Head to www.savemyexams.
com for more awesome resources
Cambridge (CIE) IGCSE Your notes
Business
4.1 Production of Goods & Services
Contents
The Meaning of Production
The Concept of Lean Production
The Main Production Methods
The Impact of Technology on Production
Page 1 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
The Meaning of Production
Your notes
Introduction to Production
Production is the transformation of resources (e.g. raw materials, components and labour) into
finished goods or services
Goods are physical products, such as bicycles and T-shirts
Services are non-physical items such as hairdressing, tourism and manicures
Diagram: the purpose of production
Raw materials are converted into finished goods/services. This process requires production and the
productivity of workers or machines
Page 2 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
This process of transforming inputs into outputs (goods and services) adds value to the raw materials
Competitive businesses combine these inputs of resources efficiently, making the most of the Your notes
resources so as to minimise costs and generate a profit
Operations management focuses on designing, controlling and improving the processes used in the
production of goods and services
It involves overseeing the entire production process, from acquiring raw materials to delivering the
final product/service to customers
Its goal is to ensure that the production process is efficient, cost-effective and meets quality
standards
The Difference Between Production & Productivity
The terms production and productivity are fundamentally different
Production is the act of adding value to the factors of production to create goods/services e.g. using
tomatoes & basil to create a soup
It is the process of converting the factors of production into goods/services
It is a measure of output e.g. 3 cans of soup
Productivity is a measure of efficiency that calculates the amount of outputs produced per unit of
input
It calculates how efficiently resources are being used in the creation of goods/services and aids
comparison of performance e.g. after training, workers proved to be 27% more efficient in their
productivity
Labour productivity is calculated using the formula
Output
Labour productivity =
Number of w orkers
Improving productivity
Productivity can often be improved so as to reduce costs. This can be achieved by
Increasing output using the same level of inputs
Maintain the level of output but using fewer inputs
Diagram: ways businesses can improve productivity
Page 3 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
Your notes
When costs decrease, a business can either pass on savings to consumers in the form of lower prices
or maintain the selling prices and enjoy higher profit margins
Businesses that increase their level of productivity are likely to be more competitive and are more
likely to be successful in the long term
WORKED EXAMPLE
The table shows the number of pairs of luxury wool socks produced by Sokkemani in 2021 and 2022
Year Units Produced
2021 46,000
2022 69,000
In 2021 Sokkemani employed 50 staff. In 2022 the number of staff employed by the business
increased by 20%
Calculate Sokkemani's productivity in 2021 and 2022. [3 marks]
Step 1: Calculate the labour productivity for 2021
Page 4 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
46, 000 units
=
50 workers (1) Your notes
= 920 units per worker
Step 2: Calculate the number of workers in 2022
= 50 workers × 1. 20
(1)
= 60 workers
Step 3: Calculate the labour productivity for 2022
69, 000 units
=
60 workers (1)
= 1, 150 units per worker
The Benefits of Increased Efficiency
Efficiency refers to the ability of a business to use its production resources as cost-effectively as
possible
Efficiency is often measured in terms of the average cost per unit
The average cost per unit is calculated using the formula
Total costs
Average cost per unit =
Number of units
Maximum efficiency is achieved when the cost per unit is at its lowest
Businesses that increase their level of productivity (e.g of workers or capital equipment) are likely to be
more competitive
Diagram: the benefits of improved efficiency
Page 5 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
Your notes
The link between productivity and competitiveness
Businesses that are competitive usually generate more profit. This provides the financial resources to
continue investing in improvements to their productivity
Why Businesses Hold Inventories
Inventories are raw materials, work-in-progress and finished goods held as stock
They enable production to take place to meet customer demand
To ensure that there is always enough inventory to satisfy demand, inventory levels must be carefully
controlled
Stock control diagrams
A stock control diagram illustrates the flow of stock (inventory) into and out of a business over time
Diagram of a stock control chart
Page 6 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
Your notes
An example of a stock control diagram
Diagram analysis
The maximum stock level is the maximum amount of stock a business is able to hold in normal
circumstances (1600)
The reorder level is the level at which a business places a new order with its supplier (800)
The minimum stock level is also known as the buffer stock level and is the lowest level to which a
business is willing to allow stock levels to fall (400)
The lead time is the length of time from the point of stock being ordered from the supplier to it being
delivered (1 week)
The stock level line shows how stock levels change over the given time period
As stock is used up, a downward slope is plotted
When an order is delivered by a supplier, the stock level line shoots upwards
Page 7 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
The Concept of Lean Production
Your notes
Lean Production
Lean production involves the minimisation of the resources used in production
Less time is required as the production process is organised in the most efficient way
Fewer materials are used as there is a focus on waste reduction
Less labour is used as lean production is typically capital intensive
The space required for production is reduced as a result of just in time stock management
A small number of trusted suppliers work closely with the business
The use of lean production is likely to lead to a competitive advantage
Lower unit costs are achieved due to minimal wastage so prices may be lower than those offered
by competitors
Better quality of output is likely as a result of supplier reliability and carefully managed production
processes
Lean production uses strategies such as Just in Time stock control and Kaizen
Just in time stock control
Just in Time (JIT) stock management is a process in which raw materials are not stored onsite but
ordered as required and delivered by suppliers 'just in time' for production
Careful coordination is required to ensure that raw materials and components are delivered by
suppliers at the moment that they are to be used
Close relationships with suppliers need to be developed
Suppliers may need to be in close proximity
The Advantages and Disadvantages of Just in Time Stock Management
Advantages Disadvantages
Stockholding costs including storage costs Bulk buying economies of scale are not
are minimised generally possible
Close working relationships are developed The ability to respond to unexpected
with a small number of trusted suppliers increases in demand is reduced
Page 8 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
Cash flow is improved as money is not tied up Administrative costs related to frequent
in stocks ordering are increased
Your notes
Unused storage space is available for Unreliable suppliers (e.g. late or poor quality
productive use deliveries) can quickly halt production
Teamwork is encouraged so employee Significant changes to organisational
motivation is likely to be improved structure and production controls are required
Continuous improvement (Kaizen)
Kaizen involves taking continuous steps to improve productivity through the elimination of all types
of waste in the production process
Changes are small and ongoing rather than significant one-off’s
They are constantly reviewed to ensure that they achieve the desired positive impact on
productivity
Kaizen requires a long-term management commitment to change
Diagram: to show Kaizen (continuous improvement)
Kaizen Versus One-off Improvements
Elements of Kaizen commonly include
Zero defects in manufacturing
Page 9 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
High levels of automation
High levels of cooperation between workers and management Your notes
Staff training and computer inventory management systems may also reduce wastage as fewer
errors are likely to be made
The Benefits of Lean Production
Lean production leads to the following benefits for a business
Right first time approach
Aims for zero defects in output
Identifies and solves problems as they arise
Prevent rather than corrects errors
Flexibility
Multiskilled staff and team working
Flexible management styles
Waste Minimisation
Removes processes that do not contribute to added value
Consumes as little as is necessary
Effective supply chain management
Develop excellent relationships with suppliers
Minimal number of suppliers
Continuous improvement
Ongoing, small steps
All staff involved in improvement
The seven wastes eliminated in lean production
Waste refers to anything that prevents a business from being efficient
Seven key types of waste are minimised in lean production
1. Transportation: Unnecessary movement of materials or products
2. Inventory: Excess raw materials, work-in-progress, or finished goods
Page 10 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
3. Motion: Unnecessary movement of people or equipment
4. Waiting: Delays or idle time in the production process Your notes
5. Overproduction: Producing more than what is required by the customer
6. Overprocessing: Using more resources than necessary to produce a product
7. Defects: Products or services that do not meet customer requirements
Page 11 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
The Main Production Methods
Your notes
Different Types of Production Processes
Businesses can organise their production processes in a variety of ways
The main methods of production
The method of production used by a business will depend upon a number of factors
The level of output required to be produced
The nature of the product
Whether the product is standardised or customised
The level of automation used in production
Assessing the Methods of Production
Method Explanation Advantages Disadvantages
Job Manufacturers produce High quality product Production is slow
Production one product at a time as
ordered by the customer Motivated and highly Labour costs are
skilled workers high
Customised products
can be produced
Page 12 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
Flow Continuous manufacturing Low unit costs due to Customisation is
Production of standardised products, economies of scale difficult
Your notes
usually on a production line
Rapid production Capital equipment
can be expensive to
Usually highly purchase
automated (capital
intensive)
Batch Groups of the same Workers can Requires careful
Production product are produced as a specialise coordination to
batch e.g. 1000 Blueberry avoid shortages
muffins Production can take
place as the previous Money is tied up in
'batch' starts running stock
out
Completed
products need to be
stored
Recommending an Appropriate Production Method
Small scale businesses often use job or batch production as they lack the resources for flow
production
Large scale businesses are more likely to use flow production to meet high demand for their products
Several factors may influence a businesses decision as to which type of production methods is used
Diagram: factors affecting the choice of production method
Page 13 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
Your notes
A business may change production methods as it grows over time
Explanation of factors
The level of demand
High demand may justify investment in flow production
The nature of the target market
Price-sensitive markets may require high volume, standardised products
High quality customised products require job production
The nature of the product
It may only be possible to produce certain products using one method, e.g. sports stadiums require
job production
The comparative costs of labour and capital
Large firms minimise labour costs by investing in automation
Cheap labour allows for labour-intensive production methods which generates the use of job or batch
production
The nature of the firm itself
Page 14 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
Small firms lack funds to invest in flow production
New technologies Your notes
As technologies become cheaper smaller firms can afford equipment previously inaccessible to them
and increase their level of flow production
The goals of the business
Firms seeking to maximise market growth and profitability may invest in flow production
Small firms may use job production methods to create unique selling points e.g. ‘hand-made’
Government policies
The government may stimulate economic growth by offering subsidies and tax breaks for investment in
technology
EXAM TIP
Carefully consider the needs of the customers to which a business sells when recommending a
suitable method of production. Where the selling price is a key driver of consumer demand, flow
production (where unit costs are minimised) is likely to be very suitable. Where demand is driven by
quality or where customisation is required, job or batch production are likely to be better choices.
Page 15 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
The Impact of Technology on Production
Your notes
Technology & Production
New technology is revolutionising flexibility in production
Two examples of this are
The use of computer aided design (CAD)
The use of 3D Printers
Increased use of 3D printers
Digital designs are uploaded and the printer produces the product with minimal labour costs
Digital printers have been used to print car engines, houses, food and more
The Impact of 3D Printing on Production
Impact Explanation
Cost Traditional manufacturing processes require expensive tooling and machinery
This is a significant upfront cost for small businesses
3D printing reduces the cost of manufacturing as there is no need for expensive
tooling
Productivity With traditional manufacturing, there are often long lead times for tooling and set-
up
This can delay production
3D printing allows quick production with minimal lead times
New products are brought to market faster
Changing customer tastes can be catered for
Page 16 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
Head to www.savemyexams.com for more awesome resources
Quality Traditional manufacturing may find it difficult to produce complex or intricate
designs
Your notes
3D printing allows for precise and accurate production of complex shapes and
designs, resulting in higher quality products
Flexibility Traditional manufacturing makes customisation to meet specific needs of
customers difficult
3D printing allows for small production runs which reduces the costs of a specific job
production
Page 17 of 17
© 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers
