5.6 production planning

stock control and supply chain management

• stock control: maintain inventory levels so that

  • total cost of holding stock is minimised (avoid overstock)

  • avoid stock out situation (if unable meet customers’ needs, impacts cash flow + brand image)

• supply chain management: coordinating and scheduling manufacturing to ensure products are produced efficiently, on time and in the quantities needed

stages/factors of supply chain

• stages

  • extraction of raw materials

  • manufacturing

  • distribution

• factors

  • length: offshoring longer / onshoring shorter → longer shipping route leads to longer delivery time + increased transport costs

  • place (marketing): retailers have smaller quantities but larger variety / wholesalers have larger quantities but limited variety

  • outsourcing

  • cash flow

why need global supply chains?

• lower cost of labour etc

• raw materials limited to certain countries

JIT vs JIC

• stock levels

  • JIT minimal stock levels: raw materials ordered and delivered right before production.

  • JIC buffer stock: protects against unexpected increases in demand/supply chain disruptions/production delays → prevents stockouts

• costs

  • JIT

    • lower cost of storage space and security

    • reduced waste from obsolete/expired goods

    • but unable exploit purchasing EOS

  • JIC

    • increased costs of larger storage facilities

    • holding obsolete/slow-moving stock increases costs

    • cost of wastage due to damage/theft

• flexibility

  • JIT efficiency and ability to respond to changes in demand BUT needs reliable and efficient suppliers

  • JIC has buffer stock to protect against unexpected changes in demand/supply BUT less responsive to market change because buffer stock must be used up before new products can be produced

adv of ordering stock earlier

• mitigate impact of possible supply chain disruptions/price fluctuations when demand increase

• product availability: secure inventory before demand increases

• avoid stockouts, able to meet customer demand → competitive advantage that can increase market share

disadv of ordering stock earlier

• reduced liquidity, since cash is tied up

• overstocking leads to increased storage costs, obsolescence and possible markdowns to clear excess inventory

• risks of consumer demands changing → need accurate forecasts

types of stock

• raw materials

• semi-finished goods

• finished goods

capacity utilisation

• capacity utilisation = (actual output / max capacity) X 100%

• extent to which org operates at max productive capacity

• indicates productive efficiency at a point in time

  • increases if workers need to work over time (eg due to high demand)

adv of high capacity utilisation

• exploit EOS, reduce unit cost of production (fixed costs spread out more) → higher profit margins

• means very efficient, since makes most use out of resources

disadv of high capacity utilisation

• workers overworked, demotivated

• machinery wear out faster, depreciate at faster rate / higher cost of repairs

• to increase capacity utilisation, may need upgrade IT systems → expensive

• inflexible: if demand increase unexpectedly, no capacity to accommodate. customers may defect to competitors, affects brand image (eg hotel rooms fully booked)

disadv of underutilisation

• (means resources are idle)

• increased unit costs (since fixed costs spread out less)

• workers under-deployed, fear of redundancy

defect rate

• defect rate = (no. of defective products / total output in time period) X 100%

• causes

  • faulty raw materials/supplies

  • faulty machinery: unable to reach acceptable tolerance limits

  • poorly trained employees

  • unmotivated employees

productivity

• how efficiently inputs are converted into outputs (not the same as level of production)

• types

  • labour productivity

  • capital productivity (or machine productivity)

• factors

  • rivalry

  • investments in technology → higher quality, reduced defect rate / tools for efficiency

  • skill levels of workforce → careful recruitment, investment in training

  • managers’ attitude towards risk

labour productivity

• labour productivity (no. of units per worker) = total output/no. of workers

• reasons

  • lack of training (eg new technology, workers do not know how to use)

• effect: more productive → more cost efficient in terms of labour costs

• how to improve?

  • improve employee training

  • improve employee motivation

  • purchase more technologically advanced equipment

  • effective management (see HR)

capital productivity

• capital productivity = value of output in time period / value of capital employed

• alt: machine productivity = output in time period/ total machine hours

cost to buy / cost to make

• calculations

  • cost to buy = price X no. of units + delivery costs

  • cost to make = total variable costs + total fixed costs

• decision-making wrt costs

  • if CTB<CTM, outsource/subcontract (buy)

  • if CTM<CTB, insourcing/in-house production (make)

adv of buying instead of making

• focusing on core competencies: does business specialise/could efforts be used more productively on other processes?

• flexibility to adapt to changes in market conditions/technology

• access to expertise

• risk sharing

• makes up for lack of own capital/labour capacity

disadv of buying instead of making

• loss of control

• quality concerns

• dependency on suppliers

• confidentiality risks

• long-term costs may increase (transport, communications, coordination)

• small businesses lack bargaining power over suppliers → affects prices and delivery times

operating profit

earnings from sales revenues before interest and taxes are deducted. It is found by subtracting all of a firm's expenses (except interest and taxes) from its total sales earnings.

Operating income = PBIT = Gross profit − Operating expenses (all expenses except interest and tax)

operating leverage

Degree of Operating Leverage = quantity (price – VC) ÷ (quantity (price –  VC) – FC)

• how well the business is using fixed costs to generate profits

• for every 1% increase in sales revenue, operating income increases by _% (note that operating profit is a ratio/number, not percentage)

  • high DOL → mostly FC, total costs will not increase by much when demand increases → amplified profits during periods of growth BUT higher risk if not enough sales

  • moderate @ 1.6

  • if DOL ~ 1.05 → mostly VC → increase in demand means total costs increase by a lot too → lower profits

    • can reduce VC using automation

  • if DOL < 1.0 → costs > profits → should review pricing methods/streamline ops to reduce costs