Labour-intensive or Capital-intensive production?
It is important to distinguish between capital-intensive and labour-intensive methods of production.
- ‘Capital’ refers to the equipment, machinery, vehicles and so on that a business uses to make its product or service.
- Capital-intensive processes are those that require a relatively high level of capital investment compared to the labour cost.
- These processes are more likely to be highly automated and to be used to produce on a large scale.
- Capital-intensive production is more likely to be associated with flow production (see below) but any kind of production might require expensive equipment.
- Capital is a long-term investment for most businesses, and the costs of financing, maintaining and depreciating this equipment represents a substantial overhead.
- In order to maximise efficiency, firms want their capital investment to be fully utilised (see notes on capacity utilisation).
- In a capital-intensive process, it can be costly and time-consuming to increase or decrease the scale of production.
- ‘Labour’ refers to the people required to carry out a process in a business.
- Labour-intensive processes are those that require a relatively high level of labour compared to capital investment.
- These processes are more likely to be used to produce individual or personalised products, or to produce on a small scale
- The costs of labour are: wages and other benefits, recruitment, training and so on.
- Some flexibility in capacity may be available by use of overtime and temporary staff, or by laying-off workers.
- Long-term growth depends on being able to recruit sufficient suitable staff.
- Labour intensive processes are more likely to be seen in Job production and in smaller-scale enterprises.
|Production & Operations Glossary - Key Terms|
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