5.6 PRODUCTION PLANNING.pdf

5.6 PRODUCTION PLANNING PREPARED BY Johanna Fabre Logos Academy, 2024  i. THE SUPPLY CHAIN PROCESS The supply chain (or logistics) refers to the sequence of activities (processes) from the production of a good or service to it being delivered to the end customer/consumer Network o...

5.6 PRODUCTION PLANNING PREPARED BY Johanna Fabre Logos Academy, 2024  i. THE SUPPLY CHAIN PROCESS The supply chain (or logistics) refers to the sequence of activities (processes) from the production of a good or service to it being delivered to the end customer/consumer Network of suppliers, producers and distributors Supply chain management (SCM) is the art of managing and controlling effectively and efficiently these activities. Global supply chains refer to the networks that span multiple countries and regions for the purpose of sourcing and supplying goods and services. THE SUPPLY CHAIN PROCESS  SUPPLY CHAIN NETWORKS Supplier’s Final supplier Customer Supplier’s Supplie Final supplier r Customer Supplier Compa Wholesaler Final Customer Supplier’s ny supplier Final Supplier Supplier’s Retailer Customer supplier Supplier’s supplier Final Customer Your turn. Identify benefits and possible problems of Supply Chain  ii. Just in time and Just in case One of the key aims of production planning is to minimize the costs of holding stocks whilst ensuring that there are sufficient resources for production to be able to meet customer demand in a timely manner. JUST IN TIME (JIT) is a stock control system based on stocks being delivered as and when they are needed in the production process. This means that a buffer stock (the predetermined minimum level of stock) is not required. JIT Advantages Stock is bought only when required. The aim is to hold low (even zero) levels of stock. It is beneficial for the working capital. Reduces costs (storage and wastage) Reduces the chance of holding stock that can’t be sold (i.e. obsolete stock) Less chance of damaged or ruined stock Creates more space for alternative production plans Creates a closer relationship with suppliers. JIT Disadvantages Relies on sophisticated technologies Frequent re-ordering of stocks can cause transaction costs Major problems if stocks are not delivered on time Inflexible in case of a sudden increase in demand Little scope for mistakes JUST IN CASE JIC is the traditional stock control system that maintains large amounts of stock in case there are supply or demand fluctuations. A buffer stock (or reserve stock) of raw materials, semi-finished goods and finished goods is used just in case there are any issues. JIC Advantages Economies of scale (by buying in bulk) You can meet sudden changes in demand JIC provides spare parts too no need to wait for delivery of stocks JIC Disadvantages Costs of storage Subject to damage or theft Opportunity cost of money being tied up in stocks  BUSINESS THINKING 1 Building a Boeing 747 The manufacturing of a Boeing 747 is done in seven stages, which take on average six months to complete in total. The engines are bought from a supplier (Rolls Royce) for the sixth stage, as buying them and storing inventories for five months would be expensive. The engines cost approximately $10 million each. Generally, Boeing can sell a 747 for $200 million. Does Boeing use JIT or JIC? Why? iii. STOCK CONTROL Stocks (or inventories) are the materials, components and products used in the production process. There are three categories of stocks: Raw materials Work in progress (unfinished goods) Finished goods STOCK CONTROL involves careful planning and control Stock-holding Costs Three costs associated with stock-holding Opportunity Cost Storage Costs Risk of Wastage and obsolescence Both stockpiling (holding too much stock) and stock-outs (holding insufficient stocks) create problems for a business YOUR TURN: Causes of stockpiling and stock-outs? Stock Control Charts Stock Control Charts These elements must be identified: Max stock level (determined by physical storage, demand) Min Stock Level (buffer stock) Reorder level Reorder quantity Lead time Exercise 1 Consider the following scenario: Imagine that a company is selling smartphones on the Internet. The company may always want to keep a reserve of 300 smartphones just in case. The manager has calculated that, assuming no unforeseen changes in demand, he will run through 700 phones over a three-month period. After two months, he knows the stock will go down to 500 phones, when he decides to arrange for a new delivery of phones to be made from the company’s supplier. It takes one month for that reorder quantity of 700 phones to arrive. Prepare a fully labelled stock control chart. What could be the optimal stock levels? Striking a balance relies on the expertise of managers to establish the economic order quantity (the optimum stock level that ensures sufficient stocks for uninterrupted production, whilst minimizing the costs of holding inventory. Several factors influence the amount of stock: Type of product (FMCG, consumer durables, perishable) Expected level of demand Lead times Cost of holding stock  iv. CAPACITY UTILIZATION AND PRODUCTIVITY RATES Capacity Utilization Rate MEASURES s firm’s existing level of output as a proportion of its potential output. A high rate means that the level of output is close to its maximum (known as the productive capacity or potential output) It is a measure of the firm’s efficiency, it reveals the extent of idle resources Practice Calculate Capacity utilization rate for the following: A firm’s maximum possible output is 10000 units per month, it actually produces 8.500 units. Possible Outcomes Full capacity: when the business produces its maximum output. Excess capacity: exists when the current levels of demand are less than the full capacity output. Importance on High Capacity Utilization Rates This is likely to be more important to firms that have: High Fixed Costs (the higher the rate, the lower AFC) Low Profit Margins High levels of Break-even Low marginal costs drawbacks of high capacity rates For service, it can Little time for cause problems such overburdening maintenance as longer waiting workers times Exercise Defect Rate Defect occurs when the quality of a particular product is unacceptable (i.e. substandard) This rate measures the proportion of output, per time period, that is substandard. The formula is A firm produces 10000 units of which 150 units were substandard In reality, it is not necessary to measure the defect rate as a proportion of total output. A business may use quality controllers to test randomly the functionality of products. Then defect rate will be calculated with this formula: Important factors To determine whether a particular defect rate is acceptable, context is important. Benchmarking a firm’s defect rate in relation to industry norms and averages. Many businesses pursue a SIX SIGMA lean production strategy (systematic approach to achieving near perfection) Productivity Rates measure the degree of efficiency in the use of resources in the production process. It is calculated with the following formula: Labour Productivity For example, Labour productivity Measures the efficiency of the workers by calculating output per worker. If a real estate firm has 10 employees who collectively sell property to the value of $2,5 million, what is the rate? via GIPHY Capital productivity Measures how well a firm uses its physical capital, such as machinery, in order to produce goods and services. It uses the following formula: If a firm operates machinery in its factory for 700 hours this month and produced 2,24 millions units of output, what is the rate? Remember to compare with the industry averages!! If the productivity rate is lower than the industry average, the business should take remedial actions. If the productivity rate is higher than the industry average, the business is considered to be efficient! Advantages of Higher Productivity Rates Advantages can be remember under the 4 E’s Economies of Scale Earnings Efficiency (improved competitiveness) Evolution (Growth) Determinants of productivity rates Technology Rivalry Innovation Entrepreneurs Skills and experience Practice Operating leverage measures a firm’s fixed costs as a percentage of variable costs. A firm with high fixed costs is said to have high operating leverage.Examples: pharmaceuticals, oil and energy. Its formula is as follows: Practice: Anna Eg. Consultancy has total sales revenue of $100000, total variable costs of $30000 and total fixed costs of $60000 CTB VS CTM Deciding whether to make or buy? Business might decide whether they produce their own products However, they might take in consideration also to outsource them from another business Buy or Make? via GIPHY Two formulae used for this activity: CTB = P x Q CTM = FC + (VCU x Q) Practice 3 Suppose a firm is deciding whether to buy or make 1000 wooden storage sheds. Suppliers could offer the product at a Price of $200 per unit. However, there is sufficient capacity for the firm to produce these with direct costs estimated to be $120 per shed and allocated fixed costs of $32 000. Calculate the CTM and CTB for this business. Interpreting If CTM is greater than CTB, then it is more financially desirable to “buy”. Conversely, if CTB is greater than CTM, it makes financial sense to “make” Warning Evaluating these values do not really only on financial aspects, as we can consider some qualitative factors connected with the decision of “making” or “buying” goods. Relative product quality (In-house vs external supplier) Timeframe in which products can be produced. Whether the firm has spare capacity to meet extra orders Reliability of suppliers Assessment of firm’s core competencies and non-core activities. FLASH ACTIVITY A laptop manufacturer (DigiTech) is deciding whether to start producing tablets that are electronically similar to a competitor. A Chinese supplier has offered 10 000 units at $150 each. DigiTech believe they can produce at a fixed cost of $100 000 and an AVC of $120. They are expected to retail for $330 Calculate the CTM and CTB for this business. Bibliography Business Management for the IB, Paul Hoang, 5th edition. IBID Press