There is more to manufacturing economics than one might think. It goes beyond the production assembly lines, automation and conveyor belts moving materials around the factory. This article will show you the business side of manufacturing and the respective strategy that is usually employed by manufacturers. In this article, you’ll have a close look at manufacturing and the economics involved in manufacturing, providing insight to the readers on how essential the manufacturing industry is to the economy and its role in the economic growth and economic development of a region.
- So, what is Manufacturing?
- Manufacturing and Economic Growth
- History of Manufacturing and Industrial Revolutions?
- The Economics of Manufacturing
- Economies of Scale
- Diseconomies of Scale
- Mass Production
- Globalization and Global Productivity
- Conversion Costs and Prime Costs in Manufacturing
So, what is Manufacturing?
First, let us define manufacturing from the perspective of its technology process. Manufacturing is defined as the utilization of chemical processes, tools, machinery, and labor of various forms to transform a previously existing matter into an entirely new thing or a product of higher value. The manufacturing process largely involves the transformation of raw materials into finished goods. When done on a large scale, Manufacturing usually involves the processing and production of several thousands of units by utilizing core assets and resources such as enhanced technologies and assembly line production processes. Typical examples include of manufacturing include food processing, engineering, vehicle manufacturing, and steel production.
Manufacturing and Economic Growth
Over the years, manufacturing has played a vital role in the economic growth and economic development of several countries around the world. It has also helped change the status and facilitated the progression of several countries to a higher status in the development rankings, especially low-income countries. Particularly in increasing the Gross Domestic Product of these low-income countries. The GDP signifies the summative value of the manufacturing and production processes that have occurred within the country within any specified period. This translates into how an effective manufacturing economic process could significantly the economic power of that region
Manufacturing has also heralded the change and revolutions that have turned the entire world around. Most of these changes have been tagged as “industrial revolutions,” which were major improvements in the manufacturing and production process at the time.
History of Manufacturing and Industrial Revolutions
Manufacturing has evolved, with less human labor and physical contact being taken out of the equation with each achieved level of the industrial revolution. There have been four industrial revolutions so far, with all four occurring within the last four centuries. The first industrial revolution was in 1765, when water and steam power became a driving source that was used to make production processes more mechanized at the time. The second industrial revolution was in 1870, when electricity was becoming widely adopted and used as a tool in the manufacturing industry. Electric power became the tool for driving mass production in the nineteenth century. The third industrial revolution was the advent of digitization into the world that saw information communication technology and electronics of various sorts to automate production processes.
There has been a fourth industrial revolution that seems to be building on the pillars of the third industrial revolution by fusing a series of technology such as the Internet of Things, AR & VR, ERP, and a few others to create a presence where the biological, physical, and digital worlds can interact and still feel as real.
The Economics of Manufacturing
Examining the concept of manufacturing from the business perspective will have us take a closer look at the economics and business processes involved in it. Manufacturing is a process of adding value to raw materials such that businesses can sell these finished goods at a higher price when compared to the value of the raw materials that were utilized in the process. It is in this aspect of manufacturing that the business or economics side comes into the spotlight.
Economies of Scale
For manufacturing and production to be efficient, the manufacturers will have to utilize the economics of scale advantage by utilizing the most effective manufacturing techniques to ensure that the manufacturing objectives are met – producing additional units at a lesser cost. Economics of scale can be described as when a manufacturer can produce more units of a product on a larger scale with reduced input costs. For manufacturing-related reasons, external economics of scale is used to describe manufacturing in a whole industry, while internal economies of scale are used to describe a single business rather than the entire industry.
Diseconomies of Scale
You can take it as the reverse of the economics of scale. It occurs when there are inefficiencies in the production process that allows an increase in input cost and average costs. Diseconomies of scale usually occur when a business expands or grows such that its cost in producing a single unit of finished goods becomes more expensive over time. The cost of production rises until the economies of scale are no longer valid in the business operations. The silver lining in this situation is that as production costs rise, the output and revenue also increase. Diseconomies of scale may arise due to internal causes such as technical challenges in business management, production processes, or the available raw materials and input.
Mass production is the manufacturing of finished products in large numbers and quantities. Mass production utilizes automated technology in getting the job done. It is one of the most efficient production strategies and processes. It enhances the production of similar products in large numbers, hence why it is called flow production, serial production, or repetitive flow production. This production process has several advantages, which include: reduced costs due to a high level of automation that helps lower labor costs as fewer workers are required. Another advantage of mass production is the higher level of efficiency that this method yields due to manufacturing being done faster, thanks to automation. This efficiency can become a competitive advantage that will yield increased revenue for the business; a valid example is McDonald’s fast-food catering to time wary consumers.
Major disadvantages of this mass production method include the high cost of automation and its expensiveness to corrects any errors if any should arise. The automation process could also make staff have a more lethargic attitude to work while decreasing morale. It is also worth noting that goods produced through the automated corridor of mass production will usually have a higher price as they require increased capital investment and specialized labor.
Globalization and Global Productivity
There are new inputs and more lucrative markets emerging, globalization – the cohesion of consumer groups and factors of production in different regions around the world. There are increased opportunities for laborers, utilization of technologies, resources, and other factors of productions to optimize the efficiency of production to even out on a global scale. This globalization allows for specialization and division of labor across different sectors to act as drivers of economic growth and development for global productivity.
Conversion Costs and Prime Costs in Manufacturing
The Manufacturing sector relies on the two major cost components to optimize the production efficiency of a target product. The expenditures incurred in all matters concerning the manufacturing of a finished product are the prime costs. On the other hand, conversion costs refer to expenses suffered in the process of turning raw material into a product. Direct material and labor costs are categorized under prime costs, while conversion costs comprise overhead expenses and direct labor expenses.
A focus must be placed on the dynamics of the manufacturing industry and the economics that revolve around its core processes to maximize the manufacturing process.
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