Supply Chain Management and Production Planning: Key Concepts and Strategies

What is production planning?

management process of ensuring that sufficient resources (such as raw materials, components, labour, and machinery) are available to produce goods or services in the right quantity and at the right time to meet customer demand efficiently.

What is the supply chain process?

refers to the different stages of activities involved in producing a product and delivering it to the final customer

What is supply chain management (SCM)?

the process of managing activities in the supply chain to ensure that goods move from suppliers to customers cost effecivitly and timely

What is a global supply chain?

a network of suppliers, manufacturers, and distributors located in multiple countries that work together to produce and deliver to customers around the world.

Why are businesses in a supply chain interdependent?

retailers depend on manufacturers to supply products, manufacturers depend on suppliers for raw materials, and suppliers depend on retailers selling products to customers.

What are stocks (inventories)?

the materials that a business holds for use in the production process or for sale to customers.

What are the three types of stock?

Raw materials - natural resources used to produce goods (e.g., timber, metal). Work-in-progress (WIP) - semi-finished products in the production process. Finished goods - completed products ready to be sold to customers.

What is stock control?

process of managing and monitoring inventory levels to ensure the business has enough stock to meet demand while avoiding excessive storage costs.

What is stockpiling?

holding excessive amounts of stock, due to overproduction or falling demand - storage costs and cash flow problems.

What is a stock-out?

occurs when a business runs out of inventory and cannot meet customer demand, resulting in lost sales and possible damage to reputation.

What is a stock control chart?

a visual diagram used to monitor inventory levels over time and show when new stock should be ordered.

What is the maximum stock level?

the highest quantity of stock that a business wants to hold. It is limited by storage space, costs, and expected demand.

What is the minimum stock level (buffer stock)?

is the lowest amount of stock a business keeps as a safety for unexpected events such as delays in delivery or sudden increases in demand.

What is the reorder level?

the stock level at which a new order for inventory is placed to ensure that new stock arrives before the minimum level is reached.

What is reorder quantity?

Reorder quantity is the amount of stock ordered each time a new order is placed.

What is lead time?

time between placing an order for stock and receiving the delivery.

What is the economic order quantity (EOQ)?

the optimal amount of stock a business should order so that production continues without interruption while minimizing storage and ordering costs.

What is Just-in-Time (JIT)?

stock control system where materials and components are delivered exactly when they are needed in production, reducing the need to store large amounts of inventory.

Advantages of JIT?

Lower storage costs, Less money tied up in stock, Reduced waste and spoilage, Faster response to customer demand, Improved relationships with suppliers

Disadvantages of JIT?

Heavy reliance on suppliers, Production stops if deliveries are late, Requires sophisticated systems and planning, Less ability to handle sudden increases in demand

What is Just-in-Case (JIC)?

JIC is a traditional stock control system where businesses keep large amounts of inventory as a safety measure in case demand suddenly increases or supply is disrupted.

Advantages of JIC?

Can meet sudden increases in demand, Reduces risk of production stopping. Allows bulk buying and economies of scale

Disadvantages of JIC?

High storage costs, Risk of spoilage or damage, Cash tied up in inventory. Risk of obsolete stock if demand changes

What is productive capacity?

the maximum possible output a business can produce using all its resources efficiently.

What is capacity utilization?

measures the percentage of a firm's productive capacity that is actually being used.

Formula

Capacity utilization = (Actual output / Maximum output) × 100

Advantages of high capacity utilization?

Lower average fixed costs, Higher efficiency, Greater profitability, Better use of resources

Disadvantages of very high capacity utilization?

Equipment breakdowns due to overuse, Worker stress and fatigue, Longer waiting times for customers. Reduced service quality

What is productivity?

Productivity measures how efficiently resources (inputs) such as labour and capital are used to produce output.

What is labour productivity?

measures the efficiency of workers by calculating the amount of output produced per worker.

Formula

Labour productivity = Total output ÷ Number of workers

What is capital productivity?

measures how efficiently machinery are used in production

Formula

Capital productivity = Total output ÷ Machine hours

What is defect rate?

measures the proportion of products produced do not meet quality standards.

Formula

Defect rate = (Defective output / Total output) × 100

What is a make-or-buy decision?

A make-or-buy decision occurs when a business must choose whether to produce a product internally or purchase it from an external supplier.

What is cost to buy (CTB)?

CTB is the total cost of purchasing a product from an external supplier.

Formula

CTB = Price per unit × Quantity

What is cost to make (CTM)?

CTM is the total cost of producing a product internally.

Formula

CTM = (Average variable cost × Quantity) + Total fixed costs

How do businesses decide between CTB and CTM?

If CTB < CTM → buy (outsourcing) If CTM < CTB → make (insourcing)