Chapter 23 - Operations Planning
Learning Objective: To understand the differences between capital and labor intensive production
Did you know there is a big difference between effectiveness and efficiency?
Efficiency is what we have been discussing in productivity so far: it is about producing at the highest ratio of output to input;
Effectiveness, however, it is about meeting customers' needs profitably and being efficient in production is just one part of it:
A company can increase productivity (efficiency) but if customers' needs are not met by the product it will end up stocking up on unsold goods - not effective.
I bet you know this... A business can be either capital intensive or labor intensive. What does that mean?
A business is considered labor intensive when it employs high level of labor input compared with the level of capital equipment employed.
A business is considered capital intensive when a high quantity of capital equipment is employed on its production process compared with the quantity of labor input.
Which is better?
It depends...
Labor intensive production has limited opportunities for increasing productivity (motivation and training);
Being labor intensive is advantageous or even a must to some companies (e.g. hand-made soap);
Labor intensive usually mean job production.
Labor intensive operations, however, face low output levels, high labor costs, and higher chances of quality-related issues.
Capital intensive production has great opportunities for increase scale:
It allows for deeper unit cost reduction (economies of scale);
It is a must in some industries (e.g. electricity generation) and optional in others;
It keeps quality consistent;
It makes it possible for businesses to operate in the mass market.
However, capital intensive production comes with potential high fixed costs, high initial capital investment, potential for high maintenance costs, the need for high-skilled workers (engineers).
Which approach should a business go with? Capital or labor intensive? It depends on:
The nature of the product being produced (e.g. hand-made products require labor intensive methods);
The product image the business wishes to pursue (e.g. hand stitched leather sits for luxury cars);
Relative cost of the two inputs (capital vs. labor): which most times depends on the market conditions;
Company's size and its ability to afford expensive capital equipment.
Summarizing...
To-Do-List:
Exam-Style Questions (Essay Question #2.a)
Chapter 22 - The Nature of Operations
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