Production Processes, Factors, Costs, and Quality Control
The Production Process
Production processes are the set of activities through which companies create, manufacture, or produce goods and services. They use the available productive resources. Goods and services will have a higher value than the elements used and are purchased by customers to meet their needs.
In goods companies, the area that is in charge of the production process is called the production department, while in service companies, it is often called the operations department.
Production Factors
These are different scarce resources that contribute to the creation of a product.
Almost all authors classify the factors of production into three groups:
- Natural resources: Also known as the land factor. Includes all resources found in the soil and subsoil.
- Labor: Constituted by the activity of human beings whose work contributes to production.
- Capital Factor: This factor does not only refer to the financial resources necessary for business—it especially refers to the set of physical elements that are needed for the production process to take place.
Besides these three classical production factors, others are now added, such as entrepreneurship and the state of technology.
Production Costs
These constitute the economic valuation of the consumption of production factors used in an activity for the production of different goods and services.
Classes of Costs
Fixed and Variable Costs
- Fixed costs: They are independent of production. These costs must be faced in any case, whether you produce much, little, or nothing. For example, the rental of premises.
- Variable costs: These costs vary as you change the quantity of product obtained. The clearest example is raw materials.
The sum of fixed costs and variable costs is called the total costs.
Direct Costs and Indirect Costs
- Direct costs are those that are fully identified with a particular product.
- Indirect costs are those that cannot be directly attributed to a production unit. These costs are difficult to assign to the various products of a company, so it is necessary to establish some criterion of distribution.
Costs Depending on Time
- Short-term costs.
- Long-term costs.
Costs According to Whether They Generate a Payment
- Explicit costs.
- Implicit costs.
The Breakeven Point
The breakeven point for a production process is the production and sales level at which profits begin. At the breakeven point, revenues from the sale of the product equal total production costs.
Research, Development, and Innovation
Modern enterprises, especially large ones, spend huge sums to research new manufacturing processes and develop technological advancements.
To clarify these three concepts, we define each of them:
- Research: Activities aimed at increasing the technical and scientific knowledge of a company.
For example, automakers research new safety measures in their models.
- Development: Systematic work based on knowledge derived from research and experience, which is aimed at obtaining new products or improving existing methods and products.
- Innovation: Application of technological knowledge in new products, new services, or processes to be introduced into the market. It also refers to significant technological changes in products, services, or processes. Continuing the example above, the airbag at the time meant a breakthrough in vehicle safety.
R&D&I contributes to increased prosperity, as it boosts economic growth, strengthening the competitiveness of enterprises. In short, the ultimate objective of R&D&I must also be to increase business profits, improve prosperity, and enhance the quality of life of citizens.
Productivity
It is said that a productive factor is more efficient than another if its productivity is higher, that is, if it obtains more units of output in the same time.
To measure the productivity of production, output is divided by the resources used:
Productivity = Output / Resources Used
Productivity can be calculated for production from a given production factor (e.g., productivity of labor), or for the total production achieved by the company using all factors of production. In the latter case, we speak of overall business productivity.
Total factor productivity of production is the amount of final product obtained by this factor in a certain unit of time. The overall productivity of a company is the overall productivity of the company, using all necessary productive resources.
The Quality of Production
Define quality as the set of features for a particular good or service that allow it to meet the needs of the customers to whom it is directed.
Today, products must meet minimum requirements for survival in the market. Poorly manufactured goods have no chance of being sold. In addition, there are many laws governing the manufacture of many items, and non-compliant companies cannot sell their products on the market.
Quality Control
Quality control techniques are a source of inspections in the production process.
One more step in quality control is to involve the whole company. This means that control should be carried out by those involved in the planning, design, and research of new products, as well as those working in the area of production, and accounting, marketing, and human resources departments. This is what is known as total quality.