Basics of Production

Basics of Production

This is the decision that a business or an industry makes concerning its geographical placing in a country. There are many factors which influence the precise location of a business or an industry, including:

  • The cost and the availability of land. Land in an urban area is clearly less abundant (and therefore more expensive) than land in rural locations or on the edge of towns and cities. Therefore it would be advisable, and also more feasible, for a business which requires a large amount of land to locate away from the centre of an urban area.
  • The cost and the availability of labour. The unemployment rate varies in different areas of the UK, and a business which is labour-intensive may choose to locate near to an area of high unemployment in order to take advantage of the availability of labour at a fairly low wage.
  • Communication links. Many businesses choose to locate near to motorways, rail links, seaports or airports if they either have a significant amount of raw materials to receive, or a significant number of products to distribute across a wide area of the country.
  • Transport costs/proximity to the market. Some businesses will locate in certain areas of the country in order to minimise their transportation costs. For example, producers of fast-moving consumer goods (f.m.c.gs) will often have to distribute their products nationwide, and therefore will try to locate as near to the market as possible so their transportation costs are not excessively high.
  • Availability of raw materials. Some businesses will try to locate near to their suppliers or to the source of their raw materials. For example, businesses which require bulky raw materials, such as timber, will often try to locate near their suppliers so to reduce the lead-time between ordering and receiving the raw materials.
  • Government location incentives. The UK government has over the past 30 years offered a range of incentives to businesses to locate in depressed areas of the UK, in order to reduce the unemployment rates in those areas by creating jobs. The incentives (such as grants, tax breaks, and reduced rent and rates) are offered both to existing businesses to relocate to the depressed areas, as well as to new businesses which are about to set up.

Industrial inertia refers to the situation when a business or an industry decides to remain in its original location and is very reluctant to relocate, even after the reasons for it locating there in the first place are exhausted. Possible reasons for this include:

  1. The cost of moving may be very large.
  2. Strong links with the local community and with other local businesses may have been developed and a move away from there may destroy those links.
  3. Some areas and products have an international reputation which may be difficult to establish if the business were to locate elsewhere (e.g. Scottish whisky).

However, industrial inertia can actually make an area become depressed if that area depends on a particular industry or business for employment and wealth-creation. If the industry goes into decline and no other industries or businesses wish to move to this area, then mass unemployment is created, and many of these unemployed will not be trained to perform any other jobs.

International location of industry is also a very important factor in today's global business environment. As well as the reasons for location mentioned earlier, there are a number of other factors that a business will need to consider before choosing a foreign country in which to locate.

These factors include:
  • the language spoken
  • legal differences
  • the economic environment
  • the stability of the political structure.

Over the past 25 years, the UK government has encouraged much foreign investment into the UK from outside Europe - specifically from Japan. These Japanese companies (e.g. Nissan, Sony) create wealth for the UK by providing employment and income to workers, and paying tax to the UK government. They can help to rejuvenate depressed areas and often purchase their supplies and raw materials from other UK businesses.

The Japanese companies are enticed to locate in the UK through a number of factors:

  1. English is the first foreign language taught in Japan.
  2. Low wage rates in the UK.
  3. Government incentives to locate in the UK (e.g. cheap rent, rates, etc).
  4. Gateway for selling goods to other EU countries.

There are four ways for manufacturing businesses to organise their production - job production, batch production, flow production and cell production.

Job production

This method of production involves an item being manufactured entirely by one worker or by a group of workers.

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These items are often made to customer requirements, rather than being mass produced. This type of production is usually undertaken by small businesses and craft industries (e.g. carpenters), although larger businesses which specialise in 'one-off' products (e.g. bridges) may also use this production method.

Batch production

This method of production involves the manufacture of an item being divided into a number of small tasks. A collection (or 'batch') of items each have one of these tasks completed, and then the batch moves onto the next manufacturing task.

In other words, several items have the same task performed on each of them and then they move onto the next task together in a group.

This production method can result in the build-up of large amounts of stock and work-in-progress. This may be a problem if the business is in a fashion industry, where customers' tastes can change quickly and unpredictably, leaving the business with much stock that it is unable to sell.

Flow production

This method of production involves the tasks which were identified in 'batch' production becoming continuous for each unit, often with the use of a moving conveyor belt (e.g. a car assembly line). Each unit is produced individually, instead of being produced in batches.

This type of production is usually undertaken by large businesses. This method of production was first established by Henry Ford in the 1920s, when he developed the world's first automated production line. This involved each car passing the workers on a moving conveyor belt, rather than the workers continually moving to the car. This method should boost labour productivity and reduce average cost of production even further.

It is often argued that flow production leads to high rates of alienation, demotivation and absenteeism amongst the employees - it is for these reasons that much machinery is today used on these production lines to perform simple, repetitive tasks which humans may easily become bored in performing.

Cell production

This method of manufacturing an item organises workers into 'cells' within the factory, with each cell comprising several workers who each possess different skills. Each cell is independent of the other cells and will usually produce a complete item, and each cell will usually have an output target to achieve for a given period of time.

It is often argued that if the group of workers in each cell can see the completion of the finished product, then their work will have more meaning and therefore their levels of motivation and job satisfaction will be greatly enhanced.

All businesses need to develop long-term strategies, and an important part of this strategy must be the continual development and launch of new products, or amendments made to existing products. This is the purpose of research and development (R&D).

R&D can basically be defined as:

'carrying out extensive scientific research into the product and its design, and then developing a range of prototypes, each to a slightly different specification.'

The prototype which best meets the needs of the customers and the business is then likely to be commercialised.

The development of products can take several years to complete and many businesses spend a huge amount of money on this process (e.g. Unilever spent over £600 million on R&D in 1997). It can often be a very risky process, since much money can be spent on ideas that will never be commercialised.

It is within the 'sunrise' industries (i.e. industries which are fairly young and have rapid growth potential, such as computers and aerospace) that extensive R&D spending today can result in a huge competitive advantage in the future.

The benefit of being the first company to launch a new, innovative product is immeasurable, since the company can charge a high price and build up a strong market share as it faces no competition.

It is estimated that only about one product in the pharmaceutical industry reaches the commercialisation stage (i.e. launched onto the market) for every ten which are developed and test-marketed. Therefore, the company will have massive R&D costs to recoup when it actually launches a new product, and it will probably take several years before it will have broken-even and covered all the R&D costs.

The businesses which are most likely to succeed in the future are those which develop more new products than their closest rivals, bring their new products to the market in less time than their rivals, compete in more product- and geographic-markets than their rivals, and provide very strong after-sales service to customers.

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