Production decisions are primarily made by a production manager. But, they cannot be made independently of the rest of the business without coordinating this with other business departments.
The finance department must allocate enough capital to pay for raw materials, machinery and labor. The Human Resources (HR) department must hire an appropriate number and type of production workers. And the marketing department must ensure that there are enough customers that can be sold the product to profitably.
Therefore, before an operations manager makes any production decision, he must plan beforehand for future production with all departments of the business, especially with the marketing department.
Examples of production decisions
Production decisions mainly evolve around preparing input resources to supply output products to meet expected market demand.
A. SHORT-TERM. Short-run production decisions include the following aspects:
- Whether to produce at all? This decision is made by comparing the total revenue from producing to the total cost of producing. If the total revenue is greater than the total cost, then the firm should produce. Otherwise, the firm should shut down in the short run.
- How much to produce? This decision is made by comparing the marginal revenue (MR) from producing one more unit to the marginal cost (MC) of producing one more unit. The firm should produce up to the point where MR = MC.
- What inputs to use? This decision is made by choosing the combination of inputs that minimizes the cost of producing a given output.
- How to allocate inputs? This decision is made by deciding how to distribute the available inputs among different production processes.
B. LONG-TERM. Long-run production decisions include the following aspects:
- What scale to operate at? This decision is made by choosing the size of the plant and the amount of equipment to use.
- What technology to use? This decision is made by choosing the production methods that are most efficient and cost-effective.
- What products to produce? This decision is made by considering the firm’s strengths and weaknesses, as well as the market demand for different products.
What to consider when making production decisions?
The decisions taken by operations managers can have a significant impact on the success of businesses. Let’s take a look at these factors in details.
Marketing factors. Key information needed when planning future production levels is the forecasted market demand. Accurate sales and operations planning allows operations managers to match supply to potential demand levels. This will require the holding of inventories to a minimum efficient level. Additionally, the business will be able to produce the right range of products that are forecast to be demanded, reduce wastage of production as well as employ and keep busy the appropriate number of sales and production workers.
Location. Location of business operations and the site chosen for a business is often very important for the long-term success of firms. A business might want to locate in place (country, region, city) that has an abundant supply of necessary raw materials and availability of skillful and knowledgeable workers. Additionally, business premises should not be too far aware from the main markets, so it is easy and convenient for customers to access the firm’s products.
Availability of resources. Each and every type of production of all goods and services requires necessary resources including land, raw materials, labor and capital equipment. The availability of these resources, or a lack of thereof, can impact important operations decisions.
– Land. All businesses need somewhere to operate from. While some small businesses offering niche services can operate from home, large firms require large sites for the manufacturing of finished products.
– Labor. All business activity requires some labor input whether it is manual labor or mental labor. The quality and effectiveness of labor will have a significant impact on the operational success of a business.
– Capital. All business organizations require the tools, machinery, computers and other equipment to produce the goods and services they sell. The more productive and advanced the capital is, the greater the chance of business success.
– Enterprise. All businesses need entrepreneurial skills of operations managers to put the entire production process together in order to ensure efficiency and effectiveness.
Production methods. The business will typically decide to operate a labor-intensive production method when the supply of suitable employees is good and wage costs are low. On another hand, when the cost of automated production line is falling, then a business might decide to change production methods into more capital-intensive.
Technology. The development of new technology such as Computer-Aided Design (CAD), Computer-Aided Manufacturing (CAM), Computer-Integrated Manufacturing (CIM) or 3D Printing have influenced the production process.
Many technological innovations have enabled businesses to develop products much more quickly than in the past.
NOTE: Resources available to a business can be described as 5Ms – Materials, Manpower, Machines, Money and Management.
In summary, production decisions are the choices that businesses make about how to produce goods and services. Production decisions are complex and can be influenced by a variety of factors, such as the cost of inputs, the availability of resources, the competitive landscape, and government regulations.
These decisions are important because they can have a significant impact on a business’s costs, profits, and competitiveness.
