5.

5 Production planning

supply chain process refers to the management of a firm’s operational logistics, i.e.
managing and controlling the sequence of activities from the production of a good or
service to its delivery to the end customer, in a cost effective way.

Just in time (JIT) is a common inventory management technique and type of lean
methodology designed to increase efficiency, cut costs and decrease waste by receiving
goods only as they are needed.

Just in case (JIC) is an inventory strategy in which companies keep large inventories on
hand. This type of inventory management strategy aims to minimize the probability that a
product will sell out of stock.

Stocks (or inventories) are the materials, components and products used in the production
process. There are three categories of stocks:
• Raw materials - These are the natural resources used for production, e.g. crude oil,
metal ores, soil, wheat and timber.
• Work-in-progress - These are semi-finished (unfinished) products, e.g. parts and
components to be used in the production process.
• Finished goods - These are complete units of output that are ready for sale, e.g.
furniture, books, bread and car

stockpiling (holding too much stock) and stock-outs (holding insufficient stocks)

Capacity utilization measures a firm’s level of output as a proportion of its total potential
output (productive capacity). the higher the capacity utilization, the closer the output is to
the firm’s maximum level of output.

Capacity utilization = Actual output/Productive capacity xlOO

The productivity rate measures how well resources are used in the production process.
The higher the labour productivity rate, the more productive (or efficient) the workers are.

A make-or-buy decision is the act of choosing between manufacturing a product in-

house or purchasing it from an external supplier. There are several quantitative methods
that can aid this decision. Examples include break-even analysis and investment
appraisal.

The main quantitative method is to consider the relative costs of manufacturing the product
(known as the cost-to-make) and the costs to purchase the product (cost-to-buy) from a
third- party supplier.

If CTM is greater than CTB, then it is more financially desirable to 'buy'. Conversely, if CTB
is greater than CTM, it makes financial sense to 'make*.

The cost-to-buy: CTB = P x Q

The cost-to-make: CTM=FC-F(AVCxQ)
If CTM is greater than CTB, then it is more financially desirable to 'buy'. Conversely, if CTB
is greater than CTM, it makes financial sense to 'make*.