5.6 - Production Planning

Supply chain process

the management process of overseeing the logistics from manufacture to the finished product being delivered to the customer

Local supply chain

suppliers and intermediaries are located within a close geographical area, such as local suppliers and service providers in the same region

Global supply chain

the business establishes relationships with suppliers and intermediaries for materials, products, and services from around the world

Features of global supply chains

more complex because firms must understand different regulatory and economic environments and the effect of international trade on supply chains

Problems with long or inefficient supply chains

they can be costly and increase the chance of problems occurring in the business

What is the difference between JIT and JIC?

JIT receives materials only when needed, while JIC keeps reserve stock as a buffer in case of problems

JIT

stock and component parts are obtained only when needed/used

Requirements for JIT

detailed production planning and scheduling, close and reliable suppliers, efficient stock ordering and delivery systems so inventory arrives at the start of production

Benefits of JIT

no unnecessary inventory in the operation process, avoids storage, maintenance, and wastage costs, supports lean production, eliminates waste, defects, and delays which can improve quality and customer satisfaction

Advantages of JIT

no need for buffer stock so stock management cost is lower, no need for stockpiling so cash flow and working capital improve, supports lean production and proactive efficiency, lower costs can help raise profits

Disadvantages of JIT

complete reliance on third

Just in case (JIC)

a stock control system designed to have reserve stock levels/buffer stock so enough resources are available to respond to unforeseen problems or events

Purpose of JIC

to make sure sufficient stock is available when there are delays, sudden demand rises, or other unexpected issues

Costs associated with JIC

insurance, maintenance, annual/ongoing storage or security, and preventing damage or theft

Best suited to JIC

non

Less suited to JIC

perishable goods and industries where consumer trends and preferences change constantly

Advantages of JIC

flexibility to meet unexpected rises in demand, enables production to continue if deliveries are delayed, maintains customer satisfaction because items are available, may allow bulk purchasing and economies of scale

Disadvantages of JIC

higher costs due to storage, maintenance, security, and insurance, risk of stock becoming obsolete, not all stock may be sold leading to waste, stock can be damaged or stolen, working capital can be tied up causing liquidity issues

Stock control chart

a graphical representation of the quantity of stock held by a business over a period of time

Purpose of a stock control chart

used to identify whether the business is overstocking, understocking, or holding the optimal level of stock to improve inventory management

Lead time

the time taken between ordering new stock and receiving it

Reorder level

the stock level at which the firm places its reorder of stock

Reorder quantity

the volume of stock ordered to replenish inventory

Buffer stock

the minimum stock level held by the firm in case of unforeseen events such as late deliveries, damaged stock, or unexpected rises in demand

Usage rate

the speed at which stock is depleted in the production process

Stock

out

How to combat stock

outs

Stockpiling

building up excessive levels of inventory

Problem with stockpiling

too much stock ties up working capital

Capacity utilisation rate

the firm’s actual output as a percentage of its maximum potential output at a particular point in time

Capacity utilisation rate formula

actual output / maximum possible output × 100

Why capacity utilisation matters

it measures the extent to which a firm is operating at its productive capacity

100% capacity utilisation

all resources are fully used

Advantages of high capacity utilisation

average cost of production is likely to be lower, lower unit costs can lead to higher profit

Disadvantages of very high capacity utilisation

employees may become overworked and stressed, capacity working at full stretch may reduce quality, and machinery/equipment may face greater wear and tear causing maintenance and replacement costs

Defect rate

the number of faulty or substandard items as a percentage of the total number of items produced

Defect rate formula

defective items / total items produced × 100

Lower defect rate

means higher product quality

Why businesses want a lower defect rate

it raises customer satisfaction and reduces costs from defects

Labour productivity

a measure of the efficiency of workers in an organisation

Labour productivity formula

total output per time period / number of employees at work, or volume of output per labour hour

Capital productivity

the effectiveness of a firm’s capital assets in generating output

Capital productivity formula

total output / capital units

Capital intensive firms and productivity

these firms are more likely to focus on capital productivity

Productivity rate

the amount of output generated per unit of input

Productivity formula

total output / total input × 100

Higher productivity rate

means the business is more efficient, and higher efficiency is positively linked to profitability and competitiveness

Operating leverage

measures how a change in a firm’s sales volume affects its operating profit (PBIT)

Operating leverage formula

contribution × price

Simplified operating leverage idea

sales minus variable costs contribute toward fixed costs and profit, so when fixed costs are high, small sales changes cause larger profit changes

Low operating leverage

fixed costs are low and variable costs are high, so profit changes are less sensitive to sales changes and risk is lower

High operating leverage

fixed costs are high and variable costs are low, so small changes in sales cause bigger changes in profit and risk is higher

Why operating leverage matters

helps investors analyse the risk and reward of a business because it measures ability to generate profit

Make or buy decision

a management decision about whether to manufacture something internally (make) or purchase it from an external supplier (buy)

Another name for make or buy

insourcing versus outsourcing decision

Cost to make (CTM)

fixed costs plus variable costs

Cost to buy (CTB)

price × quantity

Decision rule for make or buy

if CTM is greater than CTB, it makes sense to buy; if CTM is lower than CTB, it makes sense to make

Limits of make or buy analysis

qualitative factors also matter, such as quality issues, reliability, reputation of suppliers, and the effect on the workforce