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5.6: Production Planning

Supply Chain Management

  • Production planning involves ensuring that necessary resources are available to create finished products in a timely manner. The supply chain encompasses the various stages from production to distribution. Effective SCM is essential for businesses to operate efficiently and profitably.

  • Key aspects of SCM:

  • Stock control: Managing the movement and storage of inventory.

  • Quality control: Ensuring quality throughout the supply chain.

  • Supplier networks: Selecting and collaborating with suppliers.

  • Transportation networks: Choosing efficient and cost-effective transportation methods.

  • Reasons for using SCM:

  • Preventing mistakes and disruptions: Effective SCM can minimize errors and avoid disruptions in the supply chain.

  • Balancing supply and demand: SCM helps ensure that there is an appropriate supply of inventory to meet customer demand.

  • Expanding global reach: Global supply chains enable businesses to sell to customers worldwide.

  • Risk mitigation: Diversifying operations across different regions can help mitigate risks.

  • Lean production: SCM can identi

Just in Time Production

  • JIT is a stock control system that aims to minimize inventory levels by delivering materials and components exactly when they are needed for production. This approach eliminates the need for buffer stocks and reduces costs associated with holding inventory.

  • Key features of JIT:

  • Elimination of buffer stocks: JIT relies on precise timing and coordination to avoid excess inventory.

  • Reduced costs: JIT can significantly reduce costs related to storage, insurance, and handling of inventory.

  • Improved cash flow: By minimizing inventory, businesses can free up capital for other purposes.

  • Increased flexibility: JIT allows for quicker responses to changes in demand.

  • Enhanced efficiency: JIT can streamline production processes and reduce waste.

  • Advantages of JIT:

  • Lower inventory costs: Reduces storage, insurance, and handling expenses.

  • Improved cash flow: Frees up capital for other uses.

  • Increased flexibility: Enables quicker responses to market changes.

  • Reduced waste: Minimizes inventory obsolescence and spoilage.

  • Enhanced efficiency: Streamlines production processes.

  • Disadvantages of JIT:

  • Increased reliance on suppliers: Requires reliable and timely deliveries from suppliers.

  • Higher administration costs: More frequent ordering and tracking of inventory.

  • Risk of disruptions: Delays in deliveries can halt production.

  • Quality control challenges: Requires high-quality materials to avoid bottlenecks.

  • Limited flexibility for sudden demand increases: May struggle to meet unexpected surges in demand.

Just in Case Production

  • JIC is a traditional stock control system that maintains high levels of inventory to ensure that there is always enough stock available to meet demand fluctuations. This approach involves holding buffer stocks of raw materials, semi-finished goods, and finished goods to avoid stockouts and production delays.

  • Key features of JIC:

  • Holding buffer stocks: JIC maintains significant levels of inventory to safeguard against supply or demand uncertainties.

  • Avoiding stockouts: JIC ensures that there is always enough stock on hand to meet customer demand, preventing production delays.

  • Advantages of JIC:

  • Flexibility: JIC allows businesses to respond to sudden increases in demand by using the buffer stock.

  • Reduced downtime: JIC minimizes production downtime caused by stockouts.

  • Economies of scale: JIC can enable businesses to take advantage of bulk purchasing discounts.

  • Disadvantages of JIC:

  • High inventory costs: JIC incurs significant costs for storage, insurance, and handling of inventory.

  • Perishability and damage: Some products may be subject to spoilage or damage while stored in inventory.

  • Opportunity cost: Holding inventory ties up capital that could be used for other purposes.

Stock Control

  • Stock Control

  • Stock control, also known as inventory management, is the process of ensuring that businesses have the right amount of stock available at the right time. It involves planning and controlling stock levels to avoid both stockpiling (excess inventory) and stockouts (insufficient inventory).

  • Three categories of stocks:

  • Raw materials: Natural resources used in production.

  • Work-in-progress: Partially finished products.

  • Finished goods: Completed products ready for sale.

  • Costs of poor stock control:

  • Stockpiling:

  • Increased storage costs

  • Perishable goods may spoil or become outdated

  • Tied-up capital

  • Difficulty selling excess stock

  • Stockouts:

  • Damaged reputation and lost customers

  • Higher administrative costs

  • Lost sales

  • Production inefficiencies

  • Stock control charts:

  • Stock control charts are visual tools used to track stock levels and determine optimal inventory levels. They help businesses identify reorder points, lead times, and reorder quantities.

  • Factors influencing stock levels:

  • Product type: Fast-moving consumer goods (FMCGs) require higher stock levels compared to consumer durables.

  • Demand: Expected demand levels influence the amount of stock needed.

  • Lead times: Longer lead times require higher buffer stocks.

  • Holding costs: The cost of storing inventory affects the optimal stock level.

  • Computerized stock control systems:

  • Modern businesses often use computerized systems to manage stock levels, track inventory, and automate reorder processes. These systems can help businesses optimize stock levels, reduce costs, and improve efficiency.

Capacity Utilisation

  • Capacity utilization measures how efficiently a company is using its resources to produce output. It is the ratio of actual output to potential output, expressed as a percentage.

  • Key points about capacity utilization:

  • High capacity utilization: Indicates that the company is using its resources effectively and efficiently.

  • Low capacity utilization: Suggests that resources are being underutilized or inefficiently used.

  • Calculation: Capacity utilization rate = (Actual output / Productive capacity) x 100

  • Importance: Capacity utilization is important for businesses because it affects profitability, efficiency, and resource allocation.

  • Factors influencing capacity utilization:

  • Demand: Higher demand for a company's products or services leads to higher capacity utilization.

  • Production efficiency: Improvements in production processes can increase capacity utilization.

  • Economic conditions: Economic downturns can lead to lower capacity utilization, while economic growth can lead to higher utilization.

Defect Rate

  • Defect Rate

  • A defect rate measures the proportion of defective or substandard output produced by a company. It is often expressed as a percentage of total output.

  • Key points about defect rate:

  • Calculation: Defect rate = (Number of defective units / Total output) x 100

  • Importance: A high defect rate indicates poor quality control and can lead to increased costs, customer dissatisfaction, and damage to the company's reputation.

  • Benchmarking: Comparing a company's defect rate to industry standards helps assess its quality performance.

  • Continuous improvement: Companies strive to reduce defect rates through quality initiatives like Six Sigma and Total Quality Management (TQM).

  • Impact on profitability: High defect rates can lead to increased costs, such as rework, waste, and customer returns, which can negatively impact profitability.

Productivity

  • Productivity is a measure of how efficiently resources are used to produce output. It compares the amount of output (goods or services) produced with the amount of input (resources) used to produce that output.

  • Key aspects of productivity:

  • Efficiency: Productivity measures the efficiency of resource use.

  • Input-output relationship: Productivity compares the quantity of output to the quantity of input.

  • Types of productivity: Labor productivity, capital productivity, and multifactor productivity are common measures.

  • Importance: Productivity is crucial for economic growth, competitiveness, and improved living standards.

  • Factors affecting productivity:

  • Technology: Investments in technology can enhance productivity by improving efficiency and automating tasks.

  • Labor: Skilled and motivated workers contribute to higher productivity.

  • Capital: Efficient use of capital resources (machinery, equipment) can increase output.

  • Management: Effective leadership and management practices can optimize resource utilization.

  • Innovation: Introducing new ideas and products can lead to increased productivity.

Operating Leverage

  • Operating Leverage

  • Operating leverage measures the extent to which a company's fixed costs impact its profitability. It compares fixed costs to variable costs.

  • Key points about operating leverage:

  • High operating leverage: A company with high operating leverage has a significant proportion of fixed costs relative to variable costs. This means that a small change in sales volume can lead to a large change in profit.

  • Low operating leverage: A company with low operating leverage has a smaller proportion of fixed costs compared to variable costs. This means that changes in sales volume have a less dramatic impact on profit.

  • Calculation: Operating leverage = (Contribution margin / Profit) x 100

  • Impact on profitability: Companies with high operating leverage can experience significant swings in profitability due to changes in sales volume. Conversely, companies with low operating leverage have more stable profits.

  • Factors influencing operating leverage:

  • Cost structure: The proportion of fixed costs to variable costs determines a company's operating leverage.

  • Product type: Industries with high fixed costs, such as manufacturing or airlines, tend to have high operating leverage.

  • Business model: Companies with subscription-based models or high upfront costs often have high operating leverage.

Cost to buy

  • Cost to Buy (CTB) is a term used in business decision-making, specifically when considering whether to manufacture a product in-house or outsource its production to a third-party supplier.

  • It refers to the total cost associated with purchasing a product from an external supplier. This includes:

  • Purchase price: The direct cost of buying the product from the supplier.

  • Transportation costs: The cost of shipping the product to the company's facilities.

  • Inspection and quality control costs: The cost of inspecting and ensuring the quality of the purchased product.

  • Any additional costs: Other relevant costs, such as customs duties or taxes.

Cost to make

  • Cost to Make (CTM) is a term used in business decision-making, specifically when considering whether to manufacture a product in-house or outsource its production to a third-party supplier.

  • It refers to the total cost associated with producing a product internally. This includes:

  • Direct materials: The cost of raw materials and components used in the production process.

  • Direct labor: The cost of labor directly involved in manufacturing the product.

  • Manufacturing overhead: Indirect costs related to production, such as rent, utilities, and depreciation of equipment.

  • By comparing the CTM to the cost to buy (CTB), a company can determine the most cost-effective option for obtaining the product. If the CTM is lower than the CTB, it is generally more financially beneficial to manufacture the product in-house.

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