Factors which determine the choice of production method:
1) NATURE OF THE PRODUCT
Cakes are often produced in batches – so are paints and wallpaper
2) DEMAND
In terms of volume – high volume we would choose flow and in terms of stability, where demand is unpredictable or changing – flow production is not appropriate.
3) DEGREE OF CUSTOMER TASTE
I.e. flexibility required
Also: with particular reference to decisions regarding changing production methods:
4) FINANCE AVAILABLE
Expensive to set up a large factory.
5) TRAINING
This is very expensive.
6) HUMAN RESOURCE ISSUES
-redundancy
-job security
-motivation
-fear of change
The trade off between flexibility and productivity
An important consideration in modern production is the trade-off between flexibility and productivity. A firm must rely on good market research to determine the volume and the degree of customer flexibility in order to produce using the most efficient system.
In dynamic markets, with short product life cycles, firms have found it difficult to use flow production. However, the problem with job and batch is being able to produce in sufficient volume to achieve the necessary economies of scale. Some firms (BMW) get around this problem by using mass production methods and targeting a small range of niche markets. The result is products which are relatively cheap to make but can add value through the range and choices available within the niche. This is called flexible-specialisation.
Economies of Scale
Factors which drive down average cost when the scale of production increases:
N.B. Scale of production is size and scope NOT simply producing more
* A firm achieving economies of scale can produce its products cheaper therefore they gain a competitive advantage.
There are several types of economy of scale:
1) TECHNICAL ECONOMIES OF SCALE:
As a firm expands, it may be able to adopt different production techniques to reduce the unit cost of production. For example, a business may be able to replace employees on the production line with technology as it increases output. This will enable the firm to reduce the unit costs of production.
2) SPECIALISATION:
As firms get bigger, they are able to employ people to specialise in different areas of the organisation. Instead of having managers trying to so several jobs at once or having to pay specialist companies to do the work, they can hire their own staff to concentrate on particular areas of the business. For example, they might employ their own accountants or market researchers. By using specialists rather than buying in these services from outside firms, the business can save money; it is also likely to more efficient.
3) PURCHASING ECONOMIES:
As firms get bigger, they need to buy more supplies. As a result they should be able to negotiate better deals with suppliers and reduce the price of their components and raw materials. Large firms are also more likely to get discounts when buying advertising space or dealing with distributors.
Diseconomies of Scale
These are factors which tend to push up average cost when the scale of operation increases:
Economies of scale are quantifiable i.e. they are easy to measure. For example, a 10% discount given on an order of over £10,000. However diseconomies of scale are very difficult to quantify. For example, how do you measure the cost of de-motivation? So diseconomies of scale are qualitative.
Examples:
1) MOTIVATION DISECONOMIES:
In a small family business the boss has regular contact with the workers and there is usually a good, well motivating atmosphere. However as the firm grows, employees begin to feel isolated – they no longer feel a sense of worth. This results in low productivity, poor quality, and even absenteeism.
2) COMMUNICATION DISECONOMIES:
As a firm grows it begins to suffer from poor communication. For example, more layers are introduced into the hierarchy. Communicating with people in different countries and over-reliance on written communication – this leads to mistakes.
Solution: use more IT (intranet), delayer (flatter structure)
3) COORDINATION & CONTROL DISECOMIES:
As a firm grows it becomes difficult to coordinate activities and to ensure that everyone is working towards the same goal.
Solution: decentralise, delayer, delegate
EVALUATION:
To evaluate economies of scale – two questions can be asked.
1) If economies of scale are so important – why do we have small firms?
- Because small firms operate in niche markets so even though the cost of production is high, the price they can charge is also high as they have a captive audience. However if they grow too large, large operators will take an interest in these small firms and the consequence will be paid for. E.g. Holland and Barritt, organic Food Tesco’s
2) If diseconomies exist, why do some firms appear not to rectify them?
- The managers may lack experience or expertise in solving the problems
- They may be unaware that problems exist
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*Most likely* In many UK firms there is a lot of pressure from shareholders to produce short term profits. To rectify diseconomies of scale – a firm would have commit itself to long term investment in restructuring, training etc. Even though the end result would mean long term profitability, the pressure for short term performance is often so great that senior managers are not willing to take the risk.
