5.6 production planning

supply chain management

• aim of stock control: maintain inventory levels so that firms total cost of holding stock is minimised (avoid overstock) + avoid stock out situation (if unable meet customers’ needs, impacts cash flow + brand image)

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

• stages

  • supplier networks

  • stock control

  • quality control

  • transport networks

• 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

  • 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

ordering stock earlier

• adv

  • 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

• disadvantage

  • 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 vs if low means resources are idle

• 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

  • 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

  • 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

  • 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 leverage

• operating leverage = fixed costs / (fixed costs + variable costs)
  = % change in pbit / % change in sales

• high operating leverage means non-current assets can be more productive without fear of increased output leading to too much increase in variable costs

• BUT higher risk due to high fixed costs (eg recession/reduced demand)

  • regardless of sales, still need spend fixed costs to continue operating (otherwise no land etc)