Topic 5 – Operations Management

1. Topic 5 – Operations Management Production Planning

2. 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

3. 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

4. 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• Risk of wastage and obsolescence – Is stock is held for too long there is a risk of goods deteriorating or becoming outdated

5. 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

6. Optimum stock level Total costs Optimum Costs ($) Stock holding costs Out of stocks costs 0 Quantity of stock held

7. 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of stock in order to gain EoS and to ensure they don’t run out • But holding too much stock can cause problems too • Out of date stock Economic order quantity The optimum or least-cost quantity of stock to re-order taking into account delivery costs and stock holding costs

9. 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

10. ‘perfect world situation’

11. Holiday sale Holiday sale Shipment delayed ‘real world situation’

12. 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

13. Just-in-Case

14. 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)

15. 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)

16. Just in Time