5.5 Production Planning
• Supply chains - all the stages of production through which • Just in Case vs Just in Time
a product passes, from the extraction of raw materials to
the delivery of finished products or services final • Just in Time
consumers. Some elements of a product may be produced • the stock management principle of placing smaller, regular orders for resources
in-house whilst others are purchased which are delivered just in time for them to be used
• Advantages of just in time
• Supply chain management - the process of working with
• reduced stock holding costs improves cash flow
all these suppliers in an attempt to maximise efficiency and
• encourages staff to be more careful and get things right first time
deliver the maximum possible value to the final consumer. • with less warehouse space needed, and with less chance of waste or damage,
Supply chain managers will consider many different factors costs are reduced
when selecting suppliers, including the following: • with less holding stock, there may be more safe available for production, which
• cost - due to purchasing economies of scale, supply could increase capacity utilisation
costs may come down if large orders are placed. Some • Disadvantages of just in time
manufacturers prefer to use a small number of suppliers, • purchasing economies of scale are lost
with each one providing more than one component. • high risks with delays in delivery as production could be halted
• restrict a firm’s ability to react to an influx in demand
• Reliability - consistency and keeping promises, this is • may not be suitable for businesses with seasonal demand where inventories are
pivotal for just-in-time production processes of typically built up ready for short periods of high demand
manufacturers. If delivery is late, the entire production • just in case
line could be stopped. • stock control method that involves holding relatively large levels of buffer tock so
• Product Quality - meeting an agreed standard. Poor that a business can continue to operate when faced with an unforeseen event
quality components from a supplier can lead to a fall in • buffer stock - additional quantities of stock kept by a company in case of need
the overall product quality and a loss of reputation • Advantages of just in case
• Lead times - how long it takes for a supplier to make a • production can continue is supply chain is disrupted
delivery. Lead times vary depending on the industry and • larger orders should lead to purchasing economies of scale, which reduces
average costs
order size
• unexpected orders can be fulfilled quickly
• disadvantages of just in case
• storage costs are higher
Stock control charts • there is an increased risk of waste and damage
• working capital is tied up in stocks which reduces liquidity
• way of monitoring and analysing stock levels
• charts record when stocks are delivered and when they are
sold
Calculations
• main parts of a stock control chart:
• maximum stock level - the total amount of inventory a
• unit cost - the average cost of making one unit of output
firm wishes to hold, using current storage facilities
• total cost / output = unit cost
• buffer stock level - stock that is held just in case there • if a firm can reduce its unit cost while maintaining quality, it can gain a competitive
is an unexpected order or late delivery. Buffer stock is a advantage of price flexibility - reducing price to be more competitive and increase
backup so that customer needs can still be met if an market share, or maintain price to gain increased profit margins
unforeseen event occurs • productivity rate - a measurement of the efficiency of resources used in the
• lead time - the difference between when an order is production process
placed and when it is delivered • (total output / total input) x 100 = productivity rate
• re-order level - the point at which new stock is ordered • higher productivity is achieving a lot in a short space of time
from a supplier. This will take into account the lead time • most common type is labour productivity
• labour productivity - the average output per worker for a given time period
and buffer stock level
• total output / number of workers = labour productivity
• Re-order quantity - the amount of stock that is ordered • the more productive a workforce, the more output it should produce, reducing
from a supplier. average costs because the cost of staff wages will be split over a greater
number of output units
• Improving Productivity
• improve training and staff motivation
Stock control charts • improve management techniques
• increase use of technology
• way of monitoring and analysing stock levels • important to consider the effects of increasing labour productivity. If the staff are
• charts record when stocks are delivered and when they are working harder, they may get tired and motivation may fall. Overworked staff are
sold also more likely to make mistakes causing quality to fall
• main parts of a stock control chart: • Capacity Utilisation - the percentage of a firm’s capacity that is being used
• maximum stock level - the total amount of inventory a • (actual output / production capacity) x100 = capacity utilisation
firm wishes to hold, using current storage facilities • high capacity utilisation means a firm is using its resources efficiently, this should
reduce the average costs and increase profits. The downside is that workers and
• buffer stock level - stock that is held just in case there machines are working flat out. This can increase tiredness and stress levels of staff,
is an unexpected order or late delivery. Buffer stock is a whilst machines again no downtime to be fixed, full capacity utilisation also means
backup so that customer needs can still be met if an there is no room for growth so new customers may be turned away
unforeseen event occurs • a desirable capacity utilisation is 95%
• lead time - the difference between when an order is • cost to buy - the total cost of subcontracting production to a supplier
placed and when it is delivered • price x quantity = cost to buy
• re-order level - the point at which new stock is ordered • allows quantitative analysis of how much outsourcing production will cost, but this
should be considered alongside the factors discussed
from a supplier. This will take into account the lead time
• cost to make - the total cost of production if manufacturing is kept in-house
and buffer stock level
• fixed cost = (variable costs x quantity) = cost to make
• Re-order quantity - the amount of stock that is ordered • Make or Buy?
from a supplier. • Reasons to make
• control over the production process and quality management
• production secrets and patents do not need to be shared with a third party
• working conditions can be monitored and controlled. The reputation of suppliers
The cost of holding stock used by a company can damage their reputation
• Reasons to buy
• this cost should not be overlooked • specialist suppliers are likely to have economies of scale, leading to lower
• warehouses can be expensive to run as they incur other average cost
fees such as security, maintenance, and utilities. • the company does not need to invest in production facilities
• Some conditions must be controlled for correct storage of • if the company does not have the expertise to make the product itself
the goods
• Supply chains - all the stages of production through which • Just in Case vs Just in Time
a product passes, from the extraction of raw materials to
the delivery of finished products or services final • Just in Time
consumers. Some elements of a product may be produced • the stock management principle of placing smaller, regular orders for resources
in-house whilst others are purchased which are delivered just in time for them to be used
• Advantages of just in time
• Supply chain management - the process of working with
• reduced stock holding costs improves cash flow
all these suppliers in an attempt to maximise efficiency and
• encourages staff to be more careful and get things right first time
deliver the maximum possible value to the final consumer. • with less warehouse space needed, and with less chance of waste or damage,
Supply chain managers will consider many different factors costs are reduced
when selecting suppliers, including the following: • with less holding stock, there may be more safe available for production, which
• cost - due to purchasing economies of scale, supply could increase capacity utilisation
costs may come down if large orders are placed. Some • Disadvantages of just in time
manufacturers prefer to use a small number of suppliers, • purchasing economies of scale are lost
with each one providing more than one component. • high risks with delays in delivery as production could be halted
• restrict a firm’s ability to react to an influx in demand
• Reliability - consistency and keeping promises, this is • may not be suitable for businesses with seasonal demand where inventories are
pivotal for just-in-time production processes of typically built up ready for short periods of high demand
manufacturers. If delivery is late, the entire production • just in case
line could be stopped. • stock control method that involves holding relatively large levels of buffer tock so
• Product Quality - meeting an agreed standard. Poor that a business can continue to operate when faced with an unforeseen event
quality components from a supplier can lead to a fall in • buffer stock - additional quantities of stock kept by a company in case of need
the overall product quality and a loss of reputation • Advantages of just in case
• Lead times - how long it takes for a supplier to make a • production can continue is supply chain is disrupted
delivery. Lead times vary depending on the industry and • larger orders should lead to purchasing economies of scale, which reduces
average costs
order size
• unexpected orders can be fulfilled quickly
• disadvantages of just in case
• storage costs are higher
Stock control charts • there is an increased risk of waste and damage
• working capital is tied up in stocks which reduces liquidity
• way of monitoring and analysing stock levels
• charts record when stocks are delivered and when they are
sold
Calculations
• main parts of a stock control chart:
• maximum stock level - the total amount of inventory a
• unit cost - the average cost of making one unit of output
firm wishes to hold, using current storage facilities
• total cost / output = unit cost
• buffer stock level - stock that is held just in case there • if a firm can reduce its unit cost while maintaining quality, it can gain a competitive
is an unexpected order or late delivery. Buffer stock is a advantage of price flexibility - reducing price to be more competitive and increase
backup so that customer needs can still be met if an market share, or maintain price to gain increased profit margins
unforeseen event occurs • productivity rate - a measurement of the efficiency of resources used in the
• lead time - the difference between when an order is production process
placed and when it is delivered • (total output / total input) x 100 = productivity rate
• re-order level - the point at which new stock is ordered • higher productivity is achieving a lot in a short space of time
from a supplier. This will take into account the lead time • most common type is labour productivity
• labour productivity - the average output per worker for a given time period
and buffer stock level
• total output / number of workers = labour productivity
• Re-order quantity - the amount of stock that is ordered • the more productive a workforce, the more output it should produce, reducing
from a supplier. average costs because the cost of staff wages will be split over a greater
number of output units
• Improving Productivity
• improve training and staff motivation
Stock control charts • improve management techniques
• increase use of technology
• way of monitoring and analysing stock levels • important to consider the effects of increasing labour productivity. If the staff are
• charts record when stocks are delivered and when they are working harder, they may get tired and motivation may fall. Overworked staff are
sold also more likely to make mistakes causing quality to fall
• main parts of a stock control chart: • Capacity Utilisation - the percentage of a firm’s capacity that is being used
• maximum stock level - the total amount of inventory a • (actual output / production capacity) x100 = capacity utilisation
firm wishes to hold, using current storage facilities • high capacity utilisation means a firm is using its resources efficiently, this should
reduce the average costs and increase profits. The downside is that workers and
• buffer stock level - stock that is held just in case there machines are working flat out. This can increase tiredness and stress levels of staff,
is an unexpected order or late delivery. Buffer stock is a whilst machines again no downtime to be fixed, full capacity utilisation also means
backup so that customer needs can still be met if an there is no room for growth so new customers may be turned away
unforeseen event occurs • a desirable capacity utilisation is 95%
• lead time - the difference between when an order is • cost to buy - the total cost of subcontracting production to a supplier
placed and when it is delivered • price x quantity = cost to buy
• re-order level - the point at which new stock is ordered • allows quantitative analysis of how much outsourcing production will cost, but this
should be considered alongside the factors discussed
from a supplier. This will take into account the lead time
• cost to make - the total cost of production if manufacturing is kept in-house
and buffer stock level
• fixed cost = (variable costs x quantity) = cost to make
• Re-order quantity - the amount of stock that is ordered • Make or Buy?
from a supplier. • Reasons to make
• control over the production process and quality management
• production secrets and patents do not need to be shared with a third party
• working conditions can be monitored and controlled. The reputation of suppliers
The cost of holding stock used by a company can damage their reputation
• Reasons to buy
• this cost should not be overlooked • specialist suppliers are likely to have economies of scale, leading to lower
• warehouses can be expensive to run as they incur other average cost
fees such as security, maintenance, and utilities. • the company does not need to invest in production facilities
• Some conditions must be controlled for correct storage of • if the company does not have the expertise to make the product itself
the goods
