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?