5.6 - Production Planning

Question 1

Stock Control Chart

Answer 1

• A visual aid to maintaining suitable levels of inventory over a period of time

Predict future stock levels in order to ensure:

• Do not run out of inventory
• Minimize inventory levels

Question 2

Supply Chain

Answer 2

• A system of steps that convert raw materials into goods or services and then into the hands of customers
• Production and delivery of goods or service
• Might involve suppliers, producers, wholesalers, retailers and agents, etc…

Question 3

A good supply chain can…

Answer 3

• Reduce costs
• Reduce waste
• Reduce delivery time to customers
• Improve quality

Question 4

Inventory

Answer 4

When a business holds stock of:

• Raw materials
• Work-in-progress
• Finished goods

Question 5

Just-in-case (JIC)

Answer 5

• Stock management strategy whereby firms hold higher levels of stock
• High levels of stock mean that the business can easily deal with unexpected events

Question 6

Just-in-Time (JIT)

Answer 6

• Stock control method where inputs arrive just before they are used in the production process
• Finished products are delivered to consumers as soon as they are produced
• No or limited inventory is held

Question 7

Pros of JIC

Answer 7

• Less likely to run out of stock
• More potential to bulk buy - higher economies of scale
• Can deal with sudden increases in consumer demand

Question 8

Cons of JIC

Answer 8

• Higher storage costs
• Products kept in stock for a long period of time may lose their freshness
• High amounts of cash tied up in stock

Question 9

Pros of JIT

Answer 9

• Hold less stock - lower storage costs
• Can respond to the market quickly
• Stock doesn’t become outdated - e.g. food

Question 10

Cons of JIT

Answer 10

• Dependent on suppliers
• Higher delivery costs and less bulk buying savings
• Need to purchase and maintain more complex IT systems (predict consumer demand)
• Loss of reputation it unable to meet

Question 11

Maximum Level

Answer 11

Level of stock that a business can hold, as limited by space

Question 12

Re-order level

Answer 12

Level of stock that triggers a new order

Question 13

Re-order quantity

Answer 13

Amount of stock that is ordered

Question 14

Lead Time

Answer 14

Time between order and delivery of the order

Question 15

Buffer Stock

Answer 15

Minimum stock level held in case of emergencies (e.g. delay in delivery)

Question 16

Capacity Utilization Rate

Answer 16

• Measures how much a business produces in relation to the maximum possible
• Current Output Level/Maximum Output Level x 100

Question 17

What if Capacity Utilization Rate is low?

Answer 17

• Boost marketing efforts
• Move to factory with lower capacity
• Rent out the unused capacity to another business

Question 18

What if Capacity Utilization Rate is too high?

Answer 18

• Machinery and employees are used all the time = Increased possibility of breakdowns
• Possibly reduce consumer service quality = Overworked employees
• Can’t respond to increased demand = Lose potential sales

Question 19

Defect Rate

Answer 19

• A defect product is one which is faulty or below the required quality
• A lower defect rate is favorable
• Number of Defects/Total output x 100

Question 20

Productivity Rate

Answer 20

Ratio of output to input

Question 21

Labor productivity

Answer 21

Total output/Number of workers

Question 22

Capital Productivity

Answer 22

Total output/Capital employed

Question 23

How to raise productivity?

Answer 23

• Train workers
• Raise employees motivation
• Better management

Question 24

Operating Leverage

Answer 24

Q x (P - VC)/ Q x (P - VC) - FC

Question 25

Cost to Buy (CTB) Cost to Make (CTM)

Answer 25

Make it or buy it Decisions

Should you buy it or should you make it?

Question 26

Cost to buy

Answer 26

Price from the suppliers (P x Q)

Question 27

Cost to make

Answer 27

• Look at costs of the business to make the product
  E.g. increases in Fixed and Variable Costs

Question 28

Why do business hold inventories?

Answer 28

• need inputs for production - otherwise workers and machines are idle
• work-in-progress is still in the production line - otherwise the production line stops
• finished goods are waiting to be sold to customers - otherwise sales may be lost