Production of goods and services | IGCSE Class 10 Business Studies Notes

This note covers the meaning of production and how it differs from productivity, the benefits of increasing efficiency and how businesses raise it, why businesses hold inventories, the concept and benefits of lean production (including just-in-time and Kaizen), the features, benefits and limitations of job, batch and flow production, how to recommend a production method for a given situation, and how technology has changed and is changing production methods.

What is production, and how is it different from productivity?

Production is the process of combining resources (land, labour, capital and enterprise) to make goods and services that satisfy customer wants. A business manages these resources effectively so that inputs are turned into outputs with as little waste as possible.

Definition: Production. The process of turning inputs (resources) into outputs (goods or services) for sale to customers.

Productivity measures how efficiently those resources are used. It is usually expressed as output per worker, or output per unit of input, over a given period. Production is simply the total quantity made; productivity is the rate at which resources are converted into that output.

Definition: Productivity. A measure of output produced per unit of input (for example per worker or per hour) in a given period of time.

A business can increase total production (for example by hiring more workers) without becoming more productive if output per worker does not rise. Labour productivity rises when the same number of workers produce more output, or the same output is produced with fewer workers or in less time. This distinction matters because higher productivity usually lowers the cost of making each unit, while higher production alone may simply mean higher total costs.

Why is increasing efficiency important, and how can a business achieve it?

Efficiency means producing output using the minimum necessary resources, so that waste of materials, time and labour is reduced. Increasing efficiency brings several benefits to a business.

• Lower cost per unit, because fewer resources are wasted for the same output.
• Higher profit margins if selling prices stay the same while costs fall.
• Greater competitiveness, since lower costs allow a business to charge lower prices or earn more profit at the same price.
• The ability to meet customer demand more quickly, improving customer satisfaction.

Businesses increase efficiency in several ways:

1. Automation and technology: replacing manual tasks with machines, computer-controlled equipment or software reduces errors, speeds up output and can run for longer hours than human workers.
2. Improved labour skills: training workers so they make fewer mistakes, work faster and can operate more advanced equipment.
3. Better organisation of the workplace, so materials and workers do not waste time moving between stages of production.
4. Investment in modern equipment that produces more output for the same amount of labour and material input.

Automation is especially important because machines can repeat identical tasks precisely and continuously, which raises output per worker employed and can improve consistency of quality. However, automation usually requires a large upfront investment in capital, which only pays off if production volumes are high enough.

Why do businesses hold inventories?

An inventory (stock) is the materials, part-finished goods and finished goods that a business holds at any point in time. Businesses hold three main types of inventory: raw materials and components bought in for production, work-in-progress (partly completed goods), and finished goods waiting to be sold.

Definition: Inventory. Stocks of raw materials, work-in-progress and finished goods held by a business at a point in time.

Businesses hold inventories for several reasons:

• To make sure production does not stop because raw materials run out.
• To meet unexpected or sudden increases in customer demand without delay.
• To take advantage of bulk-buying discounts by ordering larger quantities of materials at once.
• To allow for delays from suppliers, so production can continue even if a delivery is late.

Holding inventory is not free of cost, however. It ties up money in stock that is not earning a return, requires storage space, and risks damage, theft or the stock becoming out of date or unfashionable before it is sold. Businesses therefore try to balance the benefits of holding stock against these costs.

What is lean production, and how can a business achieve it?

Lean production is an approach to production that aims to use the minimum resources of people, materials, time and space to produce goods, cutting out waste wherever possible while maintaining quality.

Definition: Lean production. A method of production that aims to cut out waste in the production process while keeping, or improving, quality.

Just-in-time (JIT) inventory control

Just-in-time is a method in which materials and components are ordered and delivered only when they are needed for production, rather than being stored in advance. This keeps inventory levels very low, almost eliminating the cost of holding stock.

Definition: Just-in-time. A stock control method in which materials and components arrive exactly when needed for production, so very little inventory is held.

Kaizen (continuous improvement)

Kaizen means continuous improvement: the idea that small, ongoing changes suggested by workers themselves, rather than one large change, gradually improve quality and efficiency over time. Workers are encouraged to identify problems and suggest improvements because they are closest to the production process.

Benefits of lean production include lower costs from holding less stock, less waste of materials and time, higher quality because problems are identified and corrected quickly, and greater worker involvement and motivation under Kaizen, since employees contribute ideas rather than simply following instructions.

What is job production?

Job production is a method where a single product is made from start to finish, often to a customer's specific requirements, before work begins on the next product.

Definition: Job production. Producing a single, often unique, product completely before starting production of the next one.

Advantages of job production

• Products can be made exactly to the customer's specification, allowing high prices for a unique or personalised item.
• Workers often find job production more satisfying because they see a project through from start to finish and use varied skills.
• Quality tends to be high, since skilled workers give individual attention to each product.

Limitations of job production

• It is usually slow and labour-intensive, so output per worker is low.
• Unit costs are high because little use is made of specialist machinery or economies of scale.
• It relies on highly skilled, often expensive, labour.

What is batch production?

Batch production is a method where a group (batch) of identical items is produced together, moving through each stage of production as a group, before the next batch (possibly of a different product) begins.

Definition: Batch production. Producing goods in groups, or batches, with each batch passing through one stage of production before moving to the next.

Advantages and benefits of batch production

• Some economies of scale are possible because a batch is larger than a single job, lowering unit cost compared with job production.
• It offers flexibility, since the business can switch between making different products in different batches, so a variety of products can be produced using the same equipment.
• Faster than job production because specialised equipment can be used for each stage.

Limitations of batch production

• Changing equipment and retraining workers between batches (known as changeover time) can be costly and causes production to stop temporarily.
• Work-in-progress and finished-goods inventory can build up between stages, tying up money.
• Unit costs are still higher than in flow production because output volumes are lower.

What is flow production?

Flow production (sometimes called mass or continuous production) involves producing a continuous stream of identical, standardised products, often on an assembly line, with each stage of production following on immediately from the last.

Definition: Flow production. Producing a continuous, standardised stream of identical products, with each unit moving immediately from one stage to the next.

Advantages and benefits of flow production

• Large economies of scale can be achieved, because very high volumes spread fixed costs (such as the cost of machinery) over many units, giving a low cost per unit.
• Production can run continuously, including with automated machinery, so output per worker is high.
• Consistent, standardised quality, since every unit is made in an identical way.

Limitations and disadvantages of flow production

• A very large upfront investment in specialised machinery is needed, so it is only worthwhile for high volumes of a standardised product.
• Little flexibility to customise products or switch quickly to a different product.
• Work on a repetitive assembly line can be boring for workers, lowering motivation.
• A breakdown at one stage can stop the entire production line.

How should a business choose the right production method?

Choosing between job, batch and flow production depends on several factors, including the level of demand, how standardised the product is, the amount of capital available to invest, and how much flexibility the business needs.

A business recommending a method should match these factors to its own situation. A small bakery making a single wedding cake to order should choose job production because the product is unique and demand is a one-off. A factory producing millions of identical plastic bottles should choose flow production because demand is continuous and very high, and the resulting low unit cost makes the large investment worthwhile.

Worked example 1. A furniture workshop can either make one hand-carved dining table to a customer's exact design for $2,000, taking two weeks of a single craftsperson's time, or set up an assembly line to make 500 identical standard tables over the same two weeks at a cost of $150 each to produce, selling at $220 each.

Answer: The custom table gives revenue of $2,000 from one sale. The standard tables give total cost of 500 × $150 = $75,000 and total revenue of 500 × $220 = $110,000, a profit of $35,000 from the same two weeks. The custom table's own costs are not given, so its profit cannot be calculated, but its whole revenue ($2,000) is far below the standard tables' profit. Where there is enough demand for 500 identical tables, the workshop should choose flow production; for a one-off customer request it should choose job production.

Worked example 2. A clothing manufacturer currently holds inventory worth $40,000 at all times, costing $4,000 a year in storage and insurance. Switching to just-in-time ordering would cut average inventory to $5,000, but would require a new $10,000 computer ordering system.

Answer: Annual holding cost would fall from $4,000 (10% of $40,000) to $500 (10% of $5,000), a saving of about $3,500 a year. The $10,000 system pays for itself in under three years, so the manufacturer should recommend adopting just-in-time ordering if suppliers can be relied on for fast, frequent deliveries.

Worked example 3. A print shop produces greetings cards in batches. One batch of 1,000 birthday cards takes 3 hours to set up the printing machine and 2 hours to print, giving a labour productivity of 1,000 ÷ 5 = 200 cards per hour for that batch.

Answer: If the shop instead produced cards using flow production with machines that stay set up permanently, set-up time would fall to near zero and labour productivity could rise well above 200 cards per hour. The shop should move to flow production only if it expects to sell enough standardised cards continuously to justify the cost of dedicated machinery; otherwise it should stay with batch production for flexibility.

Worked example 4. A bicycle factory introduces Kaizen, and workers suggest a change that reduces the time to fit a wheel from 6 minutes to 5 minutes per bicycle. The factory makes 480 bicycles a day.

Answer: Time saved per bicycle is 1 minute, so total time saved per day is 480 × 1 = 480 minutes, or 8 hours. This extra capacity can be used to make more bicycles or release a worker for another task, increasing labour productivity at no extra equipment cost. The factory should continue encouraging worker suggestions under Kaizen, since small continuous changes are producing measurable efficiency gains.

How has technology changed and continued to change production methods?

Technology has transformed how goods are designed and manufactured. Computer-aided design (CAD) allows designers to create and modify product designs on screen, testing different versions quickly and cheaply before anything is physically made. Computer-aided manufacturing (CAM) uses computer-controlled machinery to carry out production tasks automatically, following the design produced by CAD, with great precision and consistency.

Using computers in design and manufacturing brings several changes to production: faster development of new products because designs can be altered on screen rather than rebuilt physically each time; greater precision and less waste of material because machines follow exact instructions; the ability to make small changes to a product without retooling an entire factory, blurring the line between batch and flow production; and a reduced need for some manual labour, as computer-controlled machines replace tasks previously done by hand. Overall, technology allows modern production to be faster, more flexible and more consistent in quality than earlier methods, while generally requiring greater investment in equipment and in training workers to operate and maintain it.

Going beyond the syllabus

Many large manufacturers now combine elements of batch and flow production, known as flexible manufacturing, where computer-controlled machinery can be reprogrammed quickly to switch between different versions of a product on what is otherwise a continuous production line. This lets a business gain some of the low unit costs of flow production while retaining some of the flexibility of batch production.

Glossary

• Production: the process of turning inputs (resources) into outputs (goods or services) for sale.
• Productivity: output produced per unit of input, such as per worker or per hour, in a given period.
• Efficiency: producing output using the minimum necessary resources, reducing waste.
• Automation: using machines or computer-controlled equipment to carry out tasks previously done by people.
• Inventory: stocks of raw materials, work-in-progress and finished goods held by a business.
• Work-in-progress: goods that are partly completed and still moving through the stages of production.
• Lean production: an approach that aims to cut out waste in production while maintaining or improving quality.
• Just-in-time: a stock control method where materials arrive exactly when needed, keeping inventory very low.
• Kaizen: continuous improvement through small, ongoing changes, often suggested by workers.
• Job production: producing a single, often unique, product completely before starting the next.
• Batch production: producing goods in groups, with each batch moving through a stage of production together.
• Flow production: producing a continuous stream of identical, standardised products.
• Economies of scale: reductions in cost per unit as the scale of production increases.
• Changeover time: the time needed to reconfigure equipment and retrain workers between batches.
• Computer-aided design: using computer software to create and test product designs on screen.

Common errors and misconceptions

• Misconception: Production and productivity mean the same thing. Correct: Production is the total quantity made; productivity is output per unit of input, such as output per worker.
• Misconception: Holding more inventory is always good for a business. Correct: Inventory ties up money, needs storage space and risks damage or going out of date, so businesses balance its benefits against these costs.
• Misconception: Just-in-time means a business keeps no stock at all. Correct: Just-in-time keeps inventory very low by ordering just before it is needed, but it does not eliminate stock entirely and depends on reliable suppliers.
• Misconception: Kaizen is a single large reorganisation of the factory. Correct: Kaizen is continuous improvement through many small, ongoing changes, often suggested by the workers themselves.
• Misconception: Flow production is always the best method because it has the lowest unit cost. Correct: Flow production suits very high, continuous demand for a standardised product; for low demand or unique products, job or batch production may be more suitable.
• Misconception: Automation only benefits large manufacturers. Correct: Automation can raise efficiency and productivity for any business able to invest in it, though the investment must be justified by the volume of output.
• Misconception: Batch production is the same as job production on a bigger scale. Correct: Batch production makes groups of identical items passing through shared stages, unlike job production, where each unique product is completed from start to finish individually.

Exam-style questions with model answers

Q1. State what is meant by productivity. [2 marks]

1. Productivity is a measure of output produced per unit of input, such as per worker or per hour, in a given period of time.

Q2. State two reasons why a business holds inventory. [2 marks]

1. To avoid running out of materials and stopping production.
2. To meet sudden increases in customer demand without delay.

Q3. Explain two benefits of lean production for a business. [4 marks]

1. Lower costs, because holding less inventory and reducing waste of materials and time cuts the cost of production.
2. Higher quality, because problems in the process are identified and corrected quickly rather than being allowed to continue.

Q4. A toy maker currently makes 2,000 identical plastic toys a week using job production, employing 20 skilled workers. Explain, using this information, whether the business should switch to flow production. [4 marks]

1. Because the toys are identical and demand is high (2,000 a week), the product is standardised and suited to flow production rather than job production.
2. Flow production would allow continuous, automated manufacture, raising output per worker and lowering unit cost through economies of scale.
3. However, the business would need a large investment in specialised machinery, which is only worthwhile if demand for 2,000 identical toys a week continues.
4. If demand is stable and high enough to justify the investment, the business should switch to flow production.

Q5. Distinguish between batch production and flow production. [4 marks]

1. Batch production makes groups of identical items that move together through each stage, with the equipment then reset for a different batch, allowing flexibility to make different products.
2. Flow production makes a continuous stream of identical, standardised products with each unit moving straight from one stage to the next, without stopping between products.
3. Batch production therefore has lower unit costs than job production but higher unit costs than flow production, because it does not achieve the same economies of scale.
4. Flow production needs a much larger investment in specialised, often automated, machinery than batch production.

Q6. A furniture company makes one-off, hand-carved chairs to customer order for $300 each, using 10 skilled craftspeople, and is considering batch production of a standard chair design instead. Recommend, with reasons, whether the company should switch to batch production. [6 marks]

1. Job production currently suits the business because each chair is unique and made to a customer's own specification, allowing a high price of $300 per chair.
2. Batch production would only be suitable if there is enough demand for a standard design to be made in groups, since customisation would be lost.
3. Batch production could lower the unit cost per chair compared with job production, because machinery can be used for a group of chairs rather than one at a time, giving some economies of scale.
4. It would also allow faster production, since the craftspeople would not need to complete every stage of one chair before starting the next.
5. However, switching would mean changeover time between batches of different designs, and the company would lose the ability to offer fully customised chairs to each customer.
6. If enough customers want a standard chair design at a lower price, the company should recommend introducing batch production alongside, or instead of, job production; if most customers want a unique design, it should keep job production.

Q7. Explain how computer-aided design (CAD) and computer-aided manufacturing (CAM) have changed production methods. [4 marks]

1. CAD allows designers to create and change product designs on screen, so new designs can be tested and altered quickly and cheaply before anything is physically made.
2. CAM uses computer-controlled machinery to carry out manufacturing tasks automatically, following the design made with CAD, with great precision.
3. Together they speed up the development of new products and reduce the waste of materials that would come from physically rebuilding prototypes.
4. They also make it easier to switch between product versions without retooling an entire factory, blurring the line between batch and flow production.

Q8. State two features of just-in-time inventory control. [2 marks]

1. Materials and components are ordered to arrive only when needed for production.
2. Very little inventory is held in the business at any time.

Key takeaways

• Production is the total quantity of goods or services made; productivity measures output per unit of input such as per worker.
• Increasing efficiency, through automation, technology and improved labour skills, lowers cost per unit and raises competitiveness.
• Businesses hold inventory to keep production running, meet sudden demand and gain bulk-buying discounts, but holding stock has costs too.
• Lean production cuts out waste through methods such as just-in-time inventory control and Kaizen continuous improvement.
• Job production makes a single, often unique, product from start to finish, suiting low demand and customisation.
• Batch production makes groups of identical items together, suiting moderate demand for several product varieties.
• Flow production makes a continuous stream of identical products, suiting very high, standardised demand and offering the lowest unit cost.
• The right production method depends on the level of demand, how standardised the product is, and the capital available to invest.
• Technology, including computer-aided design and manufacturing, has made production faster, more precise and more flexible.

Test yourself

What is the difference between production and productivity?

Production is the total amount of goods or services made; productivity measures the output produced per unit of input, such as per worker, in a given period.

Give one reason a business might hold inventory of raw materials.

To avoid production stopping if a supplier is delayed, since the business already has enough materials in stock to continue working.

What does just-in-time inventory control aim to achieve?

It aims to have materials arrive exactly when needed for production, keeping inventory levels, and the cost of holding stock, as low as possible.

Name one benefit of Kaizen for a business.

Continuous small improvements, often suggested by workers, can steadily raise quality and efficiency without one large, costly reorganisation.

Which production method would best suit a one-off, custom-built yacht?

Job production, because the yacht is unique, made to the customer's own specification and is a single order rather than a repeated or continuous product.

Why does flow production usually achieve the lowest unit cost?

High volumes of a standardised product allow the large cost of specialised machinery to be spread over many units, giving strong economies of scale.

What is one limitation of batch production?

Changeover time between batches, when machinery is reset and workers retrained for a different product, is costly and stops production temporarily.

How has computer-aided design changed product development?

It lets designers create and test designs on screen, so changes can be made quickly and cheaply before anything is physically manufactured.