Definition of Production
Production means application of processes (Technology) to the raw material to add the use and economic values to arrive at desired product by the best method, without sacrificing the desired quality.
Types of Production Systems
The organization of manufacturing systems, also planning and control of production greatly depends on type of product type of the product line. Basic principles that guide the formation of planning policy and its execution may be the same for all the manufacturing concerns. But emphasis on a particular aspect of production management in fulfilling of specific requirement of the plant and the management approach to the problems of inventory, machine selection, machine setting, tooling, routing, scheduling, loading, follow up and general control will differ depending on the type of production system.
Intermittent production
- Job Production: In this system Products are manufactured to meet the requirements of a specific order. The quality involved is small and the manufacturing of the product will take place as per the specifications given by the customer. Examples include Tailors shop; cycle and vehicles repair shops, Job typing shops, small Workshops.
- Batch Production: Batch Production is the manufacture of number of identical products either to meet the specific order or to satisfy the demand. When the Production of plant and equipment is terminated, the plant and equipment can be used for producing similar products. Examples include Tyre Production Shops, Readymade dress companies, Cosmetic manufacturing companies…etc
Continuous Production
Continuous Production system is the specialized manufacture of identical products on which the machinery and equipment is fully engaged. The continuous production is normally associated with large quantities and with high rate of demand. Hence the advantage of automatic production is taken. This system is classified as
- Mass Production: Here same type of product is produced to meet the demand of an assembly line or the market. This system needs good planning for material, process, maintenance of machines and instruction to operators. Purchases of materials in bulk
quantities are advisable. Examples include Components of industrial products, - Flow Production: The difference between Mass and Flow Production is the type of product and its relation to the plant. In Mass Production identical products are produced in large numbers. If the demand falls or ceases, the machinery and equipment, after slight modification be used for manufacturing products of similar nature. In flow production, the plant and equipment is designed for a specified product. Hence if the demand falls for the product or ceases, the plant cannot be used for manufacturing other products. It is to be scraped. Examples include Cement Factory, Sugar factory, Oil refineries…etc.
Product Pricing
Product pricing refers to establishing a selling price for a product
The basic rules of pricing are:
- All prices must cover costs and profits.
- The most effective way to lower prices is to lower costs.
- Review prices frequently to assure that they reflect the dynamics of cost, market demand, response to the competition, and profit objectives.
- Prices must be established to assure sales.
Prices are generally established in one of four ways:
Cost-Plus Pricing
Many manufacturers use cost-plus pricing. The key to being successful with this method is making sure that the “plus” figure not only covers all overhead but generates the percentage of profit you require as well. If your overhead figure is not accurate, you risk profits that are too low. The following sample calculation should help you grasp the concept of cost-plus pricing:
Demand Price
Demand pricing is determined by the optimum combination of volume and profit. Products usually sold through different sources at different prices–retailers, discount chains, wholesalers, or direct mail marketers–are examples of goods whose price is determined by demand. A wholesaler might buy greater quantities than a retailer, which results in purchasing at a lower unit price. The wholesaler profits from a greater volume of sales of a product priced lower than that of the retailer. The retailer typically pays more per unit because he or she are unable to purchase, stock, and sell as great a quantity of product as a wholesaler does. This is why retailers charge higher prices to customers. Demand pricing is difficult to master because you must correctly calculate beforehand
what price will generate the optimum relation of profit to volume.
Competitive Pricing
Competitive pricing is generally used when there’s an established market price for a particular product or service. If all your competitors are charging $100 for a replacement windshield, for example, that’s what you should charge. Competitive pricing is used most often within markets with commodity products, those that are difficult to differentiate from another. If there’s a major market player, commonly referred to as the market leader, the company will often set the price that other, smaller companies within that same
market will be compelled to follow. To use competitive pricing effectively, know the prices each competitor has established.
Then figure out your optimum price and decide, based on direct comparison, whether you can defend the prices you’ve set. Should you wish to charge more than your competitors, be able to make a case for a higher price, such as providing a superior customer service or
warranty policy. Before making a final commitment to your prices, make sure you know the level of price awareness within the market.
If you use competitive pricing to set the fees for a service business, be aware that unlike a situation in which several companies are selling essentially the same products, services vary widely from one firm to another. As a result, you can charge a higher fee for a superior service and still be considered competitive within your market.
Mark-up Pricing
Used by manufacturers, wholesalers, and retailers, a mark-up is calculated by adding a set amount to the cost of a product, which results in the price charged to the customer. For example, if the cost of the product is $100 and your selling price is $140, the mark-up
would be $40. To find the percentage of mark-up on cost, divide the dollar amount of mark up by the dollar amount of product cost:
$40/$100 = 40%
This pricing method often generates confusion–not to mention lost profits–among many first-time small-business owners because mark-up (expressed as a percentage of cost) is often confused with gross margin (expressed as a percentage of selling price). The next
section discusses the difference in mark-up and margin in greater depth.
Pricing strategies
Premium Pricing
Use a high price where there is uniqueness about the product or service. This approach is used where a substantial competitive advantage exists. Such high prices are charge for luxuries such as Conrad Cruises, Savoy Hotel rooms etc
Penetration Pricing
The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach was used by France Telecom and Sky TV.
Economy Pricing
This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Supermarkets often have economy brands for soups, spaghetti, etc.
Price Skimming
Charge a high price because you have a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital
watches used a skimming approach in the 1970s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented. Premium pricing, penetration pricing, economy pricing, and price skimming are the four main pricing policies/strategies. They form the bases for the exercise. However there are other important approaches to pricing.
Psychological Pricing
This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example ‘price point perspective’ 99 cents not one dollar
Product Line Pricing
Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.
Optional Product Pricing
Companies will attempt to increase the amount customer spend once they start to buy. Optional ‘extras’ increase the overall price of the product or service. For example airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of
seats next to each other.
Captive Product Pricing
Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the
razor.
Product Bundle Pricing
Here sellers combine several products in the same package. This also serves to move old stock. Videos and CDs are often sold using the bundle approach.
Promotional Pricing
Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).
Geographical Pricing
Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.
Value Pricing
This approach is used where external factors such as recession or increased competition force companies to provide ‘value’ products and services to retain sales e.g. value meals at McDonalds.
Marketing
Marketing is defined by the American Marketing Association as “the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large The Chartered Institute of Marketing defines marketing as “the management process responsible for identifying, anticipating and satisfying customer requirements profitably.
A market is defined as a group of customers with the authority and ability to purchase a particular product or service that satisfies their collective demand
Marketing Functions
There are eight universal functions performed in marketing:
- Buying: (Raw material to produce goods and services and to purchase finished goods or services as retailer or wholesaler to sell them again for final customers and consumers) It is a function that ensures that product offerings are available in sufficient quantities to meet customer demands.
- Selling: The function to be performed to sell the products/services/idea to satisfy customer needs or wants by using advertising, personal selling and sales promotion to match goods and services to customer needs.
- Transporting: Function related to create the availability of product or services. It is used for moving products from their points of production to location convenient for purchases.
- Storing: Warehouses are used to store the products for further distribution.
- Standardizing and grading: To provide more quality products and services without variation in the quality. Ensuring that product offerings meet established and grading quality and quantity control standards of size, weight, and other product variables.
- Financing: Providing the financial resources to carry out different promotions of products and providing credit for channel members (wholesalers, retailers) or consumers.
- Risk taking: Marketer takes a risk specifically when any new product is introduced in a market because there are equal chances of success and failure. Dealing with uncertainty about consumer purchases resulting from creation and marketing of goods and services that consumers may purchase in the future.
- Obtaining Market information: Successful Marketing is no accident it involves the conduct of marketing research. This helps the managers to evaluate the potential demand, sales, buying power of the intended market.
The Marketing Process
Under the marketing concept, the firm must find a way to discover unfulfilled customer needs and bring to market products that satisfy those needs. The process of doing so can be modeled in a sequence of steps: the situation is analyzed to identify opportunities, the strategy is formulated for a value proposition, tactical decisions are made, the plan is implemented and the results are monitored.
Situation Analysis
A thorough analysis of the situation in which the firm finds itself serves as the basis for identifying opportunities to satisfy unfulfilled customer needs. In addition to identifying the customer needs, the firm must understand its own capabilities and the environment in
which it is operating. The situation analysis thus can be viewed in terms an analysis of the external environment and an internal analysis of the firm itself. The external environment can be described in terms of macro-environmental factors that broadly affect many firms, and micro-environmental factors closely related to the specific situation of the firm.
The situation analysis should include past, present, and future aspects. It should include a history outlining how the situation evolved to its present state and an analysis of trends in order to forecast where it is going. Good forecasting can reduce the chance of spending a year bringing a product to market only to find that the need no longer exists. If the situation analysis reveals gaps between what consumers want and what currently is offered to them, then there may be opportunities to introduce products to better satisfy
those consumers. Hence, the situation analysis should yield a summary of problems and opportunities. From this summary, the firm can match its own capabilities with the opportunities in order to satisfy customer needs better than the competition.
There are several frameworks that can be used to add structure to the situation analysis:
- 5 C Analyses – company, customers, competitors, collaborators, climate. Company represents the internal situation; the other four cover aspects of the external situation
- PEST analysis – for macro-environmental political, economic, societal, and technological factors. A PEST analysis can be used as the “climate” portion of the 5 C framework.
- SWOT analysis – strengths, weaknesses, opportunities, and threats – for the internal and external situation. A SWOT analysis can be used to condense the situation analysis into a listing of the most relevant problems and opportunities and to assess how well the firm is equipped to deal with them.
Marketing Strategy
Once the best opportunity to satisfy unfulfilled customer needs is identified, a strategic plan for pursuing the opportunity can be developed. Market research will provide specific market information that will permit the firm to select the target market segment and
optimally position the offering within that segment. The result is a value proposition to the target market. The marketing strategy then involves:
- Segmentation- Market segmentation is the identification of portions of the market that are different from one another. Segmentation allows the firm to better satisfy the needs of its potential customers. The basis of consumer markets segmentation are: Geographic, Demographic, Psychographic, Behaviourist that of industrial markets include: Location, Company type, Behavioural characteristics
- Targeting (target market selection)
- Positioning the product within the target market
- Value proposition to the target market
Marketing Mix Decisions
Detailed tactical decisions then are made for the controllable parameters of the marketing mix. The action items include:
- Product development – specifying, designing, and producing the first units of the product.
- Pricing decisions
- Distribution contracts
- Promotional campaign development
Implementation and Control
At this point in the process, the marketing plan has been developed and the product has been launched. Given that few environments are static, the results of the marketing effort should be monitored closely. As the market changes, the marketing mix can be adjusted
to accommodate the changes. Often, small changes in consumer wants can be addressed by changing the advertising message. As the changes become more significant, a product redesign or an entirely new product may be needed. The marketing process does not end
with implementation – continual monitoring and adaptation is needed to fulfill customer needs consistently over the long-term.
