U4: Increasing Efficiency and Productivity + Lean Production and Technology Flashcards
What is the definition of efficiency?
‘Output (production) is maximised from a given level of inputs’
What does an efficient use of inputs allows businesses to do?
Efficient use of inputs allows businesses to maximise production and therefore satisfy the needs of more consumers. Efficient use of inputs means fewer inputs are needed to produce a given level of output.
This reduces unit costs for the business.
What does lower unit costs enable?
Lower unit costs enable a business to gain a competitive advantage because a business can lower its prices and yet still maintain the same profit margin on its products. Where consumers desire high quality, the cost savings from greater efficiency can be used to improve the quality of the product.
What does high labour productivity and low efficiency suggest?
High labour productivity and low efficiency suggests greater investment in people by increasing workforce and reduce use of other inputs such as capital (machinery)
What might low labour productivity and high efficiency be best dealt by?
Low labour productivity and high efficiency may be best dealt with by increased investment in other inputs and reduced labour to increase efficiency.
What can high labour productivity and efficiency enable a business to increase?
High labour productivity and efficiency can enable the business to increase appeal to stakeholders as greater efficiency may allow:
- Pay higher wages
- Offer lower prices or improve quality
- Spend more money on the local environment
- Increase profits
Ways to increase efficiency?
• Land - increase soil fertility, factory farming
• Renewable/recycle
• Greater Education and Training
• Increasing level of investment in Capital Equipment
• Management Skills/risks
• Combining Factors of Production in a balanced way - don’t overuse one factor
• Extending levels of production mass production and internal “Economies of scale”!
What are the economies of a scale?
‘The advantages that an organisation gains due to an increase in size. These cause an increase in efficiency (lower unit cost) and tend to improve labour productivity’
What are the economies of scale?
Economies of scale are the reduction in average costs per unit that a firm benefits from as a result of increasing the scale of their business.
Why does large firms gain advantages?
Large firms gain advantages from economies of scale that smaller firms do not. This gives large businesses a competitive advantage.
What happens as output increases?
As output increases so the long run average costs of the firm fall until the business becomes so big that LRACS begin to rise and diseconomies occur.
What are the two types of the economies of scale?
Economies of scale can be categorised as either internal economies or external economies.
What is an internal economy?
An internal economy of scale is a benefit that a company receives from an increase in their size leading to a reduction in their average cost per unit.
What is an external economy?
An external economy is the advantages of scale that benefit an entire industry and not just an individual business.
What are the key types of economies of scale?
- Purchasing
- Technical
- Financial
- Managerial
- Marketing
What is another economy of scale?
Financial: Larger companies should find it easier to get loans and pay less interest. They will also find it easier to access funds from other sources such as retained profits and shareholders.
What is another economy of scale?
Research and development: larger companies can afford to devote more money to innovation and R&D. This expenditure should enable a business to discover new products and find easier ways to produce goods.
Managerial & Administrative Economies
• The larger the company, the more specialized each manager can become.
• Use of specialists - accountants, marketing. lawyers, production, human resources, etc
• In a small business, there is usually only one manager who has to do everything.
• In a large business, there is a larger span of control, with specialist managers for each department.
What are are the difficulties increasing labour productivity and efficiency:
Difficulties increasing labour productivity and efficiency:
Not all land can be made more fertile, environmental objectives conflict and some resources are not renewable all of which may limit or prevent improvements in labour productivity and efficiency.
What’s the diseconomies of scale?
Eventually as a business continues to increase their scale of operations, their LRAC curve will start to show a rise in costs.
These increases in average costs are known as diseconomies of scale and occur as a result of growing inefficiencies brought about because of a difficulty in controlling the large size of the business.
Examples of diseconomies of scales?
The 3 main examples of diseconomies are:
- Co-ordination
- Communication
- Motivation
Co-ordination Diseconomies
• As a business grows in size, different working practices are used and people are now spread out across different locations (sometimes globally).
• This makes it increasing difficult for management to monitor all activities of the business and to ensure that corporate objectives are being followed.
• As mistakes start to occur, so costs of reworking and corrective action increase and this leads to a rise in the LRACS.
Communication Diseconomies
Whilst a business remained as an SME, the owners were able to relatively easily speak with all staff on a regular basis.
As a business grows, so too do the levels of hierarchy, the number of staff and the number of branches.
This makes it much harder for all staff to be communicated with effectively and messages get lost.
This can lead to some staff not understanding their role within the organisation or following different objectives to those of the company.
Such actions lead to lower levels of productivity and a rise in LRACS.
Communication Diseconomies
Whilst a business remained as an SME, the owners were able to relatively easily speak with all staff on a regular basis.
As a business grows, so too do the levels of hierarchy, the number of staff and the number of branches.
This makes it much harder for all staff to be communicated with effectively and messages get lost.
This can lead to some staff not understanding their role within the organisation or following different objectives to those of the company.
Such actions lead to lower levels of productivity and a rise in LRACS.
Motivational Diseconomies
• As a result of a combination of poor co-ordination and communication, employees can quickly become demotivated.
• Poor motivation will lead to lower levels of productivity and production which will raise costs and make a firm less competitive within the market.
Co-ordination diseconomies
- Loss of management control as a business becomes more complex
- If control is reduced policies may not be followed (managers may have wider Spans of Control)
- Large firms often rigid and inflexible in their policies which makes they less responsive to customer needs
Communication diseconomies
- Too many layers in the hierarchy reduces effective communication (distortions!)
- Spans of control may mean more difficult for managers to meet with subordinates
- Larger firms use standardised approaches which may not be appropriate
- Employees may feel undervalued and demotivated
Communication diseconomies
- Too many layers in the hierarchy reduces effective communication (distortions!)
- Spans of control may mean more difficult for managers to meet with subordinates
- Larger firms use standardised approaches which may not be appropriate
- Employees may feel undervalued and demotivated
Motivation Diseconomies
- Bigger business tend to have more difficulty assessing the needs of individuals, even if motivational techniques are used.
- Larger firms have less time for recognition and reward
- Larger firms create a “them & us” situation due to distance between decision makers & employees
Motivation Diseconomies
- Bigger business tend to have more difficulty assessing the needs of individuals, even if motivational techniques are used.
- Larger firms have less time for recognition and reward
- Larger firms create a “them & us” situation due to distance between decision makers & employees
Economies & Diseconomies and Unit Costs relation
• The fixed costs stay the same so unit costs fall as output rises.
• Variable Costs increase at a slower rate because large scale production enables the organisation to combine the Factors of Production more efficiently
• The firm can benefit from the economies of scale described earlier.
Diseconomies
Once the output rises beyond nine units, diseconomies of scale outweigh economies of scale.
Although economies of scale such as bulk buying may be helping lower unit costs problems such as co-ordination are having a larger impact and so unit costs rise!
Difference between Labour Intensive vs Capital Intensive
Labour intensive production relies on using labour resources and capital intensive production relies on using capital resources
What is Capital Intensive?
Methods of production that use a high level of capital equipment in comparison to other inputs such as labour - e.g. car plant such as fiat, nuclear power stations, cloud hosting
What is Labour Intensive?
Methods of production that use a high level of labour in comparison to other inputs such as capital equipment - e.g. many service industries such as restaurants and call centres
Examples of Capital Intensive
Oil extraction & refining, car manufacturing, web hosting, intensive arable farming, transport infrastructure
Examples of Labour Intensive
Food processing, hotels & restaurants, fruit farming, hairdressing, coal mining
Benefits of Capital Intensity
- greater opportunities for economies of scale
- potential for significantly better productivity
- better quality and speed (depending on product)
- lower labour costs
Drawbacks of Capital Intensity
- significant investment
- potential for loss competitive due to obsolescence
- may generate resistance to change from labour force
Benefits of Labour Intensity
- unit costs may still be low in low-wage locations
- labour is a flexible resource - through multi skilling and training
- labour at the heart of the production process - can help continuous improvement
Drawbacks of Labour Intensity
- greater risk of problems with employee/ employer relationship
- potentially high costs of labour turnover (recruitment etc)
- need for continuous investment in training
Implications of Labour Intensive for Unit Costs
- Labour costs higher than capital costs
- Costs are mainly variable = lower breakeven output
- Firms benefit from access to sources of low-cost labour
Implications of Capital Intensive for Unit Costs
- Capital costs higher than labour costs
- Costs are mainly fixed = higher breakeven output
- Firms benefit from access to low-cost, long-term financing
What is Lean Manufacturing?
‘a systematic approach to identifying and eliminating waste (non-value added activities) through continuous improvement by flowing the product at the pull of the customer in pursuit of perfection’ - James Womack
What did James Womack and David Jones identify?
James Womack and David Jones identified 5 factors of lean manufacturing: value, value stream, flow, pull, perfection
What is bottle neck?
Bottle neck is where a point in a process where the flow of work becomes delayed or breaks down completely
What will applying lean principles create?
Applying lean principles will create shorter lead time/ turn around time, a decrease in inventory and an increase in productivity and quality
What does Lean Production include?
- Just in time management (JIT)
- Quality Circles ( small group of people who implement kaizen/ discuss and solve problems in production)
- Total Quality Management (TQM)
- Kaizen (continuous improvement)
- Cell production
What is Lean Production?
‘production based on the range of time saving and waste-saving measures inspired by Japanese manufacturing companies’
Examples of companies that use Lean Production?
- Toyota
- Caterpillar
- Ford
- Nike
- Intel
What is Just in Time Management?
‘a Japanese philosophy that organises operations so that stock (inventory) arrive just at the time they are needed for production or sale. The ultimate aim is to eliminate the need for stock, although in practice this is not always ideal’
What is time based management?
Time is a resource and lean production can help. Reducing unproductive time leads to:
- quicker response times
- faster new product development
- reduced waste
- greater efficiency
What does stock include?
Stock (inventory) includes:
- raw materials
- components
- work in progress
- finished goods
What is technology?
‘in the business world, the application of practical, mechanical, electrical and related sciences to industry and science’
