5.6 Production planning

A supply chain links suppliers, production, distribution and customers; managing it coordinates material, information and cash flows across organisations.

Lead times, quality, dependency and visibility determine resilience. A local saving can increase total cost if it creates delays or defects elsewhere.

Map the chain, identify the constraint and ask how a change affects total flow rather than one stage.

A manufacturer changes supplier for a lower unit price but delivery variability causes stoppages and expediting costs.

Supply chain management is broader than purchasing; upstream and downstream effects matter.

Just-in-time keeps inventory low by receiving inputs near use; just-in-case holds buffers against uncertainty. The choice balances carrying cost with disruption risk.

JIT needs reliable suppliers and predictable flow; JIC protects continuity but ties up cash and may hide waste. Hybrid buffers can protect critical items.

Identify uncertainty and the cost of stockout versus holding stock before choosing the policy.

A hospital keeps emergency masks as JIC but orders routine stationery JIT.

JIT is not “no inventory,” and JIC is not automatically inefficient.

Stock control charts track inventory over time, showing maximum, reorder and minimum levels; the reorder point should allow for lead time and demand uncertainty.

Usage, delivery reliability and safety stock determine when to order. A chart is useful only if data and lead times are current.

Read the stock level against reorder and minimum lines, then explain the consequence of ordering now or later.

If stock falls to the reorder level while supplier lead time is ten days, the order should cover expected demand plus safety stock for variability.

A reorder line is not a guarantee against stockout when demand or delivery changes.

Read the four specified quantities precisely. Lead time is the interval between placing and receiving an order; buffer stock is the minimum reserve against uncertainty; reorder level is the stock level that triggers an order; reorder quantity is the amount ordered, shown by the vertical rise when delivery arrives. With steady demand, reorder level = expected demand during lead time + buffer stock. If usage is 20 units per day, lead time is 5 days and buffer stock is 30 units, reorder at 20 × 5 + 30 = 130 units. An order of 200 units is the reorder quantity; it does not mean the reorder level is 200. Interpret sloping falls as usage, vertical rises as deliveries, and test whether changing demand or lead time makes the settings unsafe or unnecessarily costly.

Capacity utilization rate = actual output ÷ maximum possible output × 100. Defect rate = defective output ÷ total output × 100. Labour productivity = output ÷ labour input, and capital productivity = output ÷ capital input; always state whether the input is workers, labour-hours or a monetary amount.

A productivity rate compares output with the specified total input, commonly expressed as output ÷ input × 100 when the question requires a percentage. Operating leverage = total contribution ÷ profit: a high value means fixed costs are large relative to profit, so a given percentage change in sales can create a larger percentage change in operating profit, in either direction.

Select the denominator named by the measure, keep units consistent and compare like with like across time or businesses. Then interpret the cause: unused capacity, defects, process methods, workforce skills, technology, product mix and fixed-cost structure can change the result.

A plant makes 8,000 units from capacity of 10,000, so utilization is 8,000 ÷ 10,000 × 100 = 80%. If 160 units are defective, the defect rate is 160 ÷ 8,000 × 100 = 2%. With 100 labour-hours, labour productivity is 80 units per labour-hour. If total contribution is $60,000 and profit is$15,000, operating leverage is 60,000 ÷ 15,000 = 4 times.

Higher utilization or productivity is not automatically better if quality, safety, flexibility or resilience falls. A falling defect rate is normally favourable, while high operating leverage increases both profit upside and loss risk; never compare productivity figures with different input definitions or units without adjustment.

A make-or-buy decision compares producing an input internally with purchasing it, using relevant costs, capacity, quality, control, reliability and strategic dependence.

Avoidable variable and fixed costs matter; allocated overhead that remains after outsourcing should not drive the decision. Supplier risk and opportunity cost can outweigh a lower quoted price.

Compare relevant total cost at the required volume, then include capacity released, quality, lead time and dependency.

Buying a component saves $2 per unit but uses a supplier with long lead times; if internal capacity could make a higher-margin product, the opportunity cost changes the answer.

The lowest purchase price is not automatically the lowest total or strategic cost.

Calculate only relevant costs at the required output. Cost to make (CTM) = avoidable fixed costs of internal production + variable cost per unit × quantity. Cost to buy (CTB) = supplier price per unit × quantity + relevant ordering, transport, inspection or contract costs. For 5,000 units, avoidable make fixed costs of $8,000 and variable cost of$6 give CTM = $8,000 + 5,000 ×$6 = $38,000. A supplier price of$7 plus $1,000 delivery gives CTB = 5,000 ×$7 + $1,000 =$36,000, a $2,000 cost advantage to buy. The final judgment must also weigh quality, control, reliability, capacity released, intellectual property and supplier dependence; allocated fixed overhead that remains under both choices is not a saving.