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Topic 5 – Operations Management. Production Planning. Learning Objectives. To understand why businesses hold stocks and the costs of stock holding Analyse the advantages and disadvantages of traditional stock-control systems
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Topic 5 – Operations Management Production Planning
Learning Objectives • To understand why businesses hold stocks and the costs of stock holding • Analyse the advantages and disadvantages of traditional stock-control systems • Discuss and compare the just-in-case approach and just-in-time (JIT) stock management system
Stock / Inventory • Materials and goods required to allow for the production of and supply of products to the customer • All businesses hold stock of some kind • Manufacturing businesses will hold stocks in three distinct forms • Raw materials and components – held until they are used in the production process • Work in progress • Finished goods – held until despatched to customers
Stock holding costs • Three costs associated with stock holding • Opportunity cost – the working capital which is tied up in stocks could be put to a better alternative use • Storage costs • Risk of wastage and obsolescence – Is stock is held for too long there is a risk of goods deteriorating or becoming outdated
Costs of NOT holding stocks • There are risks of holding very low stock levels • Often called ‘stock-out’ costs • Lost sales – unable to supply customers from stock • Idle production resources – If stocks of raw materials and components run out, production will have to stop • Special orders could be expensive – urgent order given to a supplier – extra costs may be incurred • Small order quantities – missing out on economies of scale
Optimum stock level Total costs Optimum Costs ($) Stock holding costs Out of stocks costs 0 Quantity of stock held
Optimum order size • Managers may be tempted to order huge quantities of stock in order to gain EoS and to ensure they don’t run out • But holding too much stock can cause problems too • Out of date stock Economic order quantity The optimum or least-cost quantity of stock to re-order taking into account delivery costs and stock holding costs
Controlling stock levels – a graphical approach Terms to know • Buffering stocks– minimum stock to hold so production can continue to take place (higher with reorder uncertainty) • Re-order quantity– number ordered each time • Lead time– normal time between order and delivery • Re-order stock level– level that triggers a new order to be sent to the supplier
Holiday sale Holiday sale Shipment delayed ‘real world situation’
STOCK MANAGEMENT SYSTEMS Just-in-timeJust-in-case Avoid holding stock by Holding high stock levels requiring stock arrive “just-in-case” there is a just as they are needed production problem, in production & completed unexpected rise in demand, products are produced to or delivery problem order
Important JIT factors: • Excellent supplier relationship so supplier can work quickly to fulfill order • Multi-skilled production staff that can switch jobs on short notice • Flexible set up of equipment and machinery (usually expensive, computer-controlled machinery) • Accurate demand forecasting • Latest IT equipment allows for more success (data base) • Excellent employer-employee relations to avoid production break • Quality of utmost importance (no time for mistakes)
JIT is not suitable for all firms: • Not good if cost of production stoppage from when supplies don’t arrive far exceed the costs of holding buffer stock of key components • IT systems needed may be too expensive for small firms • Rising global inflation makes holding extra stock more beneficial, but storage may be difficult. (less delivery charge, less chance of raw material price increasing, more storage space)