Factors that Contemporary Managers Must Consider When Estimating Production - Research Paper Example

Factors that Contemporary Managers Must Consider When Estimating Production Introduction In the world today, everything starts as an idea, which by use of available resources and through various stages, gets designed and refined to a final product appropriate to satisfy certain want(s) – this involves a production process. The Business dictionary (2010) defines production as the methods and processes utilized in the conversion of tangible inputs such as raw materials, sub-assemblies or semi-finished goods as well as intangible inputs like know how, information and ideas into goods or services. In effect, production is the fundamental process of changing materials that give little satisfaction in their natural state to goods and services that give more satisfaction. Conventionally, contemporary managers have been venturing into production with great anticipation for success. This paper looks into a number of important factors that contemporary managers must take into consideration when estimating production. These factors can be classified into internal and external factors. Internal factors include factors of production, production capacity and production cost. External factors on the other hand include consumer concerns, demand and supply, government policies and social responsibility, among others. Among the internal factors that contemporary managers ought to take into consideration when estimating production are factors of production as aforementioned. Factors of production are the resources necessary in generating economic goods. These factors are land including all natural resources; labor including all human skill and work; capital including all assets, machinery, money, raw materials among others; and entrepreneurial ability including inventiveness, management and organizational skills as well as the readiness to take risks. It is important to note that there is a price for each of these factors – i.e. rent, wages and interest for land, labor and capital respectively, and profit for the entrepreneur. Land is the first factor among the factors of production. It is the planet’s naturally occurring materials that are used for the production of goods and services. They include the land itself, the water, vegetation and wildlife on the surface; the nutrients and minerals in the ground as well as the air above. In economics, land means all natural agents and resources, with their sites – locations plus extensions in space. Land is space and includes several things not colloquially called land like water and the beds under it, among others (Gaffney, n.d.). Kuhnen (1980) refers to land as the natural resources available without effort or modification on the part of humans. Land has an ever-present reputation of being a scarce factor production owing to the fact that when all land is put under agriculture; growing populations continually lead to smaller farms. Actually, chances of increasing land area are limited – it cannot be increased or extended beyond that which it is. As site however, land does not generally depreciate, spoil, wear out, obsolesce, or get exhausted by human activities incident to production and occupancy. Normally, land does not downgrade as a function of time and most of its attributes endure use and abuse. Moreover, although land as capital is subject to demand-obsolescence from alterations in fashions and tastes, overall, its taste as a consumer good rises with growth of incomes and wealth. Since land was created and is simply neither produced nor is it irreproducible, it is paid in economic rent. One can only acquire land often by “rent-seeking, or skirmishing, or in other ways that are counterproductive” (Gaffney, n.d.). The second important factor of production is labor. Kirchner (2007) defines labor as the human energy as well as mental skills used to generate economic goods. He explains that its price (wages) and conditions of employment are determined in markets known as labor markets and that these wages depend on its demand and supply. According to Peterson (2007), employers create the demand for labor while potential employees supply it. Various factors influence the demand for labor including the cost of hiring labor, salaries/wages, national insurance and pension contributions, as well as administration costs related to payment of taxes and adhering to laws and regulations governing employment. Labor supply on the other hand depends on various factors including the population size and structure, its organization, its geographical distribution, its composition by age and gender, its level of education and training, required levels of skills, time period, fashion as well as work’s opportunity cost – income along with substitution effects (Kirchner, 2007; Peterson 2007). A general classification distinguishes physical labor from mental labor. It is important to note while making this distinction that always, from the purest mental labor instance to the purest physical labor instance, some mixing of both forms exists. In more understandable terms, whilst the philosopher must labor with tongue or hand to give to the world the results of his thought, the ditch digger on the other hand can in no way do his work devoid of the exercise of intelligence (Ely and Wicker, 1909). Again, labor is only a means to an end, but not an end in itself; it is the satisfaction of wants. When a manager has this thought firmly fixed in mind, it will be easy for him or her to appreciate that unless labor increase denotes increase of human satisfactions, it is not socially desirable. A supportive argument is that although breaking window panes creates an opportunity for labor, it by no means increases human satisfactions on account of that labor. While labor-saving apparatus on the other hand may hurt individual laborers, they benefit the entire society as they allow it to secure better satisfactions with the same effort (Ely and Wicker, 1909). The third factor of production that managers should consider when estimating production is capital. According to Gaffney (n.d.), capital is generated resources that are yet to be expended. It is produced by human thrift, perseverance, investment and production, after which it bears much resemblance to land in that both coexist but unlike land, it occupies space. Capital is a human product – it is a material thing resulting from land and labor. As a factor of production, capital may be defined as comprising those intermediate products used for further production. It is the medium in which land and labor exert their instrumentality and includes all the man-made production aids like tools, machinery, buildings as well as all unfinished goods like bar iron and hides that enter into further production. In a simple expression, capital enables men to utilize the materials and forces of nature more completely – it enables the attainment of an increased amount of product. It also makes it possible to acquire various utilities, which would be hard without it, for instance great distances transportations. It also allows for manufacturing of high quality products (Ely & Wicker, 1909). Managers should put into consideration the nature of capital when estimating a given production: capital continually undergoes formation and destruction. During its formation period, it accretes value by changing physical form and storing up other inputs, which is but a phase. Upon formation, it depreciates with time and use, regularly and by nature. It must therefore be preserved from entropy by constant maintenance, remodeling, repair and safeguarding against fire and theft among other threats. Again, capital obsolesces however durable it may be owing to the fact that it is subject to incessant contest from streams of new products. In addition, capital may either be fixed or circulating, free or specialized. The former difference (fixed or circulating) is significant in that circulating capital can only be used once/in one round of operations – its entire worth passes over into the finished product, while fixed capital with each use passes only a part of its value over into the product, thus lasting through a succession of operations,. The practical significance of the difference in the latter lies in the fact that free capital forms can adjust themselves to adjustments in the social demand for goods more readily as compared to specialized forms of capital (Ely & Wicker, 1909). Managers should also take into account entrepreneurship when estimating production. Due to the fundamental role of entrepreneurship in instigating the production process, economists identify it as the fourth factor of production. It is the special kind of human effort that undertakes the risk of bringing land, labor, and capital together to generate goods. It is the organizing factor of the other three production factors, which cannot generate anything devoid of someone to organize production. A key component of this resource is risk – entrepreneurship involves taking the risk of organizing production prior to production of anything and without assurance of success in production. Entrepreneurship is embodied in ownership of asset that is in the firm’s formation and operation – the entrepreneur is not just an idea man, but an owner who rules over the capital assets he/she owns and manages (Klein, 2006). He or she detects a formerly untapped opportunity and seizes it to make substantial profits. It is associated with the introduction of new products and techniques or the founding of new businesses. It also includes taking risks, inventing new ways of doing ordinary things as well as experimenting with new ideas that could yield a monetary benefit. In its essence, entrepreneurship entails looking ahead to forecast future demand and/or supply conditions that would substantially differ with present conditions. It involves focusing imagination and creativity on act in response to human wants by developing new goods, services and production processes (Johnson, 2005). It should be clear that as a human resource, entrepreneurship is scarce owing to the fact that not everyone has the capacity to make excellent business decisions, or even willing to take risks (Henry George Institute, 2007). Another primary factor that is of great significance in estimating production is production capacity. The Business dictionary (2010) defines production capacity as the volume of products that a production plant can generate in a given period by making use of current resources. In practice, once demand estimates are complete, managers or involved parties must plan production for the purpose of meeting demand –they must make sure that the available capacity is sufficient to meet production targets. Decisions for production capacity take place at three main levels namely long term, medium term and short term levels. In long term level, major decisions relate to changing capacity by eliminating or adding capacity in capital assets form such as manufacturing plants and implementation of new technology. In medium term level, facility capacity generally remains fixed but capacity adjustments can be effected through adding labor, subcontracting and it can be apportioned to different periods by using inventory and backorders. In short term level, smaller capacity changes may be effected by using subcontracting and overtime but much of the focus is on apportioning and effective use of the already set production capacity (Capacity Planning, 1999). Measures of production capacity include output (capacity to produce or provide specific products or services) and input (capacity to accept new customer business). It is vital that managers differentiate between design capacity (what a system is designed to handle) and effective capacity (what it can really handle over a continued period). They should ensure that organizations have much production capacity enough to meet demand/customer needs but not excess that would lead to low exploitation of employed resources (Capacity Planning, 1999). When estimating production, one cannot overstate the importance of contemporary managers factoring in production cost – it determines the profitability or successfulness of production. In fact, cost of production affects demand and supply of the end product. The free dictionary (2010) defines cost as the total amount expended for goods or services including time and money and labor. Further, it defines production cost as the combined costs of labor and raw material incurred in the production of goods and services. According to Piana (2003), production cost is 'the burden sustained so as to carry out a particular production, to perform a particular activity, to achieve particular goals. Costs are lost good things or bad things endured while doing/pursuing something and are always accompanied by a cost objective. Economists define cost as opportunities sacrificed when a choice is made (the benefits lost) – they view production cost as subjective and prospective. Accountants on the other hand define cost in terms of consumed resources – they view production cost as objective and retrospective. This reflects confusion in understanding of the term cost between the two executives where they use the same term to denote different though related things (Willamette.edu, 2000). The Times Newspapers (2007) records that the two main costs incurred in production are direct costs and indirect costs. Direct costs are costs associated with every unit of output generated. In producing a car for instance, a company’s direct cost includes the direct material costs that go into every car as well as the direct costs of labor. Indirect costs on the other hand are the overheads incurred in assembling the cars and need to be appropriately allocated to the products made. Examples of such costs include rent, factory lighting and management salaries. It is imperative that managers evaluate production cost – assessing costs of various activities would allow them determine those activities whose costs are too high thereby making right managerial decisions. At the same time, without costing; it is not possible to price the end product. Basic Economics (2007) explains that every economic organization, which purchases inputs and sells outputs, incurs explicit and implicit costs of production. Explicit costs includes costs of raw materials, employees’ wages and salaries, taxes among others while implicit production costs include the value of owner/entrepreneur’s time and the opportunity cost of monetary capital invested in the organization, for instance the interest rates foregone. In explaining production costs, Piana (2003) asserts that they are categorized based on their responsiveness to various production levels attained. Whilst fixed costs are simply irresponsive to levels of production, variable costs grow with elevated production levels. The sum of all costs comprises the total production costs, which when divided by the quantity produces yields the average cost – unit cost/how much one unit of production costs. Production inputs’ total costs are dependent on two components: the quantity and price of inputs. On comparing average cost directly with price, one can assess whether the production is profitable. One of the external factors that contemporary managers should as well take account of when estimating production is consumer concerns. Consumer concerns in general are expressed unease or anxieties over an object. They comprise of several attributes including consumer preference, consumer expectations, consumer awareness, consumer attitudes and risk perception (Fife-Schaw, et al., 2007). A Dictionary of Business and Management (2006) defines consumer preference as the manner in which consumers in a free market decide to distribute their sum expenditure in purchase of goods and services. It means a consumer’s option that has the utmost anticipated value among several options. Consumers’ preferences are based on anticipations regarding the experiential and functional benefits of a new product. Consumer expectations entail what the consumer looks forward to realize from a product. Although consumers should form realistic product expectations, they develop unrealistic expectations mostly with new products especially due to their limited knowledge and experience with them. This may result into product dissatisfaction and consequential premature product disposal or rejection. Consumer awareness is the level of consumer’s knowledge concerning a product. In most cases, the sufficiency or otherwise of this awareness is fastened against the producer’s perspective on the product. Consumer attitudes entail a consumer’s negative or positive evaluation of a product. Attitudes are important factors in determining consumers’ behavioral choices. Additionally, consumers’ risk perception (level of risk linked to consumption of a particular product) highly determines products’ acceptance (Internet MBC, 2010). Another external factor is demand and supply: in their estimate of production, managers should put into consideration two diverse yet interconnected factors namely demand and supply. Perhaps, demand and supply is among the most basic economic concepts and it forms a market economy backbone. Demand on one hand denotes the amount/quantity of a product or services desire by buyers. The quantity/measure demanded is the quantity of a product people are willing to purchase at a particular price. Demand relationship, which is the correlation between quantity demanded and price, is a vital element in estimating production. Demand is dependent on the price of the product, the prices of related products, and incomes and tastes of consumers. Supply on the other hand represents the amount that the market can offer. The quantity supplied denotes the quantity of a particular good that manufacturers are willing to supply at a particular price. Supply relies on the cost obtainable for the commodity, plus the prices of similar commodities, production techniques, and inputs’ costs and availability. The relationship between how much of a good or service producers supply to the market and price is called the supply relationship – another vital element in estimating production. Therefore, price reflects demand and supply, and their elasticity is the measure of their own responsiveness to price changes. Additionally, the market functions to equalize supply and demand through price mechanism. Contemporary managers should also consider government policies when estimating production. Government policies are all government regulation that have influence on the behavior of firms/organizations or consumers themselves. They include tax policies, subsidy policies, legal restrictions and trade barriers. Others include government policies that take the form of quantity restrictions, a good example being controls on the quantity of pollutants that a particular industry can emit; and special programs designed to raise farmers’ incomes. Some government policies are pervasive and in most production and trade decisions, they weigh heavily (Surnovic, 2002). Social responsibility is another external factor that contemporary managers ought to consider when estimating production. As McClenahen (2005) asserts, although production is certainly the major obligation of business, it must be achieved in an ethical and moral way. Other than production, business has obligations to check that its employees are able to earn a wage, either directly or indirectly, and that its labor does not comprise of children and is not under danger of abuse such as extended working hours. Businesses must be committed to respecting human rights and employing culturally diverse personnel through fair practices of employment. Managers should consider the fact that firms have a responsibility to customers, including strive to reduce costs for the maintenance of reasonable prices; a responsibility to respect the dignity of employees, assuring equal opportunity, compensating them fairly, recognizing their worth, ensuring safe working environment as well as proficient management with just and ethical deeds, in addition to helping them meet their family responsibilities. Firms also have a responsibility to communities of encouraging better education and health, as well as maintaining and protecting natural resources and the environment. Moreover, they have a responsibility to shareholders, who should realize fair returns (McClenahen, 2005). In addition, a position paper on corporate social responsibility (CSR) (2006) indicates that CSR concept is not based only on a firm striking a balance between all its stakeholders’ interests within its strategic operations and planning. Unlike in old times, social responsibility is much more than firms’ charities and good works. At present, CSR is broadly regarded as a management strategy option. An increasing number successful large companies as well as small-medium enterprises has acknowledged the need of improving their strategies of social and environmental risk management, seizing chances in development of innovative technology plus knowledge creation, and engaging with their stakeholders more proactively. Conclusion Contemporary managers in both private and governmental production firms must put into consideration the internal as well as the external factors as discussed above in their estimation of production. Various laws of economy, price data as well as available resources among others are the factors in production that all producers must consider for them to achieve successful production. While the object of all undertakings is production, the sole purpose of production is consumption. For this reason, producer’s interests, which are essential for promoting those of consumers, ought to be carefully considered. Additionally, for satisfying accomplishment/production, there must be foresight, proper planning, intelligence, perspiration as well as honest purpose on the side of contemporary managers. References A Dictionary of Business and Management, (2006). Factors of Production. Retrieved from http://www.encyclopedia.com/doc/1O18-factorsofproduction.html Basic Economics, (2007). Cost and Production. Retrieved from http://www.basiceconomics.info/costs-and-production.php Capacity Planning, (1999). Retrieved from http://www.uoguelph.ca/~dsparlin/capacity.htm Dictionary of Business, (2006). Consumer Preference. Retrieved from http://www.highbeam.com/doc/1O18-consumerpreference.html Ely, R. T. & Wicker, G. R. (1909). Elementary Principles of Economics. London: The Macmillan Company. Fife-Schaw, C. et al. (2007). Consumer Preference. 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