5.

7 Production planning

Opportunity
cost

Understand why businesses hold stocks and the costs of stock holding
Stock (inventory) - materials and goods required to allow for the production of
and supply of products to the customer

Aim of production planning is to minimise the costs of holding stock

whilst ensuring that there are sufficient resources of production to meet
customer demand in timely manner

Stock control:

Risk of
wastage and
obsolescence

Raw
materials
and
component
s

Storage
costs

Lost
sales

Categori
es of
stocks
Finished
goods

Costs
of
holdin
g
stock

Work in
progress

Small
order
quantitie
s

Cost of
holding
insufficie
nt stocks

Special
orders
could be
expensiv
e

Idle
producti
on
resource
s

Discuss and compare the just-in-case approach and the just-in-time (JIT) stock
management system
Just-In-Case
The traditional view of holding stock
was to hold high stock levels,
especially of raw materials and finished
goods, to meet unexpected situations
such as:
Failure of a supplying firm to
deliver on time
Production problems halting
output
Increased consumer demand
Buffer stock (raw material,
semi-finished material) is used
just in case there are any
contingencies to allow
sufficient stock available for
to meet customer demand
Allow business to meet
sudden changes in demand.
Flexible to meet the demand.
Enjoy economies of scale

Just-In-Time
Requires that no buffer stocks
are held, components arrive
just as they are needed on the
production line and finished
goods are delivered to
customers as soon as they are
completed

Only the absolute minimum or

no storage of finished goods

Advantages and disadvantages of Just-In-Case

Advantages
Meet increase in demand quickly
Not lead to production stopping
Enjoy economies of scale
Increase chance in sales
Can meet anticipated increase in
demand of seasonal goods

Disadvantages
Working capital tied up opportunity
cost
High storage costs
Risk of goods being damage / outdated
Take space reduce productivity

Advantages and disadvantages of Just-In-Time

Advantages
Less capital invested in inventory

Incur storage and holding cost

Excess stock if the changes of

the trends

Inflexibility to cope with

sudden increase in demand
Fewer opportunity to enjoy
economies of scale
Reduce the holding and
storage stock
Responsive on the need of the
customer such as seasonal
changes in demand

Less cost of storage and stock holding

Space can be use productively
Reduce risk of damage goods / outdate
Flexibility allow quicker response to
consumer demand
Adaptable staffs gain improved
motivation

Disadvantages
Failure of receiving supplies lead to
expensive production delays
Delivery cost is high
Less likely to enjoy economies of scale
High dependence on outside factors;
reliability of suppliers