5.5. Production Planning (HL only)

  • Supply chain process
    • System that moves a product/service from supplier to customer
    • Involves transformation of inputs to outputs
    • Includes every entity that comes into contact with the business during production
    • Basic elements:
      • Customer
        • Starts the chain/process by creating demand
      • Planning
      • Purchasing
        • Purchases raw materials needed to satisfy demand
        • Purchase orders sent to suppliers
      • Inventory
        • Receiving, storing, and checking raw materials
      • Production
      • Transportation (to customer)
  • Just-in-time vs. just-in-case
    • Just-in-case (JIC)
      • Traditional stock management system that recognizes need to maintain large amounts of stock (reserve/buffer stock)
      • Important during supply or demand fluctuations or contingencies
      • Ensures there is always stock available to meet customer demands
      • Fatal to the business if they overestimate the demand for its products
      • Advantages:
        • Allows a business to meet sudden changes in demand
        • Increased flexibility
        • Purchasing economies of scale
        • Reduces down time
      • Disadvantages:
        • Costs of holding stock – costs for storage
        • Opportunity cost of money being tied in stocks
    • Just-in-time (JIT)
      • See unit 5.3
  • Stock control
    • Managing stock levels
    • Careful planning to ensure sufficient stocks are available at the right time
    • Disadvantages of stockpiling (holding too much stock):
      • Storage costs will increase
      • Stocks might be prone to fire, theft or damage
      • Stock might perish and deteriorate
      • Stocks can be illiquid and do not generate money
      • May become obsolete when demand changes
      • Excess stocks may need to be discounted to offload unwanted products
    • Disadvantages of stock-out (not holding enough stock):
      • Lost sales
      • Damaged corporate image and disgruntled customers
      • Inefficiencies in machinery
      • Higher administration costs
    • Goal is optimum level of stock/economic order quantity
      • Large orders = economies of scale but storage costs
      • Factors:
        • Type of product (e.g. FMCGs need to have large volume of stock)
        • Forecast level of demand
        • Lead times – large lead time = large volume of stock
        • Costs of stockholding
  • Stock control chart
    • Assumes sales are constant
    • Lead time – time it takes for ordered stock to arrive
    • Buffer stock/minimum stock level – reserve stock (JIC)
    • Reorder quantity – how much the business orders at reorder level
    • Reorder level
      • Level of stock wherein the business reorders
      • (Minimum stock level) + (lead time * demand per day)

  • Capacity utilization rate
    • (Actual output / productive capacity) * 100
    • Measure of firm’s efficiency in terms of idle resources
    • How to improve CU – marketing, subcontracting, reduce capacity
    • High CU means:
      • Level of output is close to max (productive capacity)
      • Fixed costs are spread over high production
    • High CU is important for firms that have
      • High fixed costs
      • Low profit margins
      • Low marginal costs
    • Drawbacks of high CU
      • Machinery may be in constant use; no time for maintenance – breakdown
      • For service oriented businesses, may mean health and safety concerns, lower standards of service, long waiting times, etc.
      • Quality may suffer
      • Diminishing marginal returns/less efficiency
      • Not a substitute for growth
  • Productivity rate
    • (Units of output / units of output)
    • Measures the efficiency of production
      • Whether inputs are effectively turned into outputs
    • How to improve productivity – training, innovation, technology, motivation
    • High productivity means a company can reduce prices or improve profit margins
  • Cost to make (CTM) or cost to buy (CTB)
    • Quantitative analysis on whether an item should be made or bought
    • CTB = Price x Quantity
    • CTM = Fixed Cost + (Average Variable Cost x Quantity)
    • Qualitative factors to consider:
      • Is it a core function that must be controlled and/or kept confidential?
      • Are there suppliers that are competent and reliable?
      • Do you have enough skill, time, and capacity to produce at desired volume/quantity?
      • How will it affect the brand?

 

Kim De Leon5.5. Production Planning (HL only)

Leave a Comment: