Topic 2.

The function of Production

1. The function of production
A production system is a method for converting inputs into outputs.

The production or operations management is the set of activities (functions) aimed at

planning, designing, staffing and controlling a firm’s production system. Initially, we have the
factors of production, then, we transform them through process and finally we have the
outputs which are sold in the market.
For example, in a hospital the inputs would be the people, the process would be the
diagnosis or intervention and the output would be the recovery of those people.

The objectives of the function of production are:

● Flexibility in the production,
● Products: adequate quality of the products, the value of it, its usefulness.
● To produce at the lowest cost that we can
● To comply with the time of delivery.
A potential contradiction of the objectives is that in order to have better quality, a higher
flexibility or to reach the time of the delivery, the cost would be higher.

2. Types of production systems

● Project production: Customized
and complex products developed
according to customer’s
specifications, in a given period of
time. ex: shipbuilding, roads…
● Craft production: made by hand or
with the help of specific tools. ex:
tailoring shops, order bakery
● Batch production: Low volume of a
high variety. Produces at a higher
size and more uniformly than craft.
ex: pharmaceuticals, heavy
machines
● Mass production: Produces at a high volume with low variability. Also uses people.
ex: Toothpastes, soaps, pens…
 ● Continuous or Process: Produces at the highest volume a single product, and there
is no differentiation in the final product. Uses machines and automatized processes.
ex: steel, cement, paper, sugar

The 5 generic types are grouped in 3 categories:

2.1. RIGID: would be mass or continuous production.
This model is based on the assembly line: it takes less time to learn a task
because of its simplicity (the learning process is cheaper for the company).
We suppress the cost of time for changing from one task to another. Easy
replacement of workers (and mechanization).
There is also a bureaucratization of the company, which divides the labor by
creating different job positions, with the assignment criteria of seniority.
○ Big volumes of production of standard products
○ Key variable: price. The products are of low price commercialization.
○ Labor intensive, but low qualified: there is high standardization and
specialization.
○ Capital intensive: There are specialized machines
○ There are high fixed costs and low variable costs.
2.2. FLEXIBLE/INTERMITTENT: it is used in batch and craft production. Variability
is very important and low volume is required.
The plant layout is based on teamwork, and as workers have more
responsibility, there are less hierarchical levels. Remuneration depends on
qualification.
○ Low volume of production with high variability products
○ Differentiated products
○ Higher qualified workers
○ Low level of mechanization
○ The equipment is for general use
So, according to production volume, it will be more convenient to use a rigid or a flexible
production process.
2.3. JUST IN TIME: Was born from the need of manufacturing many types of
automobiles, in small batches but under the same production process. It is
based on requests by demand and eliminates inventories (reduces storage
costs). It can be done in the markets of low growth.
○ Efficiency and flexibility
○ Manufacture high quality products
○ Reduce the whole production cycle
○ Assure short time of delivery
○ Important role played by suppliers (JIT)
 3. Types of layout
3.1. Functional or process layout
■ Advantages: There is a high use of the machines, which can be easily
replaced. If there are similar machines, operators can supervise them
easily. Finally, there is a specific incentive system for each worker.
■ Disadvantages: There is distance between functions(you cannot paint
a car in the same place where you assemble its parts). The flow of
materials (difficult to plan) and the operator’s work is difficult to
standardize. Finally, lines are not balanced: some are saturated and
others are free.
3.2. Product layout:
■ Advantages: There is few workload in process, so it requires less
space for transport and for the temporal storage of the products.
Planning and control systems are simplified. Operators need small
preparation and the flow of materials is easy to anticipate.
■ Disadvantages: It is an inflexible layout. Time is determined by the
slowest machine and problems in one machine affects the rest of the
process. “Bottlenecks” should be avoided. It is difficult to define
incentive programmes for each employee.
3.3. Fixed layout: Plant layout in which the product stays in one place and the
machinery, materials and labor are brought to that one place.

4. Production planning and control

Production planning is the determination of what products to produce and where, when and
how to produce them
Production control is the effort to ensure that production plans or schedules are met
We have to make some decisions in the production process:
Strategic or long-term
● Product design and production process choice.
● Localization: Impact on the whole competitiveness of the company
● Capacity: we must see if we are capable of producing the quantity that we want and
still be feasible.
● Layout: see how we arrange the machinery to determine the operative decisions
Operative or short-term
● Production process planning and control
● Control of efficiency
● Control of quality
● Control of stocks

5. Control of efficiency
Efficacy is not the same as efficiency, but, efficiency implies efficacy:
➔ EFFICACY: When we talk about
efficacy, we have to take into
account the level of goals that the
company has achieved. The closer
to the goals, the more effective the
system is.
➔ EFFICIENCY: Is the level of goals
achieved taking into account the
costs incurred The lower the
necessary costs to achieve the
goals, the more efficient the
system is.

6. Productivity

When we analyze productivity, we

must analyze the break-even point,
as it indicates at which point the
firm starts to make profit and stops
losing money. So, it is the volume
of sales/production at which the
company covers its total costs and
starts to get profits.
Practice the exercises in the power
point
There is a second way to use the previous formula, by using the margin. The margin is
calculated by subtracting to the price of the product the total variable cost.

The margin of safety represents the strength of the business. It enables a business to know
what is the exact amount it has gained or lost over or below BEP.

The operating leverage(apalancamiento operativo) measures how a change in sales

translates into a change in operating income (profit or loss). The quantity of sales and the
profit that will be obtained is determined by the owners of the company and then the
indications are carried away by the directors or managers.
OL should be over than zero, specially between 1 and two. If the company is in losses, the
ratio will be negative. If the company is very risky, the OL may be over 2 but this does not
mean a bad thing, just the risk. EX: building companies
Captures the income sensitivity, change in operating income for a given change in sales
(revenue). It is very used to compare companies in the same sector.
It is an Index of ECONOMIC RISK (operating risk).
Ceteris paribus: with all the factors not altered, the higher the fixed costs, the higher the
operating leverage is, so the company has more risk.
INTERPRETATION
OL = 3 . An increase in sales of 1% makes the profits increase by 3%. A decrease on sales
in a10% generates a decrease on profits by a 30%