TITLE:

ANALYSIS OF PRODUCTION THEORY

MALAYSIA

Team Members• Team Members1. Gaayathri Logasekaran

(PBS1421717)2. Rama Krishnan Thiruyangadam

(PBS1421748)3. Nililia bt Ahmad Zainudin

(PBS1421764)4. Mohd Faizal Ahmad

(PBS1421694)5. Tang Pooi Yee 6. (PBS1421736)7. Nirmal Shanker 8. (PBS1421770

Automotive Industry in Malaysia

Automotive Industry Malaysia• Malaysia's automotive sector

saw another good year in 2014 after achieving stable growth in 2013.

• Factors contributing to growth were:

• New models with better technology (better fuel efficiency and improved safety).

• More competitive OTR prices. • Round the year promotions by

OEMs

Honda Malaysia• On Feb26,2009, Honda

Malaysia stated that it had recorded sales of 3,815 units for the month of January 2009, the highest monthly sales ever achieved in history.

• Tremendous sales due to All-New City launched

• Civic, Accord, CR-V-registered healthy numbers of sales too

Source: Malaysian Automotive Association

Honda Malaysia Sdn Bhd

• On 15 November 2000, a partnership between Honda Motor Co. Ltd. of Japan, DRB-HICOM Berhad and Oriental Holdings Berhad resulted in the birth of Honda Malaysia Sdn Bhd.

• Since then, Honda Malaysia has been a solid and aggressive player in the Malaysian automotive market.

• Rapid progress led to the set up of a plant in Pegoh, Melaka. With this new plant, not only is Honda Malaysia optimistic of achieving high sales every year, it has further strengthened Honda's reputation in Malaysia.

• Honda Malaysia rides strongly on its slogan "The Power of Dreams". On 17 January 2003, Honda Malaysia's Pegoh plant in Alor Gajah, Melaka, proudly rolled out its first car, a CR-V.

Proud Moments • In 2010, Honda won Reader’s Digest

Trusted Brands 2010 Gold Award for Automobiles

• Best Booth Award at Kuala Lumpur International Motor Show 2010, Asian Auto and the VCA Auto Industry Awards 2010.

• Honda Freed won the Silver Award as the Best Value for Money MPV category at the Putra Brand Awards 2010.

• The brand also took the number one position in the Customer Service Index Study conducted by Malaysia J.D. Power

• Honda City was named the best entry mid-sized car in the J.D. Power Asia Pacific 2010 Malaysia Initial Quality Study.

• In 2011, Honda also received the Putra Brand Awards 2011, Gold Award. Honda City took the first place for the Family Cars category

Malaysian Automotive Market Share 2014

National brands make up 46.8% of total market share;

• National brands make up 46.8% of total market share;

• HONDA is the biggest gainer with an increased market share of 3.7%.

Source : Malaysia Automotive Institute

Source : Malaysia Automotive Institute

ObjectiveCurrently, production at line 1 and 2 are insufficient to meet the increase in demand for Honda cars. With a monthly output of 6426 cars per month in 2014 and expecting a further increase to 7083 per month in 2015, Honda Malaysia is planning to increase its production further at line 2.

To ensure production readiness to meet targeted sales by examining the 4 “M” (Man, Machine, Material and Method).

To increase the output of production to meet the increasing demand for Honda cars.

To consider the possibilities of increasing total output by increasing additional labour and automation at Honda’s production line two at Alor Gajah, Melaka to increase the output of production to meet the increasing demand for Honda cars.

Honda Malaysia Manufacturing Cars Types:

Normal Non-Hybrid Cars

Hybrid Cars

Demand has increased Honda needs to expand its

Production Line

Cause

Tools to Ensure Production Readiness by examining “4 M”:

Man • Labour

Machine• Production

Line

Method • Process

Materials • Raw material / parts supplied by their vendors

Honda Manufacturing Consist of “2” Production Lines:

• Is used since 2003• Direct Labour: 2100• Average Output

Production: 4295 cars/month

Line 1

• Is officiated on Jan 2014

Line 2

Achieve average output

of 6426 cars/ month in 2014

This output is still insufficient to support demand from Malaysian consumers due to • Expansion of Honda dealerships network• Huge expenses on promotional & advertising activities

The targeted average monthly volume for 2015 & 2016 are 7083 units & 8333 units respectively

still not achieve Honda’s 2020 vision-to produce 100,000 units annually

Current Issues Faced by Honda Production Line:

• 1st and 2nd production line unable in achieving its full capacity:

- it currently runs only one day shift

- only 700 direct labours to operate 2nd production line. • Difficulty in getting direct labour for the production team• High turnover of direct labour

Bad Impact:

Honda Production Planning Department have to project lower output on June and December

direct labours are leaving after they received their mid & end year bonus.

Other Issues faced by Honda:

Introduction of a new compact Sport & Utility Vehicle (SUV)-the HR-V further increase cars demand to Honda

Statement of Problems:• Should Honda invest into 3rd production line or should they

rely on the existing production lines (production line 1 & 2)?

• How many additional labours needed?• What would be a best combination of labour and

automation should be adopted by production team?• How many combined output of production line 1 & 2 at the

maximum utilization of production line 2?

To analyse and decide the impact of independent variables (labour and the cost of production line) on dependent variable (Honda cars production)

To increase and fulfil Honda expectation on cars production.

Purpose Of Study:

The Production Function Theory

Production function relates the maximum quantity output that can be produced from given amount of various inputs for a given technology.

Short run production - a period of time so brief that at least one factor of production cannot be varied practically.

In the short run, the firm’s production function is by using Cobb Douglas model:

 

Q = Output

L = Workers

K = Fixed number of units of capital.

Methodology

Cobb-Douglas ModelIf β1+ β2 = 1, the Cobb-Douglas model shows constant returns to scale. If β1+ β2 > 1, it shows increasing returns to scale, and if β1+ β2 < 1,diminishing returns to scale. Total, Average and Marginal ProductTotal product (TP)

Average product (AP)

Marginal product (MP)

Elasticity of production

Long Run Production

The long run corresponds to a situation that the firm is planning to expand the scale of its operations.Production IsoquantAn isoquant defines the combinations of inputs (K and L) that yield the producer the same level of output.In a multiple variables of production, various combinations of inputs enable the manager to produce the same level of output.Marginal Rate of Technical SubstitutionMarginal rate of technical substitution (MRTS) - the number of extra units of one input needed to replace one unit of another input that enables a firm to keep the amount of output it produces constant.

The Isocost The isocost illustrates all the possible combinations of two factors that can be used at given costs and for a given producer’s budget.In simple words, an isocost line represents a combination of inputs which all cost the same amount.

Data & Variable Used

Q L K K KOutput No. of Direct Labour Cost of Plant 1 (Million) Cost of plant 2 (Million) Total Cost of plant (Million)

Dec-13 6330 1245 220 0 220Jan-14 5688 1115 220 0 220Feb-14 5692 1135 220 0 220Mar-14 5639 1156 220 0 220Apr-14 6524 1297 220 0 220

May-14 6462 1289 220 0 220Jun-14 6715 1315 220 0 220Jul-14 5664 1220 220 0 220

Aug-14 6387 1280 220 0 220Sep-14 5757 1234 220 350 570Oct-14 5834 1311 220 350 570

Nov-14 6703 1355 220 350 570Dec-14 5539 1434 220 350 570Jan-15 7629 1516 220 350 570Feb-15 6518 1545 220 350 570

Month

• The above table shows Honda Malaysia’s production output from December 2013 to February 2014. Outputs represent quantity produced by Honda Malaysia for the particular month. Honda Malaysia divided type of labour by two categories namely indirect labour and direct labour. For the study purposes, we are going to use number of direct labour as it is a significant variable that has direct impact to the output volume. Plant should refer to the production line of Honda Malaysia. In the past, the automaker has only one production. Though the production line 2 has been officiated in Jan 2014, it has very little contribution to the production since then due to the fact that it was used to train a huge number of new employees (labour) that Honda Malaysia hired as preparation for new model production (Honda HR-V). Therefore, for study purposes, the cost of plant number 2 is only visible from September 2014 – the month that the plant number two really contributes to the output.

Data Analysis

• The combination of two inputs as per stated in the above table will contribute to the number output desired by Honda Malaysia. Fixed input in the production of goods and services that does not change in the short run. A fixed input should be compared with a variable input, an input that does change in the short run. Fixed and variable inputs are most important for the analysis of short-run production by a firm. However, in the long run fixed input could become variable input as a firm has a time to respond to the need of more output in future. The fixed input of Honda Malaysia was initially RM 2,200,000 in a short run. However, the company has made an investment of RM3, 500,000 to build a second plant which could help the company to increase their output.

Fixed & Variable Input

MonthNo. of Direct

LabourOutput (Total

product)

Marginal Product

(MPL=Q/L)

Average Product(APL=

Q/L)

Production Elasticity(EL=

MPL/APL)

Dec-13 1245 6330 5.08 5.08 1.00

Jan-14 1115 5688 4.94 5.10 0.97

Feb-14 1135 5692 0.20 5.01 0.04

Mar-14 1156 5639 -2.52 4.88 -0.52

Apr-14 1297 6524 6.28 5.03 1.25

May-14 1289 6462 7.75 5.01 1.55

Jun-14 1315 6715 9.73 5.11 1.91

Jul-14 1220 5664 11.06 4.64 2.38

Aug-14 1280 6387 12.05 4.99 2.41

Sep-14 1234 5757 13.70 4.67 2.94

Oct-14 1311 5834 1.00 4.45 0.22

Nov-14 1355 6703 19.75 4.95 3.99

Dec-14 1434 5539 -14.73 3.86 -3.81

Jan-15 1516 7629 25.49 5.03 5.06

Feb-15 1545 6518 -38.31 4.22 -9.08

Total Product Marginal Product & Average Product

• Total Product refers to the number of cars (output) produced by Honda Malaysia in the given month. Marginal product is defined as the incremental change in Q that may be produced by the use of one more unit of the variable input L. As we only use one variable at this stage, we assume number of K remains fixed.

• The above table shows number of cars produced by Honda Malaysia its variable input. The company wishes to maximize its output to fulfill consumer demand by adding more direct labour into the production. You may notice that there are fluctuations of number of output as direct labour fluctuate. Initially, adding more direct labour has a positive impact on total product when additional direct labour resulted in additional output and vice versa. However, when the number of direct labours was at 1,434, marginal product started to give a negative number (-14.74 in December 2014). Average product fall to only 3.86 car per direct labour and production elasticity showed negative number (-3.81) which means 1% increase in direct labour resulted 3.81% decrease in numbers of cars produced. This is a point where The Law of Diminishing Marginal Return started to give its impact on production

The End