5.7 Production Planning Chapter 36. The cost of STOCKS Stocks are materials and goods required to...
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5.7 Production 5.7 Production Planning Planning Chapter 36 Chapter 36
5.7 Production Planning Chapter 36. The cost of STOCKS Stocks are materials and goods required to allow the production and supply of products to the customers
The cost of STOCKS Stocks are materials and goods required to
allow the production and supply of products to the customers.
Stocks are materials and goods required to allow the production and
supply of products to the customers. The cost of storing and
warehousing stocks is commonly calculated at 4%-10%. The cost of
storing and warehousing stocks is commonly calculated at 4%-10%.
This can be an area of great cost-savings to business.
Slide 3
Types of STOCK Retail business: Retail business: Goods on
display Goods on display Goods in the warehouse waiting to be
shelved Goods in the warehouse waiting to be shelved Goods on the
shelves waiting to be sold Goods on the shelves waiting to be
sold
Slide 4
Type of STOCK Service business (Banks, Insurance) Service
business (Banks, Insurance) Office supplies Office supplies
Stationery Stationery
Slide 5
Type of STOCK Manufacturing business Manufacturing business 1.
Raw materials & components 1. Raw materials & components
Purchased from outside suppliers. They are held until ready to be
used in the production process. Purchased from outside suppliers.
They are held until ready to be used in the production process. 2.
Work-in-Progress (Work-in-Process) 2. Work-in-Progress
(Work-in-Process) The raw materials and components currently being
finished into the final good. Batch production has high levels of
WIP stock. The raw materials and components currently being
finished into the final good. Batch production has high levels of
WIP stock. 3. Finished Goods 3. Finished Goods Items that have
completed the production process and are ready to sell. Items that
have completed the production process and are ready to sell.
Slide 6
Stock-holding Costs What costs are associated with holding
stocks? What costs are associated with holding stocks? Opportunity
Cost Opportunity Cost Working capital tied up in the cost of stocks
that could be used elsewhere (pay off loans, pay vendors, left in
bank earning interest) Storage Cost Storage Cost Warehouse costs
(air conditioning, refrigeration, security, insurance) Risk of
Waste and Obsolescence Risk of Waste and Obsolescence If stocks are
not sold quickly, they may become out-dated, obsolete, damaged, or
deteriorate.
Slide 7
Costs of not holding ENOUGH Stock Lost sales Lost sales
Including future potential orders Including future potential orders
Payment penalties if you cannot meet delivery dates Payment
penalties if you cannot meet delivery dates Idle production
resources (if raw material or component stocks run out) Idle
production resources (if raw material or component stocks run out)
Expensive equipment not operating Expensive equipment not operating
Paying labor that is not working Paying labor that is not working
Special orders could be expensive Special orders could be expensive
Unexpected special orders could be expensive or impractical to
deliver Unexpected special orders could be expensive or impractical
to deliver Small order quantities means: Small order quantities
means: Expensive delivery Expensive delivery No economy of scale
discounts on large orders No economy of scale discounts on large
orders
Slide 8
Economic Order Quantity (EOQ) Economic Order Quantity is the
optimum quantity of stock to re-order taking into account delivery
costs and stock-holding costs. Economic Order Quantity is the
optimum quantity of stock to re-order taking into account delivery
costs and stock-holding costs.
Slide 9
Controlling Stock Levels Buffer Stocks Buffer Stocks The
minimum amount of stock that should be on-hand to ensure production
can take place in the event of delivery delays or unexpected
production increases. The minimum amount of stock that should be
on-hand to ensure production can take place in the event of
delivery delays or unexpected production increases. Maximum Stock
Level Maximum Stock Level The most stock that can be held due to
space limitations, financial costs, or deterioration The most stock
that can be held due to space limitations, financial costs, or
deterioration
Slide 10
Controlling Stock Levels Re-Order Quantity Re-Order Quantity
The number of units to be ordered each time an order must be placed
with a supplier. This will be influenced by the EOQ Economic Order
Quantity. The number of units to be ordered each time an order must
be placed with a supplier. This will be influenced by the EOQ
Economic Order Quantity. Lead Time Lead Time The time it takes
between ordering and delivery The time it takes between ordering
and delivery
Slide 11
Controlling Stock Levels Re-Order Stock Level Re-Order Stock
Level The level at which reordering of more stock is triggered. It
takes into consideration buffer stock and lead times of new stock
arrival. The level at which reordering of more stock is triggered.
It takes into consideration buffer stock and lead times of new
stock arrival. Material Requirements Planning Systems Material
Requirements Planning Systems Re-Order Stock levels can be set in
computerized production planning systems (MRP) to trigger automatic
ordering to suppliers. Re-Order Stock levels can be set in
computerized production planning systems (MRP) to trigger automatic
ordering to suppliers. EDI Electronic Data Interchange is a common
computerized communication system between production factory and
supplier EDI Electronic Data Interchange is a common computerized
communication system between production factory and supplier
Slide 12
Just-in-Case Stocking (JIC) Just-in-Case stocking holds high
stocking levels in case there is a problem with receiving from
suppliers or an unexpected increase in sales. Just-in-Case stocking
holds high stocking levels in case there is a problem with
receiving from suppliers or an unexpected increase in sales. JIC
Large Inventory Factory Production
Slide 13
Advantages/Disadvantages of JIC AdvantagesDisadvantages Easy to
meet unexpected increase in demand by increasing production Easy to
meet unexpected increase in demand by increasing production High
opportunity costs of working capital tied up in stock costs High
opportunity costs of working capital tied up in stock costs
Raw-material hold-ups will not lead to stopping production
Raw-material hold-ups will not lead to stopping production High
storage costs High storage costs Economies of scale are realized
with bulk buying discounts Economies of scale are realized with
bulk buying discounts Risks of damaged stocks or outdated stocks
Risks of damaged stocks or outdated stocks Stocks of finished
products are plentiful so they can be displayed for potential
customers Stocks of finished products are plentiful so they can be
displayed for potential customers Getting it right is less
important because of replacement stocks which increases costs
Getting it right is less important because of replacement stocks
which increases costs Stocks of finished good can meet sudden
increased of consumer demand because they are finished and
warehoused Stocks of finished good can meet sudden increased of
consumer demand because they are finished and warehoused Space to
store stock cannot be used for other purposes Space to store stock
cannot be used for other purposes Stockpiles of inventory can meet
expected increases such as seasonal items Stockpiles of inventory
can meet expected increases such as seasonal items
Slide 14
Just-in-Time Stocking (JIT) Just-in-Time stocking aims to avoid
holding extra stocks and requires suppliers to send stock when
needed on the production on the line. Just-in-Time stocking aims to
avoid holding extra stocks and requires suppliers to send stock
when needed on the production on the line. JIT Inventory Factory
Production
Slide 15
Advantages/Disadvantages of JIT AdvantagesDisadvantages
Opportunity cost is reduced because less is invested in stocks
Opportunity cost is reduced because less is invested in stocks Any
failure to receive stocks can lead to production delays Any failure
to receive stocks can lead to production delays Costs of storage
are reduced Costs of storage are reduced Delivery costs increase as
smaller quantities are delivered Delivery costs increase as smaller
quantities are delivered Storage space can be used for other
productive purposes Storage space can be used for other productive
purposes Administration costs rise because more attention is needed
to multiple orders Administration costs rise because more attention
is needed to multiple orders Less opportunity for stock to become
outdated or damaged Less opportunity for stock to become outdated
or damaged Reduction in bulk discounts pricing because of smaller
orders Reduction in bulk discounts pricing because of smaller
orders More flexibility in production is required which leads to
adapting to changing customer needs More flexibility in production
is required which leads to adapting to changing customer needs
Significant dependence on outside factors the quality and
dependability of outside suppliers Significant dependence on
outside factors the quality and dependability of outside suppliers
Multi-skilled workers may be more motivated Multi-skilled workers
may be more motivated
Slide 16
JIT not suitable to everyone What if costs of halting
production because of no stocks is TOO expensive or risky? What if
costs of halting production because of no stocks is TOO expensive
or risky? Expensive computer systems are needed and small firms may
not be able to justify the cost for potential cost savings.
Expensive computer systems are needed and small firms may not be
able to justify the cost for potential cost savings. Raw material
costs or delivery costs may actually rise making future production
more expensive with newer raw materials. Raw material costs or
delivery costs may actually rise making future production more
expensive with newer raw materials.
Slide 17
Stock Control Chart 300 125 50 0 Max stock level Re-Order Level
Buffer Stocks Time
Slide 18
Capacity Capacity utilization is the proportion of maximum
output capacity currently being achieved when compared with the
total capacity available. Capacity utilization is the proportion of
maximum output capacity currently being achieved when compared with
the total capacity available. HL Current output level Maximum
output level X 100 = rate of capacity utilization Plant A can
produce a maximum of 5000 widgets. They are currently producing
3000 widgets. There current rate of capacity is (3000/5000) X 100 =
60%
Slide 19
Impact on Average Fixed Costs When capacity utilization is
high. Then average fixed costs are spread over more units causing a
decrease in average fixed costs When capacity utilization is high.
Then average fixed costs are spread over more units causing a
decrease in average fixed costs When capacity utilization is low.
Then average fixed costs are spread over fewer units causing an
increase in average fixed costs When capacity utilization is low.
Then average fixed costs are spread over fewer units causing an
increase in average fixed costs HL
Slide 20
Maximum Capacity Are there any downsides to operating at
maximum or full capacity? Are there any downsides to operating at
maximum or full capacity? What do you think? What do you think? HL
Full capacity when a business is producing at the maximum output
level
Slide 21
Drawbacks to operating at full capacity Staff may feel pressure
of workload and added stress Staff may feel pressure of workload
and added stress Operations managers cannot make any scheduling
errors Operations managers cannot make any scheduling errors
Regular customers cannot increase their orders and may turn to
other suppliers Regular customers cannot increase their orders and
may turn to other suppliers Machinery cannot be shut down for
maintenance or repairs Machinery cannot be shut down for
maintenance or repairs HL
Slide 22
What are choices? Should more production resources be
purchased? Should more production resources be purchased? Should it
keep existing capacity but subcontract work to other firms? Should
it keep existing capacity but subcontract work to other firms? Can
work subcontracted be assured of quality? Can work subcontracted be
assured of quality? Will demand fall in the near future making
expansion unnecessary? Will demand fall in the near future making
expansion unnecessary? HL
Slide 23
Excess Capacity Excess capacity exists when current levels of
demand or less than full capacity output of the business. Also
known as spare capacity. Excess capacity exists when current levels
of demand or less than full capacity output of the business. Also
known as spare capacity. Excess Capacity Maximum Capacity Current
output capacity HL
Slide 24
Capacity Shortage Capacity shortage when demand for products
exceed production capacity Capacity shortage when demand for
products exceed production capacity When capacity shortage is
determined not to be short-term, capacity expansion options need to
be considered. When capacity shortage is determined not to be
short-term, capacity expansion options need to be considered.
HL
Slide 25
Ways to expand Capacity Outsourcing (or subcontracting)
Outsourcing (or subcontracting) Using another business to undertake
part of the production process (It is called offshoring when this
activity occurs in another country.) Using another business to
undertake part of the production process (It is called offshoring
when this activity occurs in another country.) Business Process
Outsourcing Business Process Outsourcing A form of outsourcing but
for a business function not a production function (human resources
or finance) A form of outsourcing but for a business function not a
production function (human resources or finance) HL
Slide 26
Reasons to Outsource Reduction in costs Reduction in costs
Increased flexibility Increased flexibility Only buy the amount of
capacity needed when needed Only buy the amount of capacity needed
when needed Improved company focus Improved company focus
Management can focus on core business rather than administrative
activities Management can focus on core business rather than
administrative activities Quality resources Quality resources
Experts can be used that may not be available internally in your
company Experts can be used that may not be available internally in
your company Free up resources for other business activities Free
up resources for other business activities Eliminate the payroll
department, now space and employee resources can be used for
customer service Eliminate the payroll department, now space and
employee resources can be used for customer service HL
Slide 27
Drawbacks to Outsourcing Loss of jobs within your business Loss
of jobs within your business Quality issues Quality issues Customer
resistance Customer resistance Ethical concerns Ethical concerns
Security Security HL
Slide 28
Make-Or-Buy Can you buy the component or service cheaper than
you can produce it yourself? Can you buy the component or service
cheaper than you can produce it yourself? HL