Review Unit 1.

6
Economies of Scale
Production
Methods
Efficiency
 Production decisions involve deciding
methods for new production runs and the
analysis of existing methods.
 Decisions may include:

◦ Substitute machinery for labor?

◦ Use of new technology?
◦ Organization of the production
layout?
◦ Change of production method?
Efficiency
 Any production method relies on efficiency –
this can be viewed in different ways:
 Productivity – a measurement of output per
unit of the factor used (labor, capital or land)
Total Output
Productivity = -------------------
Units of Factor
 Technical Efficiency – output produced using
the fewest possible inputs
 Productive Efficiency – output produced at
the lowest possible cost
Labor intensive versus Capital
intensive
Labor intensive – larger proportion of labor is
used in the production process.
Benefit – offer a more personalized service to
customers

Capital intensive – larger proportion of

machinery and equipment is used in the
production process.
Benefit – machinery can run 24 hours a day
which reduces average fixed costs
 Factors to consider in choosing between the
two:
a) Which is cheaper – labor or capital?
b) What is the size of the market? – the larger
the market the more capital intensive it is
likely to be
Production Methods

There are five main methods of production:

1. Job (customized) production
2. Batch production
3. Mass production
4. Flow/Process production
5. Cell production
1. Job production
 The business will create an individual
product from start to finish, which meets
the specific requirements of the customer –
usually one-off products such as a wedding
dress.
 Advantages:

1. Product is usually high quality as highly

skilled labor is used
2. Can charge a higher price due to the
uniqueness of the product
3. Workers are more motivated as they see a
product through from start to finish
Disadvantages:
1. Method tends to be labor intensive and so
production is expensive
2. Time consuming method of production
3. Large amounts of working capital (money
for running expenses) are needed as the
production time from start to selling is
usually long
4. No benefit of economies of scale
2. Batch production
 Involves producing a limited number of
identical products – one batch is fully
completed before work begins on another
batch (eg bakery makes a batch of bread;
then a batch of muffins, etc.)
 Advantages:

1. Benefits of economies of scale as raw

materials are bought in larger bulk
2. Variety of products can be produced – more
choice for customers
 Disadvantages:
1. Large stocks so storage costs can increase
the costs of production
2. Repetitive work may lead to boredom and
so low motivation of workers
3. Mass production
 Involves producing large quantities of identical
products eg printing magazines
 Tends to be highly capital intensive {use of

specialised machinery}
Advantages:
1. Large benefits of economies of scale as products
are produced in large quantities
2. Lower average fixed costs as fixed costs can be
spread over a large number of units of output
3. Products are all of the same quality – helps
consumers with buying decisions
4. Unskilled labor is used, so labor costs are low
 Disadvantages:
1. Work is repetitive and boring – low
motivation
2. If the assembly line breaks down at any
stage – all production stops
3. Very little flexibility in terms of changing the
design of the product
4. High set-up costs as machinery is expensive
5. High storage costs for high volumes of stock
4. Flow/Process Production
 Focuses on continuous process of
manufacturing products that are
standardized (homogeneous) in large
quantities.
 Flow production differs from mass

production in that production occurs on a

much larger scale, with production
assembly lines often kept running 24 hours
a day, 7 days a week to maximize output
and to eliminate waste (the extra cost of
starting and stopping the production
process).
 Advantages:
1. Production methods are capital-intensive,
output is on a large scale
2. Cost effective method as costs can be
spread over the high volume of output
3. The use of dedicated machinery and
equipment means that products are of a
standardized quality.
4. Labor costs are low as relatively unskilled
workers are required to operate much of the
machinery
 Disadvantages:
1. The work is likely to be monotonous and
therefore boring
2. There is inflexibility because once the
production process begins there is little
chance of altering the design or
specifications
3. The methods are capital intensive and
involve huge set-up costs
4. The systems are inflexible – it is not
possible to rework products that are sub-
standard as production is continuous
5. Cell production
 Tasks are completed by teams of workers –
it is hoped that this will limit the
disadvantages of isolation and boredom for
workers and improve motivation.

 Each team has workers with different skills

needed to complete their task
 Advantages:
1. Teams operate with some independence in
decision-making eg choose their own
leader; how and when to rotate tasks –
leads to more motivation
2. Teams are accountable for the quality of
their work – improves quality standards
3. Team spirit leads to higher productivity
Disadvantages:
4. Output is lower than mass production
5. Conflict between team members may occur
6. Conflict between teams can occur
7. Capital intensive, so has high set-up costs
Whichever production system is chosen, there
are impact on other areas of the business

 Effects on Marketing:
 Job production = personalized service;
high prices; personal promotion
strategies

 Mass production = impersonal service;

lower prices as there are substitute
products; impersonal mass media
promotion
 Effects on Human Resources:
 Labor intensive or capital intensive – which
is cheaper?
 Mass production – lower skilled

workers required; poor motivation

levels due to boring repetitive work;
low wages paid; large pool of
applicants to choose from; low training
costs

 Job production – high skilled workers;

high wages; smaller numbers of
applicants to choose from; higher
training costs
 Effects on Finances:
 Mass production - Capital intensity is
expensive and requires large
investment in machinery and
equipment

 Job production – most finances are

spent on wages and other finanacial
benefits for workers
EXAM TIP!
 Common mistake

 Students often comment that batch

production is only suitable when small
quantities are being produced. While
this is true to some extent, batch
production can be used to produce large
quantities of output too.

 Many students treat mass production

and flow production as the same
method of production. While there are
similarities, be sure you can explain the
differences.
Comparison of the main
production methods 1 of 3

Job Batch Mass

Production Production Production
Set-up time There is a long As set-up is There is a very
set-up time as usually a long set-up as it
there is a new modification of takes time to
set-up for every an existing synchronize the
new job process, set-up whole process.
time can be
reasonably fast.
Otherwise it is
as for mass
production.
Cost per unit High Medium Low
Comparison of the main
production methods 2 of 3

Job Batch Mass

Production Production Production
Capital This can be A mixture of This can involve
(machinery) flexible as it machines is large numbers
depends on used, but this of general-
specific use. method is purpose
based on machines
general- designed for a
purpose specific
machines. function.
Labor High skilled Workers are Workers are
workers are semi-skilled and unskilled and
needed – and need to be need minimum
may be craft flexible. training.
workers.
Comparison of the main
production methods 3 of 3

Job Batch Mass

Production Production Production
Production time This is likely to Once set up, Production is
be long. production can swift.
be swift.
Stock This involves High quantities There will be
low quantities of raw materials high quantities
of raw materials are needed. of raw materials
and finished There will be and finished
stock but a high medium stock and a low
amount of work amounts of amount of work
in progress. work in in progress.
progress and
finished stock.
Changing production method
would have implications for
all the business functions
Implications for HR:
 Some workers may have to be redeployed,
retrained, or even let go, so human
resources would need to be carefully
managed

 Refining the roles and responsibilities of

workers and middle managers would require
careful planning
Implications for Marketing:
 Production runs can reflect the orientation
of a business as well as the choice of
product available to the consumer, so the
image or perception of the business may be
altered.
 Distribution channels may be affected,

which may lead to differing response times.

 Changes in costs of production could be

passed on to the consumer through

changes in price (which are likely to mean
an increase, at least in a short term, to pay
for the transition costs).
Implications for Finance:
 Changing production method will have an
impact on stock control, which affects costs.
 Changes may take time and could interrupt

current production, causing delays in the

working capital cycle.
 Any change will need financing, whether it

is short term or for significant developments

that may require major long-term funding.
What is the most appropriate
method of production for a
given situation?
 The most appropriate method will vary from
B2B – there is no one correct method
Factors affecting the decision
include:
 The target market – for example, the
business may be producing a high volumes
of a low-cost product for a very large
market with little disposable income
 The state of existing technology – this

can limit how flexible production can be

 The availability of resources – fixed

capital, working capital, and human capital

 Government regulations – for example, a

business may have to meet certain targets

for recycling or waste emissions
 Once a business has a particular production
method in place, it is not easy to change it,
because of the opportunity costs involved.

 However, it may be possible and suitable to

combine different methods which may
result in integrating the advantages of each
different model and making the business
more productively efficient.
 Example:
◦ Thai restaurant might have a continuous supply of
a staple food such as green curry, but would
produce batches of a less popular dish, for
example Tom Yam soup, and would even be able
to make a special order on demand
◦ Apple might mass produce its most famous
iPhones and iPads, but could also have limited
editions of luxury gold-plated $30,000 models.
In this way, the business can achieve
economies of scale from the mass-produced
products while satisfying the need for
changed in demand for more customized
and higher market products.
 There is no single recipe suggesting that a
particular business should adopt a
particular production method: there are
always advantages and disadvantages to be
compared and contrasted before a
recommendation can be made.
Questions 5.2.1 –
5.2.3
Exercises
 CUEGIS
Pages 487-488
Key Terms
REVIEW
 Batch Production
• Involves producing a set of
identical products. Work on this
method is fully completed before
production switches to another
batch. It is used where the
demand for a product is frequent
and steady.
 Capital Intensive
• Means that the manufacturing or
provision of a product relies
heavily on machinery and
equipment, such as automated
production systems. Hence, the
cost of capital accounts for the
largest proportion of capital –
intensive firm’s overall production
Cellular manufacturing
or cell production
• Organizes workers into
independent group with each team
comprising of multi-skilled staff
with responsibility and autonomy
for completing the whole unit of
work in the production process.
 Flow/Process
Production
• Uses continuous and progressive
processes, carried out in
sequence. When one task is
completed, the next stage of
production starts immediately.
 Mass Production
• Is the large-scale manufacturing of
a homogeneous (standardized)
product. Unit costs of production
are relatively low when using mass
production methods.
 Job Production
• Involves the manufacturing of a
unique or one-off job. The job can
be completed by one person (such
as a tailor) or by a team of people
(such as architects and engineers).
 Labor intensive
• Means the production relies
heavily on labor input, so the cost
of labor accounts for the largest
proportion of a firm’s overall
production costs. It is most
apparent in the provision of
personalized services (ie private
tutors, hair dressers, masseurs
and
 Productivity
• Measures the level of labor and/or
capital efficiency of a business by
comparing its level of inputs with
the level of its output.
 Specialization
• Means the division of a large task
or project into smaller tasks,
allowing individuals to concentrate
on an area of expertise. It is an
essential part of mass and flow
production.
 Standardization
• Means producing an identical or
homogeneous product in large
quantities, such as printing a
particular magazine, book or
newspaper.