4.1 Production of Goods and Services

4.1.1 The Meaning of Production

Managing resources effectively to produce goods and services

Operations Management is defined as the process of production of goods and services.

Successful operations management produces goods efficiently , in sufficient quantities to meet demand, at the right time, with the right quality. 

In 4.1 we need to know how to raise productivity,  different production methods and how technology has affected production.

But let’s start with the basics and learn the key words that we will use throughout this unit.

Difference between production and productivity

Production is the processes used to transform inputs into goods or services. 

This could be transforming wood into furniture or the programming and technology to set up a music streaming service.

Productivity measures the efficiency of production. How many inputs are required to make the output?  It’s calculated by dividing total inputs by total outputs. 

So if production will measure how much is produced, productivity measures how efficiently the output is produced.

In IGCSE business we focus on labour productivity, how efficiently employees produce outputs for the business. It is calculated by dividing total output by the number of employees. 

Labour Productivity =     Total Output ÷ No of workers


Frankie’s Furniture
10,000 chairs ÷ 200 workers

= 50 chairs per worker
Charlie’s Chairs
900 chairs ÷ 30 workers

= 30 chairs per worker

So, Frankie’s Factory has higher labour productivity as the employees produce 50 chairs per worker while Charlie’s only produces 30 chairs per worker.

Benefits of increasing efficiency and how to increase it

We can see why labour productivity is so important. If Frankie’s Furniture can produce 40% more output with the same level of employees they can significantly decrease costs. This means Frankie’s Furniture can:

  • keep prices the same and increase gross profit
  • lower prices and increase sales.
Past Paper Question Example 
Paper 2 (a) Explain two benefits to business AOC of higher productivity.                             [8]

Why does Frankie’s factory have higher labour productivity? How can Charlie’s chairs and other businesses raise productivity?

Two of the possible reasons we have seen already in Unit 2, the workers at Frankie’s factory could have higher motivation levels, so work harder and take more responsibility for improving efficiency and reducing mistakes. 

It could also be because Frankie’s workers are better trained, so they can operate machinery more efficiently or work better as part of a team.

Employee training can improve productivity.

However, it could also be because Frankie has invested more in machinery and automation in her factory, so she doesn’t need as many workers.

Or it could be because her production process is better controlled and managed by leaders

For a business to change its production process in order to improve productivity, it will require a capital investment, be it training or additional machinery, so will be higher cost in the short term. The business must calculate if the spending on productivity is cost effective. Over the long term will the increase in productivity lead to lower costs for each unit produced?  

Lean production is another method of improving productivity and efficiency. 

The concept of lean production 

Lean production has revolutionised production. 

Lean production aims to continually improve the production process, decreasing waste so inputs are reduced and efficiency and productivity is increased. 

This may mean looking at how workers move around a factory. If the production process is changed, so workers move around less between different machines, less time and energy is wasted and production will increase.

A great example of this was the “Speedee” service system at the first McDonalds which stripped down every single process and worker movement and reorganised them to maximise efficiency. These lean production principles are now applied at every McDonald’s franchise around the world. 

However, lean production can also involve decreasing product defects, lowering transportation costs, and decreasing inventory costs. 

There are two examples of lean production you need to know, Kaizen and Just In Time (JIT).

Kaizen translated from Japanese means continuous improvement. Employees are empowered to suggest small changes to the production process to continually improve efficiency, so there is a strong link with Unit 2 and motivation.  Responsibility for improving productivity is shared between workers and leaders, so Kaizen needs good communication and a highly motivated workforce. 

  Link  Unit 2.1 Motivation

Just-in-Time is a lean production method that improves efficiency through reducing inventory costs.

But what are inventory costs?

Why businesses hold inventories

Inventory is stock of work in progress, raw materials, and finished products held by a business. 

Inventory at a wholesaler

A factory will need to hold inventory so they can keep the production line running by having enough components. A retailer will need to have enough inventory to satisfy demands for shoppers, and a restaurant will need to make sure they have enough ingredients for the dishes on the menu. If businesses don’t have enough inventory to satisfy consumer demand they will lose customers and revenue, and develop a negative reputation. 

However, holding inventory is an additional cost for the business, and the more inventory a business holds the greater the cost. 

Inventory involves storage costs. Businesses need a space or a building to store the inventory, so storage adds to their costs of rent. Businesses may need to invest in a secure building and pay for security for valuable goods, or rent a refrigerated warehouse to keep goods fresh. For perishable inventory like food there is also a risk it will go out of date or go “bad” while in storage and can’t be sold. Inventory like clothes may go out of fashion, or high technology items may become obsolete as new models are launched. 

Therefore, businesses have to find a balance between having enough inventory to satisfy customer demand,  but also want to keep storage costs low. 

Just-in-time or (JIT) is a lean production method, which uses technology to reduce inventory storage costs, most commonly in factories. Components or raw materials are delivered to the factory just when they are needed or “just-in-time” for production. This means businesses can (in theory) remove the need for inventory and remove storage costs. 

However, JIT only works in special circumstances. It needs excellent communication between suppliers and the business to ensure all deliveries arrive on time, with the right raw materials and components. Any error which leads to a delivery not arriving on time or defective supplies will stop production and cause huge costs to the business.

JIT also requires flexible working from employees, and advanced machinery so production can quickly switch from one product line to another. 

JIT offers large cost savings to a business, but will require a skilled workforce and effective leadership to set up the system and keep it running.

4.1.2 The Main Methods of Production

Methods of production is a popular question at IGCSE. You could be asked a question about one specific method of production or evaluate  the most suitable method of production.

Past Paper Question Example 
Paper 2 (b) Explain the three main methods of production business RBG could use to produce its products in the factory. Which method should RBG use? Justify your answer. [12]
– Method 1
– Method 2
– Method 3
– Recommendation

You need to know the features of job, batch and flow production and the benefits and limitations of each. 

Job production is suitable for unique products. It’s making a one-off product, like a wedding cake, tailor made suit, or a ship.

It allows product customisation exactly to the consumers requirements. If a consumer wants “love” written on their wedding cake they can get it. Furthermore, workers are usually more motivated. As every product made is unique, the work is less repetitive and requires higher skill. 

However, the combination of highly skilled workers, and the difficulty in using machines for unique products means higher labour costs.   Economies of scale can’t be achieved for a “one off” product Production can take a long time compared to other production methods. 

Job Production
+  Unique, highly customised  products
+   Higher worker motivation
High production costs
Highly skilled workers required
Flow production at a soft drink manufacturer.

Flow production in many ways is the opposite of job production. Instead of one unique product, thousands or even millions of identical products are constantly produced. 

Production costs are lower per unit because of mechanisation, automation and economies of scale. However, large capital costs are required to set up the machinery in the production line, workers are often demotivated because of the repetitive nature of the work and there is little flexibility. If a business wants to produce a new product it means the whole production line must be changed. 

Flow Production
+  High output
+   Low cost per unit
High capital costs
Low flexibility 

Batch production is somewhere between flow and job production, and offers a balance of the benefits and limitations of each. A number of identical goods (or batches) are produced, before moving on to another batch. Unit costs are lower than job production and it allows some economies of scale. Batch gives greater flexibility than flow production and allows the business to switch between different product lines. Storage costs are higher as the business must keep goods made in one batch must be kept until they are sold.

Batch Production
+  Lower unit costs than job production
+   More flexible than flow production
Reorganisation of production process required after each batch is produced
High storage costs

Recommend and justify an appropriate production method for a given situation

Choosing the most suitable method of production has strong links with mass and niche marketing.  Flow production is most suitable for mass market products, but the high capital investment won’t make sense for niche markets where sales are lower. 

  Link  Unit 3.1 Mass and Niche Marketing

Businesses must also consider the type of goods they are selling, will there be significant cost savings by switching methods of production?

Will they lose customers by offering less variety in their product range, or offering unique products or will they gain more customers by offering mass produced goods at lower prices. 

Can they maintain their brand image as a niche producer of high-quality goods if a business starts mass producing goods?

⚠⚠ DANGER!  ⚠⚠
Students often recommend production methods on the basis of worker motivation or demotivation. For example, making a decision not to switch to flow production because of the impact of worker motivation. However, increasing sales and profit margins is a higher priority than worker motivation for business owners and leaders.

4.1.3 How Technology Has Changed Production Methods

Production methods are continually changing.

Computer Aided Design (CAD) means products can be developed  and tested to a higher standard at a lower cost. 

Computer Aided Manufacture (CAM)  allows technology to control machinery on production lines, meaning factories can be run more efficiently, labour costs are lower due to less workers required and higher quality products with less defects are produced. 

Computer Aided Manufacture (CAM) is used on many car production lines

You may be asked a specific question on technology in production methods or a more general question on how technology can improve a businesses competitive edge, so there are strong links here with technology in the marketing mix.

Past Paper Question Example 
Paper 1 (d) Identify and explain two ways changes in technology used in production could help BFF to remain competitive                               [6]

Using the latest technology to improve production methods requires high capital investment, and businesses must continually update technology to ensure they have the most efficient systems in place. It may lead to employees being made redundant or additional costs to train workers. However, the potential cost savings and improvements in quality outweigh the short term costs. Businesses which don’t use technology to improve production methods risk losing a competitive advantage and decreasing profit margins.

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