Production of Goods and Services

Lean production is an approach to making goods that aims to eliminate waste of all kinds — time, materials, space and effort (1) — so the business produces output as efficiently as possible, using methods such as Just-in-Time and Kaizen (1).

Production (2 marks) is the total amount of output a business makes — for example a factory producing 5,000 cars in a year. Productivity (2 marks) measures output per unit of input — for example cars produced per worker — and shows how efficiently resources are used. So production is the total quantity made, while productivity is how much is made from each worker or machine.

Holding inventory means keeping a supply of raw materials or finished goods, and a business does this for several reasons. First, it lets the firm meet customer demand quickly: with finished goods in stock, it can supply orders immediately rather than making customers wait, which keeps them satisfied and avoids lost sales. Second, holding raw materials means production does not stop if a delivery is delayed — the firm has a buffer to keep the production line running, avoiding costly stoppages. Third, buying materials in bulk to hold as stock can earn discounts and protect against price rises. However, holding stock also has costs (storage, insurance, the risk of goods going out of date), which is why lean methods like JIT try to reduce it. On balance, a business holds inventory mainly to meet demand reliably and keep production running smoothly.

Way 1 — training (up to 4). By training its workers, the business helps them learn to do their tasks faster and with fewer mistakes, so each worker produces more output in the same time. Better-trained staff also need less supervision and waste fewer materials, raising productivity. Way 2 — investing in technology/automation (up to 4). Introducing better machinery or automation allows tasks to be done more quickly and consistently than by hand, so the same number of workers produces far more output. This raises output per worker, although it requires investment and may need workers to be retrained to use the new equipment.

Flow production has clear strengths, but whether it suits a custom-cake business is doubtful. In favour of flow production: it produces large volumes of identical items at a low cost per unit, runs continuously and is very efficient — so if the business grew by selling a standard range of cakes, flow production could cut costs and meet high demand. Against flow production: the business's whole appeal is custom-designed, one-off cakes, and flow production is highly inflexible — it makes identical products, which is the opposite of bespoke work. Switching to flow would mean the firm could no longer offer the customisation customers pay premium prices for, likely losing its market; flow production also needs expensive assembly-line equipment suited to mass output, not individual designs. Conclusion: flow production is not suitable for a business built on custom cakes, because its inflexibility clashes with the firm's bespoke, made-to-order nature. Job or batch production fits far better — job for individual designs, batch for runs of popular standard cakes as it grows. So unless the business changes its strategy to sell standardised cakes in huge volumes, flow production is the wrong choice; the growth should be met with batch production instead.

JIT has important benefits, but whether it is the best method depends on the business. In favour: JIT means materials arrive only when needed, so the firm holds little stock, saving on storage, insurance and space and freeing up cash tied up in inventory; it also reduces waste from stock going out of date. For a firm with reliable suppliers, this makes it very efficient. Against: JIT leaves no buffer stock, so if a supplier is late or there is a sudden surge in demand, production can stop and customers be let down; it relies on very reliable suppliers and good systems, which not every business has. Holding some stock (a buffer) can be safer for businesses with unpredictable supply or demand. Conclusion: JIT is one of the best methods for businesses with reliable suppliers and steady demand, because it cuts stock costs and waste. But it is not the best for every business — a firm with unreliable suppliers, distant deliveries or volatile demand may do better holding buffer stock to avoid running out. So whether JIT is best depends on the reliability of supply and the predictability of demand; for many firms a balance between JIT and some safety stock is wiser than relying on JIT alone.