Overproduction

Overproduction (oversupply) in economics it's an excess of supply over demand. It is more strictly defined in lean manufacturing, where overproduction includes also includes defected products.

In older approach, enterprises treated as overproduction only those products that were not sold to the customers. However this didn't show the real range of overproduction. When the company introduces internal customer concept it treats each next workplace as a customer of earlier one. In that approach more overproduction is revealed. The next step is lean manufacturing which takes into account also those products, which were manufactured with defects and then repaired. Therefore:

Overproduction = manufactured products + repaired defected products + not repaired defected products - demand

The concept of waste in the enterprise is described in articles: 7 wastes of lean and Muda mura muri.

Reducing the amount of overproduction has direct influence on expenses. Fewer raw materials are used, along with less machine time. If the extra goods are stored, reduction in overproduction production will be associated with reduced inventory and its corresponding financial impact.

Forms of overproduction

Overproduction can have two forms:

• Producing more than is required by customers (quantitative type of overproduction).
• Producing products faster than customers are buying them (early type of overproduction).

Fig.1. Causes of overproduction

Causes of overproduction

The main reasons of overproduction are:

• wrong inventory management
• not knowing exactly what the customer wants - production just in case
• desire to utilize full employees performance until end of shift or until finishing raw materials.
• poor quality of products requires manufacturing more in order to fulfil the demand
• changes in the economy (underconsumption)
• changes in consumer behaviour (capital accumulation)

Underconsumption

The underconsumption is related to drop of consumption caused by recession and stagnation. Those economic issues decrease demand and can cause overproduction in the enterprises that use push method of production. Impact of underconsumption on enterprises using pull method of production (e.g. lean manufacturing) will be limited.

Capital accumulation

The underconsumption and then overproduction can be induced also by dynamic that motivates people to limit consumption and put more capital on investments.

Artificial scarcity

Manufacturers can limit production in order to keep prices high. Therefore, they produce less than demand and price can rise. It is only possible in case of monopoly or cartel.

In modern economy the artificial scarcity has also another application. If the producers have ideas that are not shared, they create artificial scarcity. In case of products exchange of them doesn't create additional ones. In case of ideas exchange enables generating multiplication of ideas and than boost the innovativeness.

Examples of Overproduction

-*Manufacturing: In the manufacturing industry, overproduction can occur when too many products are made in relation to the demand. This can lead to high inventory costs, lost sales, and a decrease in profits.

-*Agriculture: In the agricultural industry, overproduction can occur when farmers produce more crops than the market can absorb. This can lead to price crashes and a decrease in profits.

-*Services: In the service industry, overproduction can occur when services are offered that are not in demand. This can lead to a waste of resources, such as time and money, as well as a decrease in profit margins.

-*Real Estate: In the real estate industry, overproduction can occur when too many houses or buildings are built in relation to the demand. This can lead to vacant buildings, an increase in vacancy rates, and a decrease in property values.

Advantages of Overproduction

Overproduction can have several advantages, such as:

• Increased economies of scale, as production costs are spread over a larger number of units, leading to lower costs per unit.
• Increased bargaining power with suppliers, as the company can purchase in bulk and negotiate better prices.
• Increased ability to meet fluctuating customer demand, as the company has a larger stock of goods available.
• Increased inventory turnover, as the company can quickly respond to customer needs.
• Increased efficiency and productivity, as production can be done in larger batches, leading to fewer production errors and better quality control.

Limitations of Overproduction

Overproduction can lead to a number of limitations and drawbacks, including:

• Reduced profits due to excess inventory and additional costs associated with storing and warehousing the excess products.
• Inability to quickly adjust to changes in demand, as new products or designs may have to be created to replace the overproduced items.
• Unsold merchandise can lead to price erosion and loss of market share.
• Quality issues can arise due to the lack of focus on efficient production.
• Wastefulness of resources due to the production of unnecessary items.
• If there is a sudden decrease in demand, overproduced goods can become obsolete.

Other approaches related to Overproduction

An introduction to the other approaches related to overproduction is that these approaches attempt to understand the causes of overproduction and how to mitigate it. The following are the other approaches related to overproduction:

• Inventory Management: Understanding the inventory levels for a product and adjusting the production rate accordingly is a key part of inventory management and can help mitigate overproduction.
• Production Planning: Ensuring that the production plan is accurate and up-to-date can help to eliminate overproduction. Planning should take into account customer demand, production capacity, and other factors to ensure that the right amount of products or services is being produced.
• Quality Control: Quality control is an important step in production and can help to reduce overproduction. Quality control processes should be in place to check for defects and to ensure that the products meet the standards set for them.
• Waste Reduction: Reducing waste in production processes can help to reduce overproduction. By reducing the amount of resources used, the amount of product produced can be kept in line with demand.

In summary, overproduction can be mitigated by using inventory management, production planning, quality control and waste reduction. Having a good understanding of customer demand and production capacity is essential for ensuring that the right amount of product is being produced.

Overproduction — recommended articles

Merchandise inventory — ABC analysis — Operating supplies — Buffer inventory — Maximum stock level — Finished goods inventory — Joint demand — Optimization of the production run-length — Flexible pricing

References

• C.Harris, R. Harris, Developing a lean workforce, Productivity Press, 2007.
• Johnson M.A., Pasour Jr E.C. (1980) An Opportunity Cost View of Fixed Asset Theory and the Overproduction Trap, American Jnl of Agricultural Economics, Volume 63, Issue 1, p. 1-7
• Austenfeld Jr R.B. (2003) A primer on lean enterprise, Hiroshima Shudo University

Author: Joanna Panuś