Production

Production cannot take place unless the necessary resources are available. & we are familiar with resources. Factories, railway, farms, mines, human skills, offices, & shops – these are the kind things we identify as economic resources. Again, for purposes of analysis, economists resort to a broad classification of these resources or factors of production as they are usually called. It’s very difficult to define what the factors of production are.

Usually these are labor, technologies, land, capital, enterprise & so on. But for example Eduard Limer distinguishes also between different types of labor. So as you understand there can be different approaches to identify factors of production. But the definition is more or less the same: factors of productions are the resources, that necessary to produce a good or a service. Now I’m going to describe the classification that is one most commonly

use & it does serve to assist analysis (labor – land – capital). This classification is not completely satisfactory because it is sometimes difficult to allocate the real-world resources into these neat categories. For example, land which has been fertilized, drained, an fenced is really a combination of land a capital. We shall also find that within each broad category there are wide divergences.

So the production of any good or service usually requires some combinations of three different types of resources. 1. Labor – all aspects of human effort expended in producing a good or a service, from the simplest task up to the task of combining all the other goods & services into the final good or service. 2. Land – all the natural resources used to produce something else. More specifically, the term refers to soil, minerals, forests, waters, & especially in urban &

industrialized societies, the surface of the earth on which productive activities may be carried forward. 3. Capital – those buildings, pieces of machinery, & tools which man has fashioned to help him produce still more goods & services. (In common speech, “capital” is sometimes also used to refer to the money spent in producing capital goods.) The terms are not precise ones, but their general purpose is clear. They help us to categorize all of the elements involved in any production process.

Labor, land & capital are therefore called the factors of production. The for whom question is at root simply a question about what part of the total production of an economy shall go to each of the various factors of production. A man pays 2.875 $ for a new automobile. What part of that shall go to each of the workers (assembly-line worker, maintenance man, salesman, transport driver, president) who had a hand in producing the

car? Each factor of production – or, more exactly, each owner of a factor of production – receives a share of the final product. Manufacturing companies require three basic functions: finance, production (or operation), & marketing. Finance raises the capital to buy the equipment to start the business, production (or operations) makes the product, & marketing sells & distributes it. Operations management is also of crucial importance to service companies.

The objectives of the production department are usually to produce a specific product, on schedule, at minimum cost. But there may be other criteria such as concentrating on quality & product reliability, producing the maximum possible volume of output, fully utilizing the plant or the work force, reducing lead time, generating maximum return on assets, or ensuring flexibility for product or volume changes. Some of these objectives are clearly incompatible, & most companies have to choose between price,

quality & flexibility. There is an elementary trade-off between low cost & quality, & another between low cost & flexibility to customize products or deliver it in a very short lead time. Production & operations management obviously involves production plants & factories or service branches, & the equipment in them, parts (raw materials or supplies), processes (the steps by which production or services are carried out), & planning & control system (the procedure used by

management to operate & monitor the system). But it also involves people – the personnel or human resources, who will always be necessary in production & operations, despite increasing automation. People are particularly important in organizations offering a service rather than making a product. Such organizations exist to serve the customer, but it can also be argued that they have to serve their workforce, because workers will often treat the public the same way that management treats them, so

staff training & motivation are clearly important. Decisions about what products to make or what services to offer have to take into account a company’s operational capability, & labor, capital & equipment recruitments. Introducing new products obviously requires accurate sales forecasting. If it is necessary to construct a new plant or facility, decisions have to be made concerning its location,

its size or capacity, the floor layout, the hiring of staff, the purchase of equipment, the necessary level of inventory of parts & finished products. In production & operation management there has been increasing emphasis of quality, as defined by the consumer, in terms of features offered: appearance, reliability, durability, serviceability, & so on. An important concept has been Total Quality

Management, according to which management should ensure that quality extends throughout the organization in everything it does, or at least in all features of products & services that are important to the consumer. Rather than aiming for the best quality compatible with low unit costs the company should aim for the highest quality level possible, because a lack of quality can be more expensive than achieving high quality. As the production theorist Philip Crosby puts it, quality is free.

What he means is that there are many costs that result from production that is not 100 % perfect inspecting, testing, identifying the causes of defects, implementing corrective action, training or retraining personnel, redesigning a product or system, scrapping, reworking or repairing defective products, replacing products in accordance with warranty, dealing with complaints, losing customers or their goodwill & so on. Quality theorists have shown that prevention is usually much cheaper than failures.

Every extra dollar spent on prevention might save 10 $ spent on inspection & failure costs. Furthermore, even if the current quality level appears perfect, the company should still continuously look fro product improvement, & aim to be the best in the industry. Although management is responsible fro designing & installing an overall system which ex-defects & low quality, everyone within that system, in the entire supplier-producer-customer should be responsible

for quality. In TQM, every worker is quality inspector fro his or her own trying to get it right the first time, aiming for zero defects. Many large Japanese companies – especially those guaranteeing lifetime employment – have able to attain high quality, because of the motivation of their staff & the long-term nearly all the relationships among employees, suppliers, distributors, owners & customers. Japanese invented quality circles: voluntary groups of six or twelve people, who ate usually training

in problem-solving, analysis, & reporting methods, & who then meet once a week to discuss their department & the problems they are encountering. Quality circles have been less successful in the more individuals cultures of America & Europe. Manufacturing companies all have to decide how much R&D to do. Should they do fundamental or applied research themselves, or use research institutes,

universities, & independent research laboratories, or simply license product or service designs from other organizations as necessary? Companies are faced with a “make or buy” decision for every item, process or service. Do they make it themselves or do they outsource, & buy from a subcontractor? If a company assembles products supplied by a large number of subcontractors, they face the problem of how much inventory they require. In Just-In-Time production – also called lean production, stockless

production, & continuous flow manufacture – nothing is bought or produced until it is needed. Each section of production process makes the necessary quantity on the necessary units at the necessary stage of the manufacturing process, or buy distributors of customers. The JYT system is wholly contrary to the European & American logic of encouraging greater productivity, & welcoming production that exceeds the agreed

schedule or quota, & stocking extras in case of future problems. JIT minimizes the costs of holding inventories, which are regarded negatively, as avoidable costs, rather than as assets. The large Japanese manufacturing companies have long practiced outsourcing, & generally use extensive networks of small subcontractors. Of course, if a single subcontractor fails to deliver a component on time, the whole production process

is sabotaged, but the Japanese industrial system relies on mutual trust & long-term relationships. Small suppliers often attempt to situate their facilities close to the location of a larger company with which they work. The Japanese also prefer small, specialized production plants with a limited capacity, in which, wherever possible, all the machines required for a certain job are grouped together. This avoid all the waiting & moving time involved in sending half-finished items from one department

to another, although it often requires flexible, multi-skilled employees. JIT thus greatly reduces transportation & inventory costs, & should ensure that there is no waste from overproduction, or from idle workers waiting fro parts. It allows increased productivity because of shortened throughput time. If factories are equipped so that set-up times are short, very small production runs are possible.

Any quantity problems or product defects should be noticed more quickly, production lead times are reduced, & the firm can react more rapidly to demand changes.