In this lesson, learn about the different processes businesses use in the production of goods and services in our economy. You'll also learn about the concept of productivity and ways to improve it.
The Production Process
Imagine that you're a small business owner that started a successful bakery several years ago. You specialize in making muffins. A buddy from college has approached you about partnering up to bring your muffins to the national market. It sounds like a great opportunity, and you and your friend form a new company. You obtain financing to build an industrial bakery to mass-produce your muffins. However, before you complete construction, you need to figure out what production process you will use to make the muffins.
A production process is the method you'll use to turn inputs into muffins to sell. Inputs include raw materials, such as flour, sugar, oil, yeast, fruits and other ingredients you use for making muffins. Inputs also include the work you and your employees put into making the muffins. The production process is the manner in which you organize your muffin making activities. You have more than one production process from which to choose.
One option is to use mass production to produce your muffins. Mass production allows you to make massive amounts of muffins in a very efficient manner utilizing machinery, assembly lines and specialized labor. Each employee will be assigned a specialized task.
You'll have employees that are responsible for putting the ingredients into industrial mixers and employees responsible for monitoring the baking process. You'll also have employees who monitor the quality of the muffins as they leave the ovens and employees who package the muffins. Other employees will transport the packaged muffins to your shipping department for distribution to your retailers. This is a type of flow production where all production activities flow smoothly in one direction throughout the factory.
Since you are operating a bakery, the batch production process looks appealing. In batch production, you focus on producing a set quantity of one product at a time - called a batch. You can produce a batch of blueberry muffins followed by a batch of apple cinnamon muffins. You can then produce your chocolate chip and bran muffins. If you use batch production, it will be easier to keep your baking process running smooth because you won't have to worry about changing ingredients as much.
You also looked into job production as a method of production, but it didn't seem to be a good fit. Job production is all about a variety of products but at a low volume of production. The same tools and similar resources are used, but the products are diverse. For example, a wedding cake company might have a team of bakers working in an assembly line. However, unlike your muffins, each cake will be different in some way. Some cakes will have two tiers and some will have three or more. Some cakes will be chocolate, some white and some marble.
Each cake will be decorated in different ways as well. So, while each baker on the line will have the same job, the details of that job changes from cake to cake. Unlike making bran muffins, each wedding cake is a separate 'job' unto itself. If you were starting a custom wedding cake business, the job production process might take the cake, but you're mass-producing muffins.
Flexible Manufacturing System
You've looked into purchasing a flexible manufacturing system, but don't have the cash to do it right now. A flexible manufacturing system would allow you to almost completely automate your muffin manufacturing. Flexible manufacturing systems usually increase productivity and reduce costs in the long run. It also leaves the boring part of the job to the machines.
You pride yourself on your organic muffins. Since you want to keep the same level of quality when you go national, you are looking into just-in-time production. When using just-in-time production, you will not need to keep much inventory of muffins beyond what has been ordered by your retailers. This not only keeps your muffins fresh, but your business partner happy, because it also means you won't have a bunch of cash tied up in flour, yeast and blueberries until you need them.
Now, imagine that your factory is built and you've just completed your first year of muffin production. You are meeting with your business partner to discuss costs and revenue. While your business made a profit this year, you both feel that you could make even more money if you can increase the factory's productivity.
In order to be more productive, you must figure out a way to increase your muffin output per hour while maintaining their quality and keeping costs to a minimum. Your partner explains to you that productivity is simply how much output you get for your inputs. He even writes down an equation:
Productivity = Output/Input
He sees that you have a glazed look on your face as you stare at the equation. He smiles and tells you that all productivity really means is the number of muffins you make given the ingredients and manpower you put into making them. If you make more muffins with the same or less ingredients and man-hours, your factory has increased its muffin making productivity.
You realize that there are really two ways to increase productivity. You can either increase output or decrease inputs. Fortunately, productivity is an objective concept that is quantitative - it can be measured. You perform some research and find numerous factors that affect your muffin production that you can control. Some of these factors include investments in production, technology, equipment and facilities.
Productivity is also affected by the economies of scale - the more muffins you produce, the cheaper it costs to produce each muffin because you can buy ingredients in bulk. Worker training and experience also play an important role. You learn that you can also improve productivity through better work methods, procedures, systems and processes.
You and your partner decide to give lean manufacturing a try. Lean manufacturing is an approach to production management where you will try to continuously improve your production process by reducing inventory and streamlining the process. If you can reduce the amount of ingredients you waste, you'll be able to produce the same amount of muffins with fewer ingredients. And, if you can take out unnecessary steps in the muffin making process, you can produce more muffins per hour. This should help you increase your productivity.
Let's review what we've learned. Production consists of a process of turning inputs, such as labor and raw materials, into finished goods or services. Production processes vary and include mass production, batch production, flexible manufacturing and just-in-time-production.
Productivity is how much output you can get out of inputs. In other words, how much of your goods or services you can create with a given amount of raw materials and labor.
You can increase productivity if you are able to decrease inputs and maintain the same level of output. You can also increase productivity if you increase output using the same level of inputs. Lean manufacturing is one way to try to increase productivity. It involves continuously seeking to improve the production process by keeping inventory to a minimum and streamlining the production process.
Watching this lesson should help you learn to do the following:
- Describe several production processes, including mass production, batch production, flexible manufacturing and just-in-time production
- Define productivity
- List ways to increase productivity and explain how lean manufacturing relates to increased productivity