5.6 - Production Planning (HL - Unit 2) Flashcards
Stock Control Chart
- A visual aid helps to maintain 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
Supply Chain
- 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…
A good supply chain can…
Reduce:
- costs
- waste
- delivery time to customers
Improve quality
Inventory
When a business holds stock of:
- Raw materials
- Work-in-progress
- Finished goods
Just-in-case (JIC)
- Stock management strategy whereby firms hold higher levels of stock
- High levels of stock mean that the business can easily deal with unexpected events
Just-in-Time (JIT)
- 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
Pros of JIC
- Less likely to run out of stock
- More potential to bulk buy - higher economies of scale
- Can deal with sudden increases in consumer demand
Cons of JIC
- 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
Pros of JIT
- Hold less stock - lower storage costs
- Can respond to the market quickly
- Stock doesn’t become outdated - e.g. food
Cons of JIT
- 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 if unable to meet
Maximum Level
Level of stock that a business can hold, as limited by space
Re-order level
Level of stock that triggers a new order
Re-order quantity
Amount of stock that is ordered
Lead Time
Time between order and delivery of the order
Buffer Stock
Minimum stock level held in case of emergencies (e.g. delay in delivery)
Capacity Utilization Rate
- Measures how much a business produces in relation to the maximum possible
- Current Output Level/Maximum Output Level x 100
What if Capacity Utilization Rate is low?
- Boost marketing efforts
- Move to factory with lower capacity
- Rent out the unused capacity to another business
What if Capacity Utilization Rate is too high?
- 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
Defect Rate
- 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
Productivity Rate
Ratio of output to input
Labor productivity
Total output/Number of workers
Capital Productivity
Total output/Capital employed
How to raise productivity?
- Train workers
- Raise employees motivation
- Better management
Operating Leverage
Q x (P - VC)/ Q x (P - VC) - FC
Cost to Buy (CTB) Cost to Make (CTM)
Make it or buy it Decisions
Should you buy it or should you make it?
Cost to buy
Price from the suppliers (P x Q)
Cost to make
-
Look at costs of the business to make the product
E.g. increases in Fixed and Variable Costs
Why do business hold inventories?
- 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
