5.6 Production Planning (HL Only)

5.6 Production Planning (HL only) – Detailed Revision Notes

The Local and Global Supply Chain Process (AO2)

Supply Chain Management (SCM) refers to the organization, coordination, and optimization of the flow of materials, information, and finances as goods move from suppliers to manufacturers to wholesalers, retailers, and finally the customer.

• Local supply chains: typically shorter, involve nearby suppliers, reduce transportation costs, and allow quicker response times. They are less exposed to global risks but may have limited product variety and capacity.

• Global supply chains: involve sourcing, manufacturing, and distributing across multiple countries. They provide access to cheaper labor and wider markets but introduce risks such as political instability, exchange rate fluctuations, and cultural or logistical barriers.

• Key functions of SCM:

• Stock control: ensuring businesses do not hold too much or too little stock.

• Quality control: monitoring standards across the supply chain.

• Supplier networks: managing relationships with multiple suppliers.

• Transportation: arranging logistics for timely and efficient delivery.

• Benefits: increases efficiency, prevents overstocking, reduces mistakes, supports lean production, and maintains steady cash flow.

• Drawbacks: delays from global partners, reliance on technology, time zone differences, and the risk that disruptions in one area can impact the entire chain.

Just-in-Time (JIT) vs Just-in-Case (JIC) Stock Control (AO3)

Just-in-Time (JIT)

• Stock is delivered only when needed in the production process.

• Advantages:

• Minimizes storage costs.

• Improves cash flow by freeing working capital.

• Reduces waste and obsolescence.

• Promotes closer supplier relationships and teamwork culture.

• Disadvantages:

• Heavy reliance on reliable suppliers.

• Any disruption can stop production entirely.

• Limited ability to exploit bulk discounts.

• Requires advanced IT systems and strong organizational culture.

Just-in-Case (JIC)

• Businesses maintain a buffer stock to cover fluctuations in demand or supply.

• Advantages:

• Ensures production continues despite delays.

• Can quickly respond to sudden increases in demand.

• Supports bulk buying and economies of scale.

• Disadvantages:

• Higher storage and insurance costs.

• Risk of stock wastage, especially perishables.

• Ties up working capital in unsold stock.

• Stock can become obsolete due to changing tastes.

Stock Control Charts (AO2)

Stock control charts help businesses monitor inventory levels and plan replenishment effectively.

• Lead time: time between placing an order and receiving stock. Longer lead times require higher buffer stock.

• Buffer stock: minimum safety stock to prevent stock-outs in case of delays or unexpected demand.

• Reorder level: the point at which new stock must be ordered to avoid shortages.

• Reorder quantity: the standard amount of stock ordered each time, balancing between ordering too frequently and excessive storage costs.

• Optimum stock levels: vary by industry. For example, a florist needs frequent smaller orders (perishables) while a furniture retailer may hold larger volumes.

Drawbacks of stockpiling: high storage costs, risk of theft/damage, obsolescence, or tied-up cash.
Drawbacks of stock-outs: lost sales, halted production, reputational damage, and inefficiencies.

Capacity Utilization Rate (AO2, AO4)

Capacity utilization measures actual output as a percentage of potential output.

• Formula:
  Capacity Utilization = (Actual Output ÷ Maximum Potential Output) × 100

• High utilization advantages:

• Spreads fixed costs over more units, reducing average cost.

• Improves efficiency and competitiveness.

• Indicates good use of resources.

• High utilization drawbacks:

• Strain on machinery and staff, reducing quality.

• Little flexibility to handle demand surges.

• Less time for maintenance.

• Low utilization: suggests underused resources, higher average costs, and inefficiency, but allows flexibility for growth.

Defect Rate (AO2, AO4)

• The defect rate measures the proportion of faulty or substandard output in total production.

• High defect rates: increase waste, lower productivity, damage customer trust, and raise costs.

• Low defect rates: improve efficiency, reduce waste, and enhance reputation.

• Businesses track defect rates to evaluate quality control systems and identify process improvements.

Productivity Measures (AO2, AO4)

Productivity is the efficiency with which inputs are converted into outputs.

• Labour productivity: Output per worker. Reflects workforce efficiency.

• Capital productivity: Output relative to machinery/equipment used. Reflects effective use of technology.

• Productivity rate: Overall efficiency measure of resources.

• Operating leverage: Ratio of fixed to variable costs. High leverage increases vulnerability to demand changes, as firms must maintain sales to cover fixed costs.

Benefits of productivity improvements (4Es):

• Economies of scale: lower unit costs as output increases.

• Earnings: higher profits and wages.

• Efficiency: better competitiveness and lower costs.

• Evolution: drives growth and innovation.

Determinants (TRIES): Technology, Rivalry, Innovation, Entrepreneurship, Skills/experience.

Cost to Buy (CTB) vs Cost to Make (CTM) (AO3, AO4)

Firms face the decision to manufacture products in-house or purchase from external suppliers.

• Formulas:

• Cost to Buy (CTB) = Price × Quantity

• Cost to Make (CTM) = Fixed Costs + (Variable Costs × Quantity)

• Quantitative factors: direct cost comparison between CTB and CTM.

• Qualitative factors:

• Spare capacity: can resources be used efficiently in-house?

• Supplier reliability: are they dependable?

• Quality control: can the firm maintain better standards internally?

• Strategic importance: is the product core to the business?

• Investment needs: capital expenditure vs outsourcing flexibility.

• A decision depends on both cost analysis and long-term strategy.