LECTURE NOTE
By:
NGANG PEREZ MORFAW
670-204-480
The concept of production or manufacturing is more important than ever today, and so will its
importance ever keeps increasing as the days go by. The word manufacturing was originally
derived from two Latin words manus (hand) and factus(make), so that the combination
means make by hand.
In this way manufacturing was accomplished when the word first appeared in English around
1567. Commercial goods of those times were made by hand. The methods were handicraft,
accomplished in small shops and the goods were relatively simple. As many years passed, the
products become more complex along with processes. Thus factories were developed with
many workers at a single site; the work was organized using machines
Modern manufacturing enterprises that manage these production systems must cope with the
economic realities of the modern world. These realities include the following: Globalization,
Trend toward the service sector, International outsourcing, Quality expectations, Local
outsourcing, Operational efficiency, Contract manufacturing and the uncertainty of
customers change of taste
The Production function or department is that part of an organization, which is concerned
with the transformation of a range of inputs into the required outputs (products) having the
requisite quality level. Production is defined as the step-by-step conversion of one form of
material into another form through chemical or mechanical process to create or enhance the
utility of the product to the user. Thus production is a value addition process. At each stage
of processing, there will be value addition. Edwood Buffa defines production as a process by
which goods and services are created.
It is said from preliminary studies that production is not yet complete till the goods reaches
the final consumers. Therefore, production function enables the required goods or services to
reach the final consumers. The factors that influence this production has never changed over
time (land, labour, capital and the entrepreneur) but their degree of usage and complexity
coupled with the advent of technology has greatly influenced the pace of manufacturing in the
twenty first century business environment. Thus their rewards remain the same as rent is
being considered the reward for land, wages for labour, interest for capital and profits goes to
the entrepreneur. It is important to note that economic production is based on the concept of
wants and not needs. This is because in contemporary business, exchange is principally done
on the foundation of wants and not needs. So, production is not just a function of your
capacity to produce as much as you can, but it is also a reflection of whether you are
producing wants or needs for the consumers.
From basic economics, we are made to know that needs are the basic necessities for human
survival. This simply means that it does not follow the normal laws of demand and supply in
the market, neither does it respect the individual desires of consumers. Thus once a need
arises, the only remedy for it, is an unconditional satisfaction. For example, when the need for
food arises as a result of true hunger, its satisfaction is not influence by preference for a
particular meal. Other examples of needs are shelter, clothing, transport and even
communication. You cannot say under normal circumstances that you need a means of
communication but want a blackberry phone. That is no longer a need but an expression of
your desire. Need is not a function of desire, rather it is a function of necessity. Thus, we
often hear the famous saying a beggar has no choice. Choice is that decision that originates
from the bed rock of desire which influences human behavior to any extend. On the other
hand, production should be based on the platform of wants. This is because wants have the
option of choice imbedded in it. Preliminary studies of economics makes us understand that
wants are considered as the expressions of a choice desire by the consumer of a product. This
means that man by nature has an infinite pool of desires but when he succeeds to make a
decision over a particular desire, it becomes a want, generally considered as his chosen
desire. At this level his decision is not influence by price of the good which he wants.
The above explanations justify the reason why the production function is a very important
aspect in the business of any organization whether for profit or nonprofit. What you produce
has a great role to play in this perspective. This becomes a reason why many African
businesses do not grow fast and may be justified with a high rate of mortality in the new
ventures created in the countries. It is good to copy successful business lines and in fact you
should be smart to that, but mere copying is not sufficient enough to guaranty success in an
environment characterized with fierce competition from both the multinationals and domestic
companies.
So, when we talk of production improvement program, the first question that should come to
our mind is what are we producing? it is on the basis of what we produce, that we can find
measures to improve on it. Therefore the focus of this course is centered on two dimensions;
firstly we shall discuss what production is all about and secondly we shall consider measures
of improving on the production.
CHAPTER ONE
THE CONCEPT OF PRODUCTION
Put simple, production is the process of combining units of inputs (natural, man-made and
human resources) to create output (goods and services) capable of satisfying human needs
and wants. It is important to note that, this definition is not limited to the traditional methods
of production characterized by the manufacturing of semi-finished and finished goods from
raw materials. Many people often limit the concept of production to the transformation of
Cocoa from Cameroon to Chocolate in France or the transformation of Banners from
Cameroon to Biscuits from America or the transportation of Timber from Cameroon for
transformation in to chairs, cupboards and tables. This is good, but there exist production in
contemporary society that challenges the traditional style and happens to be the new trend of
global production. From this perspective, production will include works of musicians, the
talents of people, the development of certain places, the organization of events, business
ideas, new style of leadership and many more conventional things which happen on daily
basis, that before now could not considered marketable. In this sense, development becomes
an integral part of production whether personal development or community development.
Over time with research people created new products that beat the imagination of others for
example the self-driving car Tesla and Google Car created in America. Production could
equally be seen at the level of consistent training people under go become super stars in their
respective fields of professionalization. For example Etoo in Football, Michael Jackson in
pop music, Lucky Dube in reggae music, Nelson Mandela in Leadership and the example
continues with most recently the Obama style of leadership copied as the model all over the
world. People pay extremely high prices to consume the products of these super stars,
especially at the level of the entertainment industry. The entertainment industry has risen to
become one of the most dynamic sectors in emerging as well as transition economies. It is
characterized by modern and sophisticated services offered by theses countries ranging from
football, wrestling, and home videos to cultural festivals. Furthermore, production could also
be seen at the level of community development in specific areas of the World with super
impose gigantic technological structures which attracts a high percentages of visitors as
tourist. For example Dubai down town City, Las Vegas, Beijin and many more.
From this perspective, production will involve the tangible as well as intangible goods.
Tangible goods are the ones which can be touched or seen whereas the intangible are those
which cannot be seen, for example services. In the transformation process, the inputs change
the form into an output, by adding value to the entity. The output may be a product or service.
If it is a product centric output, it is known as production. If it is a service centric output then
it is known as operation.
Continuous
Inventory
Quality
Cost
Environment
Feedback Information
Fig. 1. Schematic production system
The classification of the different types of production systems can be seen below on the
diagram
Production starts with the idea of the product. It recognizes that in a consumer democracy
society, money is considered as votes and they are cast daily. However, to win those votes
you need to offer either a better product at the same price or the same product at a lower price
than your competitors. Price is objective and tangible but what is a better product? Only one
person can tell you the consumer. It follows, therefore, that a product development starts
and ends with consumers and requires one to make what one can sell rather than struggle to
sell what one can make. But production is not a philanthropic exercise in which producers
give away their goods. Producers are entitled to profits and the more value they add and the
greater the satisfaction they deliver, the more the customer will be prepared to pay for this
greater satisfaction. Production therefore is all about mutually satisfying exchange
relationships for which the catalyst is the producers attempt to define and satisfy the
customers need better.
Introduction Stage
The introductory stage is viewed as fairly risky and quite expensive because
large amounts of money is spent on advertising and other tools of marketing
communications to create consumer awareness in sufficiently large numbers,
and encourage trial.
3D Televisions: 3D may have been around for a few decades, but only after
considerable investment from broadcasters and technology companies are 3D
TVs available for the home, providing a good example of a product that is in the
Introduction Stage.
Growth Stage
The growth stage of life cycle is characterised by a sharp rise in sales. Only a
small percentage of new products introduced survive to reach the growth stage.
Tablet PCs: There are a growing number of tablet PCs for consumers to choose
from, as this product passes through the Growth stage of the cycle and more
competitors start to come into a market that really developed after the launch of
Apples iPad. Another example is NANO car.
Maturity Stage
Most products after surviving competitive battles, winning customer confidence
and successful through growth phase enter their maturity stage. The sales
plateau, and this flattening of sales usually lasts for some time because most
products in the category have reached their maturity stage, and there is stability
in terms of demand, technology, and competition.
Laptops: Laptop computers have been around for a number of years, but more
advanced components, as well as diverse features that appeal to different
segments of the market, will help to sustain this product as it passes through the
Decline Stage
Decline stage sets in when customer preferences change due to the
availability of technologically superior products and consumers shift in
values, beliefs, and tastes to products offering more value.
Implications and Limitations of Product Life Cycle Concept
Product life cycle concept shows a framework to spot the occurrence of
opportunities and threats in a product market and the industry. This can help
firms to reassess their objectives, strategies, and different elements of marketing
programme.
DEFINITION
Breakeven point (BEP) is the point at which cost or expenses and revenue are
equal. There is no net loss or gain. All cost that need to be paid by the firm are
paid but the profit remains zero
Break Even Point (IN UNIT)= Fixed Cost /S. Price- Variable Unit Cost
Break Even Point (in Rs)=Fixed Cost/ S. Price-Variable unit Cost*Units
Example:
XYZ co. ltd
1000 tables ( break even)
More than 1000 tables( profit )
Less than 1000 tables(loss)
Alternate option
Try to reduce the fixed costs (by renegotiating rent for example, or keeping
better control of telephone bills or other costs)
Try to reduce variable costs (the price it pays for the tables by finding a
new supplier)
PURPOSE
The purpose of break-even analysis is to provide a rough indicator of the
earnings impact of a marketing activity.
The break-even point is one of the simplest yet least used analytical tools in
management.
It helps to provide a dynamic view of the relationships between sales, costs, and
profits
The break-even point is a special case of Target Income Sales where Target
Income is 0 (breaking even).
This is very important for financial analysis.
CHAPTER FIVE
THE CONCEPT OF PRODUCTIVITY
Before we make some progress into the concept of productivity, it is important to establish
the distinction that exist between production and productivity. Many people often, are
confused between what is production? And what is productivity? In this context, we shall
differentiate both to some extent.
Defining Productivity
Productivity represents the relationships between inputs and outputs in the production
process. As a practical concept, productivity helps define both the scope for raising living
standards and the competitiveness of an individual worker, company or economy.
Productivity has, therefore, an increasing role in formulating and assessing government
policy.
Productivity is the ratio between output and input. It is quantitative relationship between what
we produce and what we have spent to produce.
Productivity is nothing but reduction in wastage of resources like men, material, machine,
time, space, capital etc. It can be expressed as human efforts to produce more and more with
less and less inputs of resources so that there will be maximum distribution of benefits among
maximum number of people. Productivity denotes relationship between output and one or all
associated inputs. European Productivity Council states that Productivity is an attitude of
mind. It is a mentality of progress of the constant improvement of that which exists. It is
certainty of being able to do better than yesterday and continuously. It is constant adoption of
economic and social life to changing conditions. It is continual effort to apply new techniques
and methods. It is faith in human progress. In the words of Peter Drucker productivity means
a balance between all factors of production that will give the maximum output with the
smallest effort. On the other hand, according to International Labour Organisation
productivity is the ratio between the volume of output as measured by production indicates
and the corresponding volume of labour input' as measured by production indices and the
corresponding volume of labour input as measured by employment indices. This definition
applies to an enterprise, industry or an economy as a whole.
The productivity of a certain set of resources (input) is therefore the amount of goods or
services (output) which is produced by them. Land and building materials, machines,
manpower (labour), technology etc. are the resources at the disposal of a manufacturing
company. Therefore higher (improved) productivity means that more is produced with the
same expenditure of resource i.e. at the same cost in terms of land, materials, machine, time
or labour, alternatively, it means same amount is produced at less cost in terms of land,
materials, machine time or labour that is utilized.
In countries where capital and skill are short, while unskilled labour is plentiful and poorly
paid, it is especially important that higher productivity (improved) should be looked for by
increasing the output per machine or piece of plant or per skilled worker. Improving
productivity means increasing or raising productivity with the help of using same amount of
materials, machine time, land, labour or technology. The following examples of each type of
productivity may make improved or higher productivity meaning clearer.
1. Improved productivity of land:
If by using better seed, better methods of cultivation and more fertilizer, the yield of corn
from a particular hectare of land can be increased from 4 quintals to 6 quintals, the
productivity of that land, in the agricultural sense is increased (improved) by 50 percent. The
productivity of land used for industrial purposes is said to have been increased if the output of
goods or services within that area of land is increased by whatever means.
A skilled tailor is able to cut 12 suits from a bale of cloth where an unskilled labour is able to
cut only 10 suits from a bale of cloth, then the productivity of the bale used by skilled worker
is 16.6 percent greater than unskilled labour.
A machine tool is producing 90 pieces per working day (i.e. 8 hours). Considering that
through the use of improved cutting tools, the output is increased to 120 pieces, then the
productivity of that machine will be increased by 33.33 percent.
The worker is producing 32 plates per hour. Considering that with the improved methods of
work, he will be able to produce 42 plates per hour, then productivity of worker will be
improved by 31.25 percent.
Thus it can be said that more output results into higher productivity or improvement from
same amount of resources which means lower money costs and higher net money returns per
unit of output.
Physical
goods and Customer Q
services Satisfaction U
produced A
L
Output I
T
Resource Processed Impact Y
Pollutants on
Generated
Reflected By L
Quality I
Employee of F
Satisfaction Work Life e
HOW TO MEASURE
Productivity is the relationship between the quantity of output and the quantity of input used
to generate that output. It is basically a measure of the effectiveness and efficiency of your
organization in generating output with the resources available.
Productivity is defined as a ratio of output to input:
OUTPUT
PRODUCTIVITY =
INPUT
Total productivity index Total output Total production of goods and services
Total inputs Labour + Material + Capital + Energy
This index measures the productivity of the entire organization with use of all resources. It is
a way of evaluating efficiency of entire plant or firm.
It has been said that the challenge of productivity has become a challenge of measurement.
Productivity is difficult to measure and can only be measured indirectly, that is, by measuring
other variables and then calculating productivity from them. This difficulty in measurement
stems from the fact that inputs and outputs are not only difficult to define but are also difficult
to quantify.
Any productivity measurement system should produce some sort of overall index of
productivity. A smart measurement program combines productivity measurements into an
overall rating of performance. This type of system should be flexible in order to
accommodate changes in goals and policies over time. It should also have the ability to
aggregate the measurement systems of different units into a single system and be able to
compare productivity across different units.
The ways in which input and output are measured can provide different productivity
measures. Disadvantages of productivity measures have been the distortion of the measure by
fixed expenses and also the inability of productivity measures to consider quality changes
(e.g., output per hour might increase, but it may cause the defect rate to rise). It is easier to
conceive of outputs as tangible units such as number of items produced, but other factors
such as quality should be considered.
Experts have cited a need for a measurement program that gives an equal weight to quality as
well as productivity. If quality is included in the ratio, output may have to be defined as
something like the number of defect-free units of production or the number of units which
meet customer expectations or requirements. Therefore, it is very much essential to
understand different techniques of measuring the productivity and its improvement. In
practice, there are multiple productivity improvement techniques. Section 3.5 explains some
of the important techniques for measurement of productivity. They are discussed briefly as
follows:
Productivity Improvement Indices:
Labour productivity (in terms of money) Total cost (or sales value) of output
produced Amount in terms of rupees spent on workers
The productivity of labour can be increased by increasing efficiency of labour and reducing
labour time.
ii) Material productivity: Production system converts raw material into finished
product with the help of mechanical or chemical processes. Material
productivity plays important role in cost of production. Material productivity
depends upon how material is effectively utilised in its conversion into finished
product. Material productivity depends upon percentage of rejection, creation of
scrap, level of spoilage, obsolescence, work wastage etc. Material productivity
is expressed as:
Total output
Material productivity or
M aterial input
Material productivity can be increased by using skilled workers, adequate machine tools,
good design of product etc.
iii) Machine Productivity: Production system converts raw material into finished
product through mechanical or chemical process with the help of machines and
equipments. Machine productivity depends upon availability of raw material,
power, skill of workers, machine layout etc.
iv) Capital productivity: For any production set-up, facilities of machines, tools,
land etc. are required which are assets of organisation. Capital is needed for such
assets. As huge capital is locked in assets, their effective utilization is absolutely
necessary. Capital productivity depends on how effectively assets are utilised.
Therefore decision is necessary to take about replacement of fixed assets. Early
replacement of fixed assets brings down maintenance cost but requires capital
expenses. On the other hand, late replacement of fixed assets improves ratio of
production to capital expenditure, but it increases maintenance cost. Therefore
proper balance is necessary. Organaisation spent large amount (direct expenditure)
for assets like direct material, direct wages, land, building, equipment etc. But a
production system incurs a lot of direct expenditure like salaries of manpower
employed in planning, store keeping, record keeping, inspection etc. Indirect
labour is also used for material movement, good housekeeping, cleaning etc.
Indirect expenditure is incurred on indirect material like tools, oils, lubricant etc.
Capital productivity Total output or Capital productivity Total output
Capital input Capital employed
A) JIDOKA:
Jidoka is a Toyota concept aimed at describing the man-machine interface such that people
remain free to exercise judgment while machines serve their purpose. The jidoka system
shows faith in the worker as a thinker and allows all workers the right to stop the line on
which they are working. Jidoka is often referred to as automation with a human mind. The
jidoka way of working consists of following three principles- Do not make defects, Do not
pass on defects, Do not accept defects.
B) HEIJUNKA
i) Five Ss of Housekeeping:
A structured approach to achieve clean and orderly work place by fixing place for everything.
Five Ss is an abbreviation for the Japanese words: Seiri, Seiton, Seiso, Seiketsu and Shitsuke.
It means:
Seiton- Arranging items (materials, tools, gauges) systematically for easy retrievability.
Shitsuke - Making all the above task meet agreed standards at agreed intervals.
Muda means Waste. Here muda elimination implies an on going and systematic reduction
or elimination of waste. There are seven kinds of major waste: Overproduction Muda, Stock
Muda, Transport Muda, Defects Muda, Delay Muda, Motion Muda, Over processing Muda. It
helps to eliminate redundant processes or parts of processes, delete non-value added
activities, simplify motions, minimize fatigue, reduce wait time, etc.
(iii) Poka-Yoke:
Single Minute Exchange of Die (SMED) is a technique of performing a set up operation in lesser
amount of time .It affects a machinery setup for change over from job to another in less than 10
minutes expressed as a single digit. It helps in reduced Work-in-progress, better average daily
production, increased capacity and faster delivery to customers.
(v) Just-In-Time:
JIT is a management philosophy aimed at eliminating waste from every aspect of manufacturing
and its related activities. The term JIT refers to producing only what is needed, when it is needed
and in needed quantity. The aim of JIT in a factory is to reduce lead times, minimise inventory,
reduce the defect rate to zero and accomplish all of the above at minimum cost. There are three
essential ingredients to effective manufacturing excellence through JIT: (i) JIT manufacturing
techniques that aims to promote a rapid response to customer demand while minimising
inventory (ii) a total quality culture to pursue excellence in both the product and every area of the
business, including customer service, purchasing, order taking, accounting, maintenance, design,
etc.; and (iii) people or employee involvement in the development of the organisation through its
culture and its manufacturing and other business processes.
(vi) Kanban:
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WHY DOES PRODUCTIVITY MATTER?
Productivity isnt everything, but in the long run it is almost everything. A countrys ability to
improve its standard of living over time depends almost entirely on its ability to raise output per
worker (Paul Krugman, OECD, 2006). Defining productivity may be the start, but the key
question is: why does productivity matter? How, as an economic concept, does it relate to people
living their day-to-day lives? In everyday life, people care about their living standards and would
like to see them improved as much as possible for themselves and for others. The main economic
indicator for living standards has traditionally been national income, although it is widely
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acknowledged as being imperfect. Consequently various alternatives have been considered over
time and productivity is one of such.
Economic theory, economic behaviour and actual consumer spending patterns suggest that the
majority of people want an increase in the quantity and quality of goods and services available.
At the same time, they would like it at as small a cost as possible.
Importance of Higher Productivity:
Any of these scenarios may be realized through improved methods, investment in machinery and
technology, improved quality, and improvement techniques and philosophies such as just-in-
time, total quality management, lean production, supply chain management principles, and
theory of constraints.
A firm or department may undertake a number of key steps toward improving productivity.
3
William J. Stevenson lists these steps to productivity improvement:
Develop productivity measures for all operations; measurement is the first step in managing
and controlling an organization.
Look at the system as a whole in deciding which operations are most critical; it is over-all
productivity that is important.
Develop methods for achieving productivity improvement, such as soliciting ideas from
workers (perhaps organizing teams of workers, engineers, and managers), studying how
other firms have increased productivity, and reexamining the way work is done.
Make it clear that management supports and encourages productivity improvement. Consider
incentives to reward workers for contributions.
Don't confuse productivity with efficiency. Efficiency is a narrower concept that pertains to
getting the most out of a given set of resources; productivity is a broader concept that
pertains to use of overall resources. For example, an efficiency perspective on mowing the
lawn given a hand mower would focus on the best way to use the hand mower; a productivity
perspective would include the possibility of using a power mower
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Therefore it is essential to know the importance of higher / improved productivity in
manufacturing company/ organization. Thus importance of productivity can be summarized as
follows:
ii) Higher productivity leads to economic growth and social progress. Higher
productivity helps to reduce cost per piece which make product available at cheaper rate.
Thus it is beneficial for consumers. Low price increases demand of the product which in
turn increases profit of the organisation. Higher profit enables organisation to offer higher
dividend for shareholders. It increases export and increases foreign exchange reserves of
a country.
iv) Improvement in productivity is important for country like ours because it can
minimise level of poverty and unemployment.
Improving productivity results in improved living standards. This is because an increase in
productivity translates into an increase in output (amount and quality) without any increase in
input (labour and materials). In this context, labour can be seen as the amount of effort required
to produce a good or service. The term living standards also covers the way the output of these
goods and services is distributed within a population. It is not just overall productivity of an
economy that is important but also how it varies across the economy and across the people living
in it. Therefore the productivity of different geographical areas is important, as is the
productivity of different industries or types of firms and even the individual employees.
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