- 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)
- 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)
