5.6 Production Planning

Capacity Utilisation

the percentage of a company’s total capacity that is currently being used. When capacity utilisation rates are higher, the average fixed costs will fall because they will be divided by a larger output.

Capacity

maximum possible output

Spare capacity

potential additional output that is not currently being realised

under utilisation

operating below full capacity

under utilisation benefits

more time for maintenance, repair, training and improvement

less pressure on workers

ability to cope with sudden increase in demand

under utilisation limitations

higher production of fixed costs per unit

lower profit levels, increase price, lower sales volume

negative brand image

lack of motivation

over utilisation

operating close to full capacity

over utilisation benefits 

reduced average costs and increase profit

fixed costs spread across higher output 

positive brand image

increased motivation

over utilisation limitations

too much strain on resources

stress on staff

no time for maintenance or training

quality can suffer

damage reputation

factors affecting make or buy decisions (quantitative)

total and average costs

defect rates

capacity utilisation

productivity rates 

cost of logistics

capital expenditure

profitability

factors affecting make or buy decisions (qualitative)

quality management 

reputation

ethical implications

availability of factors of production

changing demand

supply chain reliability and lead times

specialisation

Reasons to make

quality and cost control through vertical integration

protecting intellectual property

meeting global and local responsibilities

Reasons to buy

specialisation and expertise

low costs due to economies of scale

lower fixed costs

supply chain

refers to all stages of production through which a product passes, from the extraction of raw materials to the delivery of final products to customers. it may involve a number of different businesses.

Procurement

refers to the process required in order to acquire the necessary resources to conduct operations. procurement can be local or global.

benefits of local supply chains (procurement)

greater control/less risk

lower transport costs

local, social, global, ecological benefits

limitations of local supply chains (procurement)

higher production costs

less choice

benefits of global supply chains (procurement)

greater choice

lower costs of production

limitations of global supply chains (procurement)

greater risk

lack of transparency and control

just-in-time production

the principle of placing smaller, regular orders for resources, which are delivered just in time for them to be used. it reduces storage costs and waste.

just-in-time production benefits

improved cash flow and reduced costs

improved operations

increased capacity

just-in-time production limitations

reduced economies of scale

high risk

reduced resilience

just-in-case production

involves holding relatively large levels of buffer stocks so that a business can continue to operate when faced with an unpredictable event. it results in higher storage costs, but more resilience to disruptions.

just-in-case production benefits

resilience

economies of scale

less risk

just-in-case production limitations

less working capital

higher storage costs

waste