5.5 Production Planning

Supply Chain - The network between a company and its suppliers to produce and distribute a good or service to the end customer. Supply chain management is crucial to optimize the production and distribution of a product, in order to have a faster, more reliable and more efficient production cycle.

Supply Chain Management

Stock Control - Managers must plan, implement and monitor the movement and storage of all stocks.

Quality Control - All stages in the supply chain must add value to the final product.

Supplier Networks - Managing the quality of relationships with suppliers and intermediaries, and ensuring they are up to the same high standards of the business itself.‍

Transportation - Utilising the most cost-effective methods of distributing products to customers.

Just-in-Time (JIT) - Stock control system based on stocks being delivered as and when they are needed in the production process.

Just-in-Case (JIC) - Traditional stock control system that maintains large amounts of stock in case there are supply or demand fluctuations.

Differences

Flexibility - JIC allows a business to meet a sudden increase in demand as there is a buffer stock to rely on, but will suffer when there is a decrease in demand as there will be a lot of stagnating buffer stock. JIT will benefit the business in times of a sudden drop in demand as capital would not be wasted on stock that will not be sold, but the business may not be able to supply and capitalise on a sudden increase in demand.

Vulnerability - JIC businesses are vulnerable to a sudden drop in demand that will not be able to cover its high fixed costs in storage and maintenance of its inventory management. Whereas JIT is vulnerable to the reliability of its suppliers, who could cause major disruptions in its supply chain if the supplier is unable to deliver raw materials on time.

Saving Capital - JIC allows businesses to benefit from purchasing economies of scale as they tend to make bulk purchases of stock, whereas JIT allows businesses to free up capital that would have been used for storage space and inventory management. The additional capital from both systems can be reinvested into other business practices and core operations.

Stockpiling - Holding too much stock, either caused by intentional overproduction or falling demand.

Implications of Stockpiling

Storage costs - Storage is inevitably required to house the excess stock.

Inflexibility - businesses cannot adapt as quickly to changing trends as they will have to offload their current stock before changes can be made.

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Stock-outs - Holding insufficient stock, generally caused by poor sales forecasting or practice of Just-in-Time management.

Implications of Stock-outs

Reputation - Businesses may pick up a reputation for not being able to supply market demand, damaging the goodwill held by the business.

Lost of sales - Customers may opt for competitors who were able to adapt and meet changing demands.

Stock Control Chart - Graphical illustration of the optimal stock level a business should have during their production process.

Maximum Stock Level - Upper limit of stock that a business wishes to hold.

Reorder level - When an order for new stock should be placed to account for the time lag between an order and the delivery of new stock.

Minimum stock level - Lowest amount of inventory that the business should hold, it is the level of buffer stock the business has as a precautionary measure against unforeseen circumstances.

Reorder quantity - Difference between minimum and maximum stock levels.

Lead time - Time lag between placing an order and receiving the new stocks.

Capacity Utilisation - A measure of a firm’s existing level of output as a proportion of its potential output. It is often used as a measure of a firm’s efficiency, as it reveals the extent of under-utilised resources a business has.

Capacity Utilisation = (actual output / productive capacity) x 100

High capacity utilisation is important for firms that have:

• High Fixed Costs - A high capacity utilisation will spread out fixed and indirect costs of production over a larger level of output, helping the business achieve technical economies of scale.
• Low Profit Margins - Products with a lower unit contribution will require a large number of sales to cover fixed and indirect costs and be profitable for the business.

Drawbacks of High Capacity Utilisation

Servicing - Constant output will leave little to no time for routine servicing or maintenance of equipment and machinery. This leaves the business vulnerable to long-term breakdowns that could have been prevented with earlier servicing.

Stress - Overworking employees will raise the level of stress and lower job satisfaction, which may lead to a lower quality of output, lower productivity, and possibly higher staff turnover.

Labour Productivity - A measure of the efficiency of workers by calculating the output per worker.

Labour Productivity = ( total output / number of workers ) x 100

Importance of Productivity

Increased Profitability - Higher productivity will lead to higher levels of output, which will spread fixed and indirect costs, such as salaries and wages, and reduce the average costs of production.

Labour Costs - As productivity increases, the business will require less labour to produce the same level of output. Businesses can lower costs without compromising the scale of output, by hiring fewer employees, or introducing more flexible work schedules with fewer hours in order to reduce salaries of employees.

Increased Morale - A motivated employee will create a positive work environment that will spread its influence to others.

Make-or-buy decision - Choice between manufacturing a component or purchasing it from an external supplier. The cost-to-buy and cost-to-make variables are often compared to determine the more financially beneficial decision.

Cost to Buy = price x quantity

Cost to Make = fixed costs + ( average variable cost x quantity )

Qualitative Factors to Consider

Quality - Consider whether the business has the experience or understanding required to complete the task to a high standard of quality, and whether the specialisation of an external supplier would produce higher quality in a shorter time frame.

Reliability - Using a supplier leaves the business vulnerable to the reliability of the supplier, who will cause a disruption in the entire production operation if they do not meet the requirements of the business.