All You Need to Know About Levels of Production in a Business
Many people have a general understanding of what goes into the different levels of production in a business.
However, many do not know about some aspects that are important to know and understand before starting your own company.
This blog post will break down everything you need to know about the different levels of production in a business for entrepreneurs or those who want to get more educated on this topic.
So let's get started!
What is production and what does it mean for a business?
Production is a final stage of a process that produces goods or services for trade.
The production phase instigates the distribution and management of resources to complete necessary tasks, such as manufacturing, packaging, and marketing.
In other words, production refers to the set of processes used in transforming inputs into outputs.
Some examples of earnings from business activities during the process of production include the following:
Profit
Earnings from goods and services
Sales
Income from investments
Rent income
The three levels of production - manufacturing, wholesale, retail
The three levels of production in the same business are manufacturing, wholesale, retail.
Manufacturing
When your company produces goods or services to sell to other parties. This is the first level of production because you are faced with creating a product to be sold in addition to any marketing involved in doing this. You will need employees on hand to assist in all steps of production within your business.
Wholesale
When you sell goods from your business to other distributors and retailers at a higher price than the wholesale cost. This is the second level of production as you are making a profit from the goods or services being sold.
Retail
When your company sells products or services directly to consumers at a lower price than it cost to produce. This business model requires employees who can sell and communicate effectively with customers on pricing, features, and quality of their products.
How do you determine the level of production in a business?
As an owner, it is important to know how different aspects of your company affect your bottom line.
Listed below are costs and revenues associated with each level of production in your company:
Level 1: Workforce-related costs - salary, vacation pay, and overtime taxes
Labor costs in this category include salaries and compensation to employees. These labor expenses may be the largest cost in a company.
Labor also includes worker's compensation such as bonuses, insurance benefits, etc. The next item in this category is overtime wages and salary.
In order to cut costs, you could reduce the number of employees working overtime or hire independent contractors as opposed to full-time employees.
Level 2: Production related costs - materials, supplies, subcontractors
In this category, you have fixed costs that go with the business activities outside of your employees. Such as manufacturing parts and pieces for a truck or car.
In order to cut costs, you could focus on bulk purchases to drive down material prices. You may also hire subcontractors such as Vidl Sourcing who can procure the the required parts in the best possible price due to their vast global network.
Level 3: Distribution Costs
The distribution costs include transport, insurance, and packaging or storage for your customers.
The business will need packaging materials, supplies inventory, insurance for incoming and outgoing products. Businesses that sell retail items may want to consider packaging their products for sale in stores or online.
Here again, you can work with a company like Vidl Sourcing who ships products in bulk- because of the fact that they work with dozens of businesses at a time- and can provide you with the most competitive shipping and transportation rates.
Why do businesses use these different levels of production?
Businesses use these levels because it allows them to maximize their profits.
Each level of production has its own set of opportunities and challenges, so owners have to choose the model that works best for their business.
Every company wants to make sure they are profitable, whether they are selling products or services.
A business with different partners may sell its products to specific customers, depending on the agreement the businesses have in place. To maximize profits, companies use all levels of production.
How to determine which level of production best suits your needs?
The following three questions can be a good starting point in identifying the best level of production.
1. How much money do you want to make?
If a business wants to make a big profit from its products, it will have two options.
The first would be to own and operate the manufacturing process themselves, which can result in large income if done efficiently.
The second option is to sell their product at a wholesale rate, allowing them to receive a smaller percentage of the price but increasing sales volume.
2. Where will the product be sold- wholesale or retail?
If the product will be sold in bulk quantities at wholesale prices, then outsourcing production to a company that specializes in producing these goods is the best option for this type of business model.
3. How many employees are required?
If a business is operating on a small level, it will need few workers.
Additionally, they are not likely going to need many subcontractors or independent contractors because this level of production usually doesn't require more than a few people.
Conclusion
Understanding the different levels of production in a business is essential to managing your company.
Start by evaluating how important each level is and then deciding where you want to focus most on.
This will provide some direction for your marketing plan so that it can be tailored to meet the specific needs of each stage, rather than trying to do everything at once with no real focus or strategy.
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