5.6 production planning (hl) Flashcards
supply chain
system of organisations, people, activities, information, and resources involved in moving a product or service from supplier to customer
what do supply chain activities do?
transform natural resources, raw materials, and components into a finished product that is delivered to the end customer
what do supply chains include?
all of the companies that participate in the design, assembly, and delivery of products for buyers like you
Retailers, manufacturers, transportation companies, and distributors are some of the key players
supply chain process
raw materials –> supplier –> manufacturer –> distributor –> retailer –> consumer
in terms of operations two flows need to be managed
a) The flow from raw materials to the finished product (bought by the consumer); via the different stages of manufacturing.
b) The flow of information from consumer to supplier
in relation to the two flows of operations, what are therefore the two dimensions of the supply chain
Logistics (i.e. trucks transporting raw materials to the factory)
Information and communication (i.e. spreadsheets or database used by administrative staff in the company)
when considering a supply chain process, _____ becomes very important
stock control
stock
refers to the materials and goods required to allow for the production and supply of products to the customer . The terms JIT (just-in-time) and JIC (just-in-case) are both methods of stock control that have different approaches.
JIT (just-in-time)
A stock control method that aims to avoid holding stocks by requiring supplies to arrive just as they are needed in production and completed products are produced to order
JIC (just-in-case)
Holding high stock levels ‘just in case’ there is a production problem or an unexpected upsurge in demand
limitations of JIT
If the costs resulting from production being stopped when supplies do not arrive exceeds the costs of holding buffer stocks.
Rising global inflation makes holding stocks of raw materials more beneficial as it may be cheaper to buy a large quantity now than smaller quantities in the future when prices have risen.
Higher oil prices will make frequent and small deliveries of materials and components more expensive.
limitations of JIC
High storage costs.
Risk of goods being damaged or becoming out-dated.
Space used to store stock cannot be used for productive purposes.
3 forms of stock
Raw materials and components - These will have been purchased from outside suppliers. They will be held in stock until they are used in the production process.
Work in progress - At any one time the production process will be converting raw materials and components into finished goods, and these are ‘work in progress’. For some firms, such as construction businesses, this will be the main form of stocks held. Batch production tends to have high work-in-progress levels.
Finished goods - Having been through the complete production process goods may then be held in stock until sold anddispatchedto the customer
costs of “holding too much stock”
- opportunity cost
- storage costs
- risk of wastage and obsolence
cost of holding not enough stock
- lost sales
- special orders could be expensive
- worthless production resources
- small order quantities
economic order quantity (EOQ)
refers to the optimum or least-cost quantity of stock to re-order taking into account delivery costs and stock-holding costs (minimum point of the total cost).
the EOQ goes in line with the concept of Buffer stocks
the costs of holding stock and the cost of not holding it (stock out) can be combined in a diagram to determine the total cost of stock and ultimately the
Economic Order Quantity (EOQ)
Buffer stocks
the minimum stocks that should be held to ensure that production could still take place should a delay in delivery occur or production rates increase
7 elements of stock control
1) The initial order – the first amount of the stock delivered (i.e. beginning of the year, month week)
2) The usage pattern – how much stock is used over a given period of time (shown by a line with negative slope)
3) The maximum level of stock – the maximum amount of stock held at any one time.
4) The minimum level of stock (buffer stock) – the amount of stock kept back as a reserve. The stock should never go lower than this level or else production of the final good might not be possible
5) The reorder level – when stock has to be reorder (measured in time!) this should be higher than the minimum stock level
6) The reorder quantity – the amount of stock that is ordered which is basically the difference between the maximum stock level and the minimum stock level.
7) The lead time – the amount of time it takes between ordering and receiving new stock
what factors need to be taken into account to determine optimal stock level
The market – basically take into account the current market situation
The final product – what type of product is it? Difficult easy to produce?
The stock – perishable, not perishable, storage, etc.
The infrastructure – is there a place to stock? Weather condition, natural disasters; how do they affect the stock?
The finance – are there enough resources to buy now? In bulk? Etc.
The Human Resources – implications for workers, how will it affect them?
capacity utilisation
refers the proportion of maximum output capacity currently being achieved. In other words, is the extent to which a business uses its production capacity.
how is capacity utilization measured
as the relationship between actual output, which is currently being produced,and potentialoutput, what could be produced at full capacity.
The capacity utilization rate is a percentage as follows:
(Actual output / productive capacity)x100
For example, if a t-shirt manufacturer can produce a maximum of 10,000 t-shirts a month in her factory using current equipment and staffing and is currently producing 7,000 t-shirts a month then its capacity utilisation rate is70%.
limitations of operating at full capacity:
- staff under pressure due to workload and operations managers cannot afford to make production scheduling mistakes as there is no slack time to make up for lost output
- regular customers who wish to increase their orders will have to be turned away or kept waiting for lo g periods, which could encourage them to use other suppliers, therefore losing them as long-term clients
- machinery will be working flat-out and there may be insufficient time for maintenance and preventative repairs, and this could lead to increased unreliability in the future.
the term defect
refers to output that is faulty or had a problem during the production process (i.e. stains, discolorations, scratches, etc.). Defected output often has to be re-produced, which wastes time, resources, and money
defect rate
measures the percentage of output (units) that fail to meet the quality standards
Of course, the lower the defect rate the better. And since the defect rate is an indicator of quality; quality controls , quality assuranceand total quality control play a big role on keeping this defect rate close to zero.
defect rate equation
(number of defective units / total input) * 100
productivity rate
measures the efficiency of production; that is how well a firm is using its resources in the process of producing its goods or services
This measure of production is also more readily applied to physical or tangible products and is usually associates the TQM. As we have seen in different production methods, the higher the productivity rate the lower the quality of the products. Therefore, a business has to determine the productivity rate where quality loss is not costing the business
how is the productivity rate measured
by the ratio of output to input in production and refers to the added value of the business:
(total output / total input)*100
labour productivity
measures the efficiency of a worker. Basically, how much output a worker produced per hour or how many sales the worker made in an hour
labour productivity formula
total output / total hours worked
For example, a company that produces socks employs a person to work 40 hours per week. If the worker produces 200 socks in that week the labour productivity for that worker will be 5 socks per hour. We can then compare this rate with average productivity per worker and see which workers are more efficient than others.
capital productivity
measures the efficiency of the company’s capital. Basically, how well capital (i.e. machinery) is used to provide output. Hence, a high capital productivity indicates that a business is making good use of its resources. We first need to stablish the working capital that comes from the Statement of Financial Position (Balance sheet).
working capital formula
current assets - current liabilities
working capital productivity formula
sales revenue / working capital
operating leverage, also known as the Degree of Operating Leverage (DOL)
measures how a firm’s operating income is affected by its fixed costs, variable costs, and output (all this financial data comes from the Break-even analysis).
The ratio helps managers to determine whether the firms has too manyFixed Costs – FC (such as rent or mortgage payments) or too many Variable Costs - VC (cost of sales related to making and/or selling the products)
what can the operating leverage be used to measure
to measure the impact of an increase in sales revenue on the operating profit of the business, as this will depend on the firm’s fixed and variable costs.
when is it evident that a company relying on Fixed Costs is exposed to greater risks
This is evident when sales decline, potentially due to an economic recession, as these fixed expenses persistently demand payment. Conversely, when sales revenues rise, the company’s fixed costs remain constant, thereby potentially increasing operating profit significantly.
why is a company’s risks diminished when incurring substantial Variable Costs
This is because a decrease in sales revenue corresponds to a reduction in the firm’s cost of sales, given that Variable Costs are directly tied to production or output levels. Therefore, operating leverage highlights the necessity of managing Fixed Costs . Therefore, the operating leverage ratio enables businesses to determine the influence of various expense types on their operating profit.
operating leverage formula
(𝑄∗(𝑃−𝐴𝑉𝐶))/(𝑄∗(𝑃−𝐴𝑉𝐶)−𝐹𝐶)
or
(total contribution / total contribution - FC)
One important business decision is whether to manufacture a product or purchasing it from an external supplier - buy or make
The “buy” decision should go ahead if the business does not have the expertise, equipment or productive capacity to efficiently manufacture a product. As with outsourcing, non-core functions can be contracted to outside suppliers. If the firm is financially better off by making the product then the “make” decision is pursued
a key factor in business decisions is costs
since it may be cheaper for a business to buy a product made elsewhere by specialists, rather than making it directly
when deciding wether to make or buy, 4 key variables must be known
- Q = the expected sales volume or quantity
- FC = the fixed costs associated with making the product (tools, equipment, machinery)
- AVC = the average variable costof making the product (wages & material). Remember that: 𝑨𝑽𝑪 = 𝑉𝐶/𝑄 hence: 𝑽𝑪 = 𝐴𝑉𝐶*Q
- P = price per unit charged by the supplier
cost to buy formula
CTB = P*Q
cost to make formula
CTM = FC + (AVC*Q)
= FC + VC
if CTM > CTB
then it is more financially desirable to buy
If CTB > CTM
then it makes for financial sense to make
Calculating the costs only gives us quantitative information; which is obviously limited. For a firm to make an accurate decision, qualitative factors should also be taken into account. These quality factors can be:
- The quality of the product if produced inhouse or from a external supplier
- The timeframe it will take to produce the good or buy it externally
- If the firm has spare capacity to meet more orders
- The reliability of the suppliers
- Compare the firms’ and the external firms’ characteristics, it might be that the external firm has more technological innovation
- How flexible the decision will be if it could be changed or it’s irreversible
The BMTs than can be used to choose a location or relocation are
Gantt Charts
Critical Paths Analysis
Gantt chart
is a visual representation of all the tasks in a particular project plotted against a timescale.
It was developed by Henry Gantt around 1910 to help supervisors see whether factory workers were on their targets in meeting deadlines for manufactured products.
Now a days, it is a management tool used to plan and schedule business projects, allowing managers to monitor progress
what does the Gantt chart process involve
- Identify all the activities required to complete the project
- Break down the project into separate tasks, clearly identified (vertical axis)
- Determine how long each task will take (horizontal axis)
- Identify all the activities that need to be completed before going into the next task ( also called dependencies)
- Determine which tasks can take place at the same time, highlight them in the chart
- Place all the tasks in a sequence manner in the chart
Benefits of Gantt chart
Gives a clear picture of current progress of various tasks
Gives a clear picture of the overall project
Flexible - can be applied to many situations
Simple and visually attractive
Allows managers to plan the use of resources to complete the project in the most efficient way
Limitations of Gantt chart
Is based on estimates on the timings of each tasks
Difficult to follow for complex projects
Is based on qualitative data, ignoring quantitative data (i.e. costs)
Can’t separate independence tasks
Is target oriented, deadlines must be met. Could affect the quality of work
Critical Path Analysis (CPA)
A Critical Path Analysis is sequence of scheduled activities that determines the duration of the project.
It is a tool to plot the tasks, processes, timelines and resources required of a project. Basically, the sequence of all activities required in the planning of the project can be plotted onto a critical path or simple network diagram.
It will show how the different activities run alongside of each other and is a useful visual aid to be able to plan and know which activities can happened at the same time.
It should be regularly referred to, so that the actual progress of the project can be measured against the projected critical path analysis.
Advantages of CPA
CPA provides managers and decision makers with a visual representation of a complex project which may be easier to interpret.
It can be used to suit a range of situations and help solve a variety of business problems or issues.
It reduces the time lost between tasks, ensuring that projects run smoothly and are completely in the most time efficient way.
It forces managers and decision makers to consider all aspects of a project, including resourcing all tasks, thereby improving efficiency in production.
Disadvantages of CPA
Construction of a network diagram alone does not guarantee the smooth completion of a project. In real life, there are likely to be disruptions and unforeseen circumstances that may well delay the project.
Not every single task in a project may be included during the planning stage; human error therefore limits the extent to which CPA assists with project management.
Some projects are too big, making network diagrams complex and difficult to manage.
Network analysis will only be helpful if the data used to construct the network diagrams are complete and reliable.
