Production Manager must decide on using the most appropriate production system.
A production system is the combination of factors of production (mix of labor and machinery used in operations) that business uses in the process of transforming inputs into finished products that are supplied to customers.
In general, businesses can be described as either being labor intensive, capital intensive or using automation. These are three main types of production systems:
- Labor intensive. Where mainly people are used to produce products.
- Capital intensive. Where mostly machines are used to produce products.
- Automation. Where production of products is controlled by a computer.
While some methods of production are labor-intensive some other ones are heavily capital-intensive or use automation.
Labor intensive
This is a production system in which production operations are mainly done by workers themselves. A larger proportion of labor input is used in the production process compared with capital equipment and any other factor input (in terms of their costs). The cost of labor accounts for the largest proportion of firm’s overall production costs.
When most of the budget typically goes towards the payment of staff wages, only small amount can be spent on other items such as capital equipment. Hence, the business heavily relies on workforce because it is relatively cheaper.
It is important to note that other businesses may choose to be labor intensive even though capital-intensive production is still possible.
Examples of labor intensive production
From providing unskilled services in economically developing countries such as rural farming or cooking that require manual labor. Through making customized one-off goods that require a human touch such as handmade leather shoes, wedding dresses, tailor-made suits or hand-made cars. Up to highly-skilled professions in developed such as such as lawyers, surgeons, private bankers, private tutors or financial consultants.
Here are some examples of labor intensive industries: agriculture, construction, food processing, garment manufacturing, hospitality, personal care, retail and tourism.
Advantages of labor intensive production
- Creates jobs. Labor intensive production requires a large workforce, which can help to reduce unemployment and boost the economy.
- Lowers costs. Labor intensive production can be less expensive than capital intensive production, as it requires less investment in machinery and equipment. Therefore, the business will have lower Fixed Costs (FC) but higher Variable Costs (VC) as a higher proportion of costs is attributed to workforce than capital structure.
- Allows for customization. Labor intensive production can be used to produce customized products with higher prices, which can be difficult or impossible to do with machines. The provision of a more personalized service to customers can be offered. It also gives the business an additional Unique Selling Point (USP) when customers can create their own specifications.
- Promotes innovation. Labor intensive production can encourage workers to be more innovative and efficient in order to increase their productivity. The business will also have an improved image of selling ‘built-by-hand’ products leading to marketing advantages.
- Is more sustainable. Labor intensive production can be more sustainable than capital intensive production, as it requires less energy and resources.
Disadvantages of labor intensive production
- Can be low-paying. Workers in labor intensive industries often earn low wages, especially in developing countries.
- Can be dangerous. Labor intensive industries often have high rates of workplace accidents and injuries.
- Can lead to exploitation. Workers in labor intensive industries are often vulnerable to exploitation, such as forced labor and child labor.
- Can be inefficient. Labor intensive production can be inefficient, especially when compared to capital intensive production. The opportunities to increase labor productivity are likely to be limited when a business insist on maintaining a high degree of labor intensity.
- Can be difficult to scale. Labor intensive production can be difficult to scale up to meet high demand, as it requires a large workforce.
How to choose between different types of production?
The most appropriate production system for a business depends on several factors including:
- Aims and objectives of the organization. More capital-intensive technologies will be used by businesses where the main objective is maximizing profit as operating in mass markets will allow for minimizing unit cost of production. On another hand, more labor-intensive production allows for possible cost reductions during a recession when some of the workforce might be laid off to better control costs.
- Business size. Smaller businesses may not be able to afford expensive capital equipment due to limited sources of finance. On another hand, large businesses will most likely use automated production lines in order to fulfill huge market demand.
- Relative cost of labor and capital. When the relative prices of these two inputs are much different from one another, the business will choose the production system that is cheaper. Assuming that substitution resources are feasible. If labor costs are high and rising, then using more capital equipment might be preferred. Consequently, when costs of purchasing capital are high, then the firm will choose more labor-intensive production methods.
- Product. The nature of the product will determine whether it should be produced using labor intensive methods, capital intensive methods or whether the process should be fully automated. Additionally, the product image that the firm wishes to establish will play a role in choosing the type of production system.
- Size of the market. Larger markets will require more capital-intensive technologies such as using automation with mass production (flow production methods). Whereas businesses that serve smaller markets are more likely to use more labor-intensive types of production.
The main factors to consider in choosing the right production system includes the cost of labor and capital (whichever is lower) as well as the size of the market (the larger the market the more capital-intensive production).
