4.2.1 The Use of Technology in the Production of Goods and Services
Learning Objective
Explain how technology improves productivity in both manufacturing and service sectors, evaluate its impact on costs, quality, location and inventory decisions, and illustrate the concepts with a detailed case study of contactless payments.
Key Definitions
- Production: The process of creating goods or delivering services by combining inputs – labour, capital, materials and information.
- Productivity: The ratio of output to input. Higher productivity = more output for the same or lower input.
- Technology: Tools, machines, software or processes that automate, speed up or improve the quality of production and service delivery.
- Contactless Payments: Electronic transactions made by tapping a card, smartphone or wearable on a reader, without inserting a card or entering a PIN.
- Inventory: Stock of raw materials, work‑in‑process or finished goods held by a business.
- Lean Production / Kaizen: A systematic approach that seeks to eliminate waste, improve flow and continuously improve processes.
Why Firms Produce & Hold Inventories
- **Buffer against demand fluctuations** – protects against stock‑outs when sales are higher than expected.
- **Economies of scale** – larger orders reduce unit purchase costs, so firms keep extra stock.
- **Lead‑time management** – when suppliers need time to deliver, inventory bridges the gap.
- **Safety stock** – a small extra quantity to guard against unexpected delays or quality problems.
- Technology (e.g., real‑time demand forecasting, RFID tracking, Just‑In‑Time systems) can reduce the amount of inventory required while still protecting service levels.
How Technology Improves Productivity
Technology raises productivity through three inter‑related routes:
- Automation – machines or software perform repetitive tasks faster and with fewer errors (e.g., CNC machines, robotic arms, self‑service kiosks).
- Information & Communication Technology (ICT) – real‑time data, cloud computing and ERP/SCM systems enable better planning, scheduling and inventory control.
- Lean Production & Kaizen – technology supports waste reduction, continuous improvement and rapid feedback loops (e.g., Toyota’s JIT system uses barcode scanners and Kanban cards to signal exact replenishment quantities).
Production Methods and the Technology That Supports Them
| Production Method |
Typical Products / Services |
Key Technology Enablers |
| Job (or bespoke) production |
Custom furniture, specialised software development |
3‑D printing, CAD/CAM, flexible CNC, cloud‑based project management tools |
| Batch production |
Baked goods, clothing lines, printed circuit boards |
Programmable Logic Controllers (PLCs), batch‑size optimisation software, automated material handling |
| Flow (or mass) production |
Automobiles, soft drinks, fast‑food meals |
Robotic assembly lines, conveyor‑belt systems, real‑time ERP, IoT sensors for predictive maintenance |
Impact on Costs & Break‑Even Analysis
- Variable costs (labour, energy, consumables) usually fall because machines or software take over routine tasks.
- Fixed costs (capital equipment, software licences, system maintenance) rise initially; the key question is whether the reduction in variable cost per unit offsets the higher fixed cost.
- Break‑even point (BEP) formula:
$$\text{BEP (units)} = \frac{\text{Fixed Costs}}{\text{Selling Price per unit} - \text{Variable Cost per unit}}$$
- Example – Automated dough‑mixing machine (bakery)
• Fixed cost ↑ from £5 000 to £12 000.
• Variable cost per loaf ↓ from £0.80 to £0.45.
• Selling price = £1.20.
• Old BEP = 5 000 ÷ (1.20‑0.80) = 12 500 loaves.
• New BEP = 12 000 ÷ (1.20‑0.45) ≈ 15 714 loaves.
Although the BEP rises, the lower variable cost widens the profit margin once the higher volume is reached, and the machine also reduces waste and improves product consistency.
Quality Improvement (QC & QA)
- Quality Control (QC) – barcode scanners, vision‑inspection cameras and statistical process control (SPC) software detect defects instantly.
- Quality Assurance (QA) – integrated ERP and CRM systems track standards from design through delivery, ensuring every stage meets specifications.
- Result: fewer returns, higher customer satisfaction and lower re‑work costs.
Location Decisions Influenced by Technology
- High‑speed internet and cloud services enable remote or off‑site service centres (call centres, virtual offices).
- Automation reduces the need for proximity to a large labour pool, allowing factories to locate in lower‑cost regions.
- Technologies that require rapid delivery (e.g., same‑day e‑commerce fulfilment) push firms towards urban hubs with superior logistics links.
- Inventory‑reducing technologies (JIT, RFID) can also shift location choices because firms no longer need large on‑site storage.
Why Technology Matters in Services
Service businesses are time‑based and heavily reliant on human interaction. Technology can:
- Reduce transaction time.
- Minimise errors and fraud.
- Provide real‑time data for better decision‑making.
- Enhance customer experience, encouraging repeat business.
Contactless Payments – Detailed Case Study
Contactless terminals are now commonplace in retail, hospitality, transport and online services. They illustrate several ways technology boosts productivity.
| Aspect |
Traditional Cash / Card (PIN) |
Contactless Payment |
Productivity Impact |
| Transaction time per customer |
≈ 30–45 s |
≈ 5–10 s |
30–80 % time saved per transaction |
| Staff handling errors |
Higher (manual entry, change giving) |
Lower (automated processing) |
Fewer errors → less re‑work & refunds |
| Queue length during peak periods |
Longer queues, customer dissatisfaction |
Shorter queues, smoother flow |
Higher throughput → more sales per hour |
| Data collection |
Limited, often manual |
Instant digital records (time‑stamp, amount, card type) |
Better inventory & demand forecasting; enables targeted marketing |
Quantifying the Productivity Gain
Assume a coffee shop serves 200 customers per day.
Average transaction time falls from 35 s to 8 s:
$$\text{Time saved per day}=200\times(35\text{s}-8\text{s})=200\times27\text{s}=5400\text{s}=90\text{ minutes}$$
The extra 90 minutes can be used to:
- Serve additional customers (increase revenue).
- Allow staff to focus on upselling, product quality or cleaning, thereby improving the overall customer experience.
Other Technological Innovations in the Service Sector
- Self‑service kiosks – fast‑food restaurants, airports, banks; reduce staff workload and queue time.
- Online booking & reservation systems – hotels, salons, medical practices; eliminate phone‑call handling and enable capacity planning.
- Customer Relationship Management (CRM) software – stores client data, automates follow‑ups and personalises offers.
- Artificial Intelligence chatbots – 24/7 handling of routine enquiries, freeing staff for complex problems.
- Cloud‑based collaboration tools – remote consulting, virtual classrooms and cross‑location project management.
Potential Drawbacks and Limitations
- Initial investment – capital outlay for hardware, software licences and infrastructure.
- Training & support – staff must learn new systems; ongoing technical support may be required.
- Security risks – data breaches, card‑skimming or hacking if security protocols are weak.
- Customer exclusion – some users prefer cash or lack access to smartphones; businesses must retain alternative payment options.
- Over‑reliance on technology – system failures can halt operations; robust contingency plans are essential.
Summary Checklist (AO1–AO4)
- Define production and productivity; explain the difference.
- Identify at least three ways technology can raise productivity (automation, ICT, lean/Kaizen).
- Match each production method (job, batch, flow) with a relevant technology.
- Explain how technology affects variable and fixed costs and illustrate the effect on the break‑even point.
- Describe how technology supports quality control and quality assurance.
- Discuss how technology influences location decisions for both manufacturing and service firms, including inventory considerations.
- Use the contactless‑payment case study to calculate productivity change and evaluate secondary benefits (customer satisfaction, data quality).
- Assess the limitations of technology and propose mitigation measures (training, backups, multiple payment options).
Suggested Diagram
Flowchart comparing a traditional cash transaction with a contactless payment transaction, highlighting the time saved at each step (e.g., “Enter PIN” removed, “Card read instantly”).
Exam Practice Question
Question: A fast‑food outlet processes 150 orders per day. Before introducing contactless payments the average transaction time is 40 s. After introduction it falls to 12 s. Calculate the total time saved per day and discuss two ways the outlet could use this saved time to improve profitability.
Answer outline:
- Time saved per order = 40 s – 12 s = 28 s.
- Total time saved = 150 × 28 s = 4 200 s = 70 minutes.
- Possible uses of the 70 minutes:
- Serve additional customers during peak periods, increasing sales volume.
- Re‑allocate staff to upsell, improve order accuracy or prepare fresh stock, raising the average transaction value.
- Link to AO2–AO4: show calculation, interpret the result and evaluate the wider impact on revenue, costs and customer satisfaction.