- Production means taking a set of raw materials and turning them into something the customer wants or needs.
- It generally refers to the whole process from obtaining resources right through to checking the finished product for quality and delivering it to the customer.
- Production can also be used to describe a company supplying a service, rather than a phsyical product.
Productivity measures how good a firm is at turning inputs into outputs
- Productivity is a way of measuring how efficient a business at turning inputs (resources) into output (finished products). It's usually calculated as either labour or capital productivity.
- The business can then measure its productive efficiency by comparing its productivity over several years to see if it's improving or by looking at how its productivity compares to productivity in other, similar firms.
Firms measure Labour Productivity and Capital Productivity
- Labour productivity = Output per year / Number of employees
- Capital productivity = Output per year / Capital employed
Labour productivity doesn't always relate directly to competitiveness, or costs per unit. A business with high labour productivity might pay its workers high wages, which would increase its production costs.
Methods of improving Productivity (1)
Businesses can cut production costs
- The cost of materials can be reduced, to reduce the total cost per unit (may affect quality).
- The cost of employee wages can also be reduced (may reduce motivation, lowering labour productivity).
Businesses can change production method
- Changing from job to batch production or from batch to flow production increases efficiency.
- Increasing the scale of production improves efficiency, because of economies of scale.
- Switching to lean production improves productive efficiency. This reduces waste to a minimum and it can also motivate employees to achieve more.
Businesses can invest in equipment
- Employees may need new equipment to help them produce more.
- The cost of investing in new machinery may be prohibitive though.
Methods of improving Productivity (2)
Businesses can change the way the workforce is managed
- Motivation gets employees to work harder, and reduces absenteeism.
- Employees must be trained in the skills they need to do their jobs productively and efficiently.
Work study can show where productive efficiency can be improved
- Work study has two parts, method study and work measurement.
- Method study examines a task and finds the most efficient method to use. It can cover worker motivation and ergonomic design as well as basic production methods.
- Work measurement times standard tasks. It's used for setting tasks.
- Work study is useful in finding out where and how a task can be done more efficiently.
- However, managers should bear in mind that sometimes productive efficiency might be affected by factors that work study doesn't pick up on - e.g. poor management or dated machinery. They need to be careful not to hold workers responsible for issues that are beyond their control.
HR Issues with attempts to improve Productivity
- Can be perceived by staff as a way to wring the last drop of work out of them without paying them any more.
- Staff may also worry that an improvement in productivity may result in redundancies - if everyone's working harder, there may not be enough work to go around. The introduction of new labour-saving equipment such as robots is likely to bring redundancies, although remaining staff will probably be better trained and better paid.
- When a company pays another, specialist company to carry out some of its business activities - usually things like IT services or customer service.
- Companies often outsource work to specialist companies located abroad. This is called offshoring.
- One of the main reasons why companies outsource is to save money. Firms that provide outsourcing services can often do the work at much lower cost due to division of labour and specialisation.
- Companies providing outsourcing services might also have more advanced technology because the service they're providing is the main focus of their business, so they can afford to invest more heavily in it than the company they're working for might be able to.
- Outsourcing firms often have greater knowledge and experience of the service they're providing.
- It also leaves the comapny free to focus on its most important areas - such as production and developing long-term strategy.
Disadvantages of outsourcing
- Can affect staff motivation if employees are concerned that outsourcing might put their jobs at risk.
- Communication with clients can also suffer as a result of outsourcing - especially when firms outsource their call centres. Some customers don't like to think that they're speaking to a specialist call centre rather than communicating directly with the company. Language barriers can be a problem if call centres are 'offshored'.
- The firm loses direct control over certain areas of the business, which can make internal communication slower. Sensitive information might be at risk of being leaked if its passed to external firms.
- It takes time for outsourcing to be successful - it can be months before outsourced work is completely co-ordinated with the rest of the business. Firms need to plan for this and carefully monitor outsourced activities.