2.3 Productive efficiency Flashcards
Productivity
Measures the efficiency with which resources are used.
Most common measure of labour productivity is output per person per hour
Labour productivity equation
Output per time period / Number of employees
Production vs Productivity
An increase in productivity will mean an increase in output but an increase in production may not always mean an increase in productivity
Physical capital
Tools and machines
Make labour more effective
Investment in new technologies is important; most modern production and distribution systems need sophisticated computer systems
Improvements in technology yield improvements in productivity
Human capital
Skills of the workforce
Education provides general skills, then improved and refined by specialist training
Increases with relevant experience
Organising resources more efficiently
Delays cause employees’ time to be wastes - improving way they are organised = increased productivity
Linking productivity and competitiveness
When successful businesses increase productivity, more can be produced using same amount of resources
Average costs fall - competitive advantage
Opens up opportunities to reduce prices, make quality improvements or simply increase profitability
Effective R&D projects can enhance productivity
Important for international competition
Productivity and wages
Improving productivity = can raise wages
Each employee can add more value
Bonuses
Productive employees = higher wages in new positions
Productivity and economic growth
Businesses become more productive, supply of consumer good increases, costs and prices may fall, standards of living rise and real incomes increase
Capital intensive production
Uses large amounts of capital and relatively little labour
More advanced an economy is = more capital intensive
eg: power stations - massive investment in plant and equipment and only a few people needed to operate plant
Labour intensive production
Uses large amounts of labour and relatively little capital
Developing economies with cheap labour + service sector
eg: healthcare
Capital and dynamic market
Tools and machinery may become obsolete
Failure to upgrade may mean losing competitive advantage
New investment in capital needed
Labour and dynamic market
Skills may no longer be needed
Retraining is often necessary
In general, new investment in human capital is needed
Capacity
The output a firm can produce with a given amount of resources
Full capacity
All the resources available to the firm are being used to the fullest extent all of the time
Spare capacity
Some of the time some resources are not being used and therefore there is a loss of potential output
Capacity utilisation
Measures what proportion or percentage of the theoretical maximum possible output is actually produced
Capacity utilisation calculation
(Current output / Maximum possible output) * 100
Under-utilisation of capacity
Capital equipment is lying idle some of the time = wasteful + productivity lower than it could be
Business producing less rhan it actually could: average costs rise because fixed costs are spread across a lower level of output
Business not as competitive as it could be
Over-utilisation of capacity
Business is trying to produce more than its capital equipment was designed for
Average costs higher than necessary - breakdowns + overcorwding etc reduces efficiency
Business not as competitive as it could be
Ways to reduce under-utilisation of capacity
Extend product range and promote new products vigorously
Focus on marketing effort to generate increased demand
Rent excess capacity to other businesses
LR close excess capacity - sell some machines + redundancy
Ways to reduce over-utilisation of capacity
Recruit more employees
Identify shortages
Sub-contract some production to other businesses
Training schemes to increase labour productivity
LR invest in increased capacity
Efficiency
Organising production so that waste is minimised and costs are the lowest possible
Lean production
General term given to any system of production that tries to minimise waste and cut costs at every stage of production and distribution
Components of lean production
Just in time - a way of managing stocks
Kaizen - continuous improvement
TQM - total quality management
Cell production - setting up teams that work flexibly
Job enrichment and empowerment - giving everyone more responsibility
Time based management - careful sequencing of tasks to reduce delays
Principle lean production works on
Continuous improvement
Quality
Can be an important source of competitive advantage
Business may be able to charge a higher price and gain increased profits
Improved quality = less wastage and reduced costs, improved profitability
Quality control
The traditional method of checking that products are of an adequate standard.
Drawbacks of traditional quality control
Does not identify the cause of the defect or find every faulty product
Expensive in terms of implementation and wastage of stock
Does not add value
Quality assurance
Ensuring that quality standards are agreed and met throughout the organisation
Reasons for quality assurance success
Putting in place systems that require high standards at each stage of production
Organising employees in teams that can collaborate and take responsibility for quality issues
Changing the corporate culture of the business, so that all employees see quality as a high priority
Focussing on preventing defects
Developing Kaizen and total quality management
Total Quality Management
Employees are all involved in quality control and take responsibility for the quality of their and their team’s work
Helps reduce costly wastage and reinforce employee motivation
Components for TQM
Committed leadership - management must be wholeheartedly behind the scheme
Employee empowerment - everyone must be involved and responsible for maintaining quality
Increased training - it takes time and effort to make employees aware of TQM
Kaizen and quality circles are important elements in TQM
Closer relationships with customers - determination to meet their needs
Closer relationships withs upplier -raising the quality of inputs
Benefits of TQM
Improved products and services
Reduced costs
Increased customer satisfaction
Brand loyalty + repeat purchases
Improved profitability
Competitive advantage
Motivated workforce
Drawbacks of TQM
Implementation costs
Takes time to set up
Retraining of employees
Increased pressure on managers
Does not suit all businesses
May be difficult to involve staff
Kaizen
Continuous improvement
Summarises whole company approach to quality and cost control
Everyone involved in search for improvements to product and production
Requires good teamwork
Kaizen means?
Everyone in business takes it upon themselves to monitor and improve qualit wherever possible
Improvements are small but spread throughout business add up to continually improving product or service
Customers benefit from better quality product
Kaizen trade off
Trade-off between price and quality
However, quality assurance, TQM and continuous improvement all may help to give business competitive advantage and add value
JIT
A stock control system that does away with the need to hold large quantities of stocks or raw materials
JIT in practice
Frequent deliveries of small quantities of supplies are made to the producer as and when they are needed
Involves building close relationships between suppliers and producer to ensure supplies do arrive on time and quality of components is reliable
No longer necessary to hold large reserve stocks which are experience to store and require finance
AC reduced = increased competitiveness
Advantages of JIT
Reduced costs in terms of buffer stocks and handling
Less need for storage space, can be converted to production
Greater flexibility in responding to changes in demand
Disadvantages of JIT
Will not benefit from reduced unit costs for bulk purchases
Break in supply = production will be lost
Heavy reliance on reliability of supplier
Competitive advantage from lean production
Improved quality = more satisfied consumers + reduced costs of production leads to possibility of reduced prices or increased profit margins
Producing only to order = reduces cost of storing unsold goods + cuts costs and waste by ensuring that the business is not left with unwanted stock
Advantages of lean production
Reduces wastage + related costs
Reduce costs of storage + handling
Improves quality
Fewer reject costs
Customers more satisfied with quality
Greater flexibility
Shorter lead times
More motivated staff, less staff turnover
No waste caused by unsold output
Disadvantages of lean production
Does not suit all production processes
Failure by one small supplier may halt entire production process
Some employees may not want more responsibility
Managers may not be flexible enough
May not be able to meet unexpected orders
Time based management
Aims to save time wherever possible, ensuring that no one is delayed by having to wait for other employees to finish their work
Product development lead time
Starts from the first idea about the product, through the design and development period, to being ready to start selling the final product
Benefits of short product development lead times
Reduces development time in product life cycle
Reduces costs
Improves cash flow
Can respond rapidly to changes in consumer tastes and demand
Can enter market before competitors do
GIVES BUSINESS COMPETITIVE ADVANTAGE
Drawbacks of short product development lead times
Requires that capital equipment, labour and management are flexible enough to do this
