults, cutting waste and rework, and involves and motivates all staff — but it needs training and takes longer to embed.

Some firms combine both within total quality management, a culture in which every employee is responsible for quality throughout the business.

Location decisions

Where a business sits shapes its costs, its customers and its legal freedom to operate. The factors differ sharply between a factory and a shop.

Factors in the decision

A manufacturing business weighs the cost and size of the site, nearness to raw materials, transport links for moving goods, and the availability and wage level of labour. A service business weighs proximity to customers above almost everything: footfall, visibility and convenience decide a shop or restaurant’s takings, so it will pay a premium for a busy location.

Country choice and legal controls

When choosing a country, a business considers wage costs, the size of the market, trade barriers, exchange rates and government incentives such as grants or tax breaks. Cutting across all of these are legal controls: planning permission, zoning rules that reserve land for particular uses, environmental and health-and-safety regulations, and licensing requirements. These can rule out an otherwise ideal site — a factory may be refused permission in a residential zone however cheap the land — so they must be checked before any location is chosen.