BUSINESS MANAGEMENT

5.6 Production planning (HL only)

Topic 5: Operations management

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BUSINESS MANAGEMENT

Unit content
Assessment
Content
objective
The local and global supply chain process AO2
The difference between JIT and just-in-case (JIC) AO3
Stock control charts based on the following:
• Lead time
• Buffer stock AO2, AO4
• Re-order level
• Re-order quantity
Capacity utilization rate AO2, AO4
Defect rate AO2, AO4

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BUSINESS MANAGEMENT

Unit content (continued)

Assessment
Content
objective
Labour productivity, capital productivity, productivity rate, o AO2, AO4
perating leverage
Cost to buy (CTB) and cost to make (CTM) AO3, AO4
Business Management Toolkit:
• Critical path analysis
Production planning and the business management conce
pts

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BUSINESS MANAGEMENT

The local and global supply chain process

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BUSINESS MANAGEMENT
Amazon’s supply chains

What is the fastest

shipping time
offered by
Amazon?

2 hours
for eligible
Amazon Prime
Now locations

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BUSINESS MANAGEMENT
Amazon’s supply
chains
• One of Amazon’s key
competitive advantages is its
enormous portfolio of
products that can be shipped
to customers quickly, some
even as soon as 2 hours
after an order has been
placed.
• This is due to its supply chain
management as seen in this
behind-the-scenes video of
its order fulfillment centre.
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BUSINESS MANAGEMENT
Supply chain
management (SCM) Key functions of SCM
• The supply chain process
(a.k.a. logistics) refers to the Stock control
sequence of activities from a
production of a good or
service to it being delivered to
Quality control
the end customer.
• SCM is the art of managing Supplier networks
and controlling these logistics
which must be efficient and
cost effective for a business to
Transportation
be profitable.
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BUSINESS MANAGEMENT
Transportation solutions by UPS

Listen carefully to the

lyrics of the song in
this advertisement for
UPS.
• What are the
benefits of
outsourcing
transportation to
specialist firms in
logistics?

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BUSINESS MANAGEMENT

Benefits and drawbacks of SCM

Benefits
• Prevents mistakes that occur in long supply chains.
• Manages stock effectively so ensure cash is not tied up in too much
stock or insufficient stock causes delays in fulfilling orders.
• SCM is an effective tool for lean production.

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BUSINESS MANAGEMENT

Benefits and drawbacks of SCM

Drawbacks
• Time differences, and language/cultural differences with global supply
chain partners can delay the logistics of getting goods to customers.
• Greater interdependence means a single problem in the supply chain
can cause major disruptions.

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BUSINESS MANAGEMENT

Over to you

• Hoang textbook
• Question 40.1 Carrefour
• Page 541
• Answer all parts

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BUSINESS MANAGEMENT

The difference between just-in-time (JIT) vs.

just-in-case (JIC)

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BUSINESS MANAGEMENT
Just-in-time (JIT) stock
control
• JIT is a Japanese stock
management method based
upon having stocks delivered as
and when they are needed.
• Only the absolute minimum
levels of stock are held
• Finished goods are dispatched
as soon as they have been
produced.
• It is a prerequisite to lean
production and is widely used by
car manufacturers.
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BUSINESS MANAGEMENT
Just-in-case (JIC) stock
control
• This traditional stock control
method recognizes the need to
maintain large amounts of
stock in case there are supply
or demand fluctuations.
• A reserve stock (known as
buffer stock) of raw materials,
semi-finished goods and
finished goods kept just in case
there is unexpected demand. JIC systems ensure there is always sufficient
stock available to meet customer demands.
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BUSINESS MANAGEMENT
Just-in-time vs.
just-in-case
• Toyota was the first
company in the
world to develop a
JIT approach to
stock control.

Volkswagen discovered the consequences of

denial of fraudulent behaviour when it was
caught cheating emissions tests in 2015.

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BUSINESS MANAGEMENT
Just-in-time vs. Just-in-case
Toyota was the first
company in the
world to develop a
JIT approach to
stock control.
1. What are the
pros and cons of
JIT stock control?
2. What are the
pros and cons of
JIC stock
control?
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BUSINESS MANAGEMENT

Advantages and disadvantages of JIT

Advantages
• Reduces costs of holding stock.
• Working capital can be better used elsewhere.
• Improves cash flow.
• Can reduce the break-even point.
• Firms can be more flexible in times of changing demand.
• Improves motivation of staff by promoting team work.
• Reduces waste.
• Strengthens the firm’s relationship with its suppliers.
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BUSINESS MANAGEMENT

Advantages and disadvantages of JIT

Disadvantages
• Huge reliance on external suppliers.
• Little room for mistakes.
• Can be inflexible in times of increased demand.
• Few opportunities to exploit economies of scale.
• Stocks must be of good quality.
• Relies on sophisticated computer technology.
• The philosophy must be embedded in the culture.

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BUSINESS MANAGEMENT

Advantages and disadvantages of JIC

Advantages
• Business can meet sudden changes in demand.
• Increased flexibility.
• Can speed up production if necessary.
• Economies of scale.
• No need to wait for delivery of stocks.

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BUSINESS MANAGEMENT

Advantages and disadvantages of JIC

Disadvantages
• Higher costs of storage.
• Some stocks are perishable, so buffer stocks are wasteful.
• Stock can be subject to damage or theft.
• Purchasing large volumes of stocks can be detrimental to cash flow.

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BUSINESS MANAGEMENT
Over to you

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• Question 40.2 IB Café
• Page 543
• Answer all parts

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BUSINESS MANAGEMENT

Stock control charts based on the following:

• Lead time
• Buffer stock
• Re-order level
• Re-order quantity

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BUSINESS MANAGEMENT

Work-in-progress – Finished goods –

Raw materials
semi-finished goods goods that are ready for sale

• Stocks are the materials, components and

Stocks products used in the production process.
(inventories) • There are three categories of stocks as outlined
above.

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BUSINESS MANAGEMENT

Managing stock Stockpiling:

holding excess
• Managing stock is an
stock
important task for all
businesses so that
stockpiling or stock-
outs do not occur.

Stock-outs:
holding
insufficient
stock

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BUSINESS MANAGEMENT

Drawbacks of stockpiling

Costs of stockpiling

• Storage costs.
• Fire, theft or damage.
• Perishables may deteriorate.
• Stock is illiquid.
• Stock may become obsolete if demand changes.
• Changing fashions and tastes.

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BUSINESS MANAGEMENT

Drawbacks stock-outs

Costs of stock-outs

• Lost sales and potentially customers lost to rivals.

• Halted production leading to inefficiencies.
• Damaged corporate image.
• Higher costs due to fixed costs still needing to be paid.

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BUSINESS MANAGEMENT
Stock control charts
• Stock control charts are
used to graphically
illustrate a simplistic
system of stock control.
• Key concepts illustrated
by stock control charts
are:
• Maximum stock level
• Re-order level
• Buffer stock
• Re-order quantity
• Lead time
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BUSINESS MANAGEMENT

Stock control charts illustrated

Stock
level
(units) Maximum
stock
Place level
order
Re- Re-order
order level
quantity

Minimum
stock
Buffer
Delivery level
stock
(JIC) of stock

Lead time Time

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BUSINESS MANAGEMENT
Optimum levels
of stock
• Businesses must
decide between:
• Ordering in bulk to
get purchasing
economies of scale The best level of stock for a business will vary from
(but pay high storage industry to industry e.g. the optimal stock level for a
furniture store will be quite different from a florist.
costs) and/or
• Order smaller
quantities, but more
frequently.

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BUSINESS MANAGEMENT
Factors influencing the amount of stock held – types of
product
Fast moving consumer Consumer durables or
goods (FMCGs) perishables

• Consumer durables (e.g. white

goods) are purchased
• FMCGs need to have more infrequently, hence less stock
available stock due to high should be held.
stock turnover. • Consumer perishables must
not be overstocked in order to
avoid spoilage.

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BUSINESS MANAGEMENT
Factors influencing the amount of stock held – forecast level
of demand

Peak season demand Low season demand

• Peak season at seaside
• Low season at seaside
destinations results in greater
destinations will see these
sales of sunscreen, ice-
same products suffer from a
creams, barbecues and cold
decline in sales.
drinks.
• Therefore, levels of stock
• Greater levels of stock should
should be held in smaller
be held to meet this surge in
quantities.
demand.

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BUSINESS MANAGEMENT
Factors influencing the amount of stock held – lead times

Short lead times Long lead times

• If there are long lead times,

• Suppliers that can guarantee
larger volumes of stock would
short lead times allow a
need to be reordered
business to have minimal
• e.g. shipments of heavy
buffer stocks.
and bulky products.

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BUSINESS MANAGEMENT
Factors influencing the amount of stock held – cost of
holding stock
High opportunity cost of Low opportunity cost of
stockpiling stockpiling
• Firms such as fine jewelers
and luxury sports car
• Low cost FMCGs are sold with
manufacturers will find it too
such high levels of stock
expensive to hold excess
turnover that there is a low
stock.
opportunity cost of holding
• This is due to limited demand
such large volumes of stock.
and the risk of theft or
damage.

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BUSINESS MANAGEMENT

Over to you

• Hoang textbook
• Question 40.4 Diallo Bakery
• Page 548
• Answer all parts

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BUSINESS MANAGEMENT

Capacity utilization rate

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The productive BUSINESS MANAGEMENT
efficiency of a
firm
• Capacity utilization measures a
firm’s output level as a
percentage of its potential
output.
• It is a measure of a firm’s
efficiency as it reveals the
extent to which there are idle
resources in the organization.
• High-capacity utilization is This formula appears on the formulae sheet in the
financially important as it examination.
spreads out fixed and indirect
costs of production over a
large level of output.
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Feature Reason
BUSINESS MANAGEMENT
The importance High capacity utilization reduces the
of high capacity High fixed average fixed costs as fixed costs will be
costs distributed across a higher number of
utilization units produced.
• High capacity
Products with low profit margins
utilization is Low profit contribute little (per unit) to the profits of
generally more margins a business so need to be sold in large
important to firms quantities to be profitable.
that have the
High levels of High capacity utilization will reach break-
following features:
break-even even faster, thus earning profit earlier.

If the extra cost of providing a particular

Low marginal product to an additional customer is
costs close to zero, then high capacity
utilization is important for profitability.
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BUSINESS MANAGEMENT
High capacity
utilization on
the Tokyo
subway
• Tokyo subways
have professional
pushers to cram
commuters onto
the trains during
rush hour (i.e.
high capacity What are the drawbacks of high-capacity utilization
utilization). on the Tokyo subway?

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BUSINESS MANAGEMENT
Drawbacks of high
capacity utilization
• Minimal time for maintenance
repairs.
• Stress on workforce which can
result in problems with quality.
• Negative impact on service
including long waiting times or
health and safety dangers, e.g.
overcrowding.
• Not a substitute for growth as
growth is limited by the
maximum capacity.
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BUSINESS MANAGEMENT

Over to you
• Hoang textbook
• Question 40.5 The Emirates
Stadium, London
• Page 551
• Question 40.6 Virginie Srienz Inc.
• Page 551
• Question 40.7 AMC Theatres
• Page 552
• Answer all parts

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BUSINESS MANAGEMENT

Defect rate

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BUSINESS MANAGEMENT
Defect rate
• Defects occur when the
quality of a particular product
is unacceptable (i.e.
substandard output).
• Defects represent waste and
inefficiency.
• The defect rate measures the
proportion of outpour per time
period, that is substandard.
• Defect rates can be used to
evaluate production
processes and as a measure
of quality assurance.
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BUSINESS MANAGEMENT

Over to you

• Hoang textbook
• Question 40.8 Durex
• Page 553
• Answer all parts

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BUSINESS MANAGEMENT

Labour productivity, capital productivity,

productivity rate and operating leverage

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BUSINESS
The relationship between MANAGEMENT
input, productivity and output
Productivity
• Productivity refers to how Resources
Productivity Production
well resources (inputs) are (land, labour
(efficiency) (output)
and capital)
used in the production
process to generate
outputs.
• Productivity can be
measured using various
formulae. They include:
• Labour productivity
• Capital productivity
• Productivity rate

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BUSINESS MANAGEMENT
Productivity
formulae
• Capital productivity measures
how well a firm uses its
physical resources (e.g.
machinery).
• Labour productivity measures
the efficiency of the workforce.
• The productivity rate measures
the degree of efficiency in the
use of resources in the
production process.

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BUSINESS MANAGEMENT
Benefits of higher productivity rates

• The benefits
of higher
productivity
rates can be
remembered
easily by the Economies of Earnings Efficiency Evolution
‘4Es’: scale (higher (improved (growth)
profits and competitiven
wages) ess)

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BUSINESS MANAGEMENT
Operating leverage

• Operating leverage measures a

firm’s fixed costs as a
percentage of variable costs.
• A firm with relatively high fixed
costs has high operating
leverage, and vice versa.
• Firms with high operating
leverage are vulnerable to a
drop in sales volume as they
must achieve sufficient sales
volume to pay for its substantial
fixed costs.
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BUSINESS MANAGEMENT

Determinants of productivity rates - TRIES

Technology Rivalry Innovation Entrepreneurship Skills and

Investment in Competition Commercialization Effective experience
technologies incentivises of new ideas and leadership and Education,
helps workers be productivity in products changes personal training and
more productive firms the way people motivation of development can
work (e.g. remote entrepreneurs increase human
working using can drive capital for
laptops and productivity increased
smartphones) productivity
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BUSINESS MANAGEMENT

Over to you
• Question 40.9 Measuring
productivity
• Page 555
• Question 40.10 Social media and
productivity
• Page 556
• Question 40.11 Bath & Body Works
Inc.
• Page 557
• Question 40.12 Nicola D’ambrosio
Manufacturing Corp
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BUSINESS MANAGEMENT

Approaches to
learning

• Hoang textbook
• Activity 40.1
Communications and
Thinking skills
• Page 556

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BUSINESS MANAGEMENT

Cost to buy (CTB) and cost to make (CTM)

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BUSINESS MANAGEMENT
Volkswagen (VW) – car or sausage producer?
True or false?
Volkswagen’s factory
produces more sausages
than it makes cars
worldwide.

Watch this video of the VW

factory and answer the
below questions:
1. Does VW produce more
sausages than cars?
2. Why does Volkswagen
produce sausages?
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BUSINESS MANAGEMENT

CTB vs. CTM

• A business faces a make-or-buy
decision when it has a choice
between manufacturing a
product or purchasing it from an
external supplier.
• To decide whether to make or to
buy, a firm uses quantitative and
qualitative factors in its decision
making.

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BUSINESS MANAGEMENT

Quantitative factors in make or buy decisions

Cost to buy = Price × Quantity
versus
Cost to make = Fixed costs + (Variable costs × Quantity)

Cost to Cost to Cost to Cost to

buy make buy make

$ $
The firm $ $ $ $ The firm
should buy
should
the product $ $ $ $ manufacture
from a third-
the product
party
in-house
supplier

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BUSINESS MANAGEMENT

Qualitative factors in make or buy decisions

Time frame of Spare capacity Reliability of In-house Size of capital

production suppliers expertise expenditure

Core & non-core Strategic Significance of External

competencies importance the product to influences
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the firm
BUSINESS MANAGEMENT

Over to you

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• Question 40.13 To make or to
buy? That is the question
• Page 559
• Answer all parts

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BUSINESS MANAGEMENT

Theory of
knowledge

How can knowledge of

change in the external
business environment
create both opportunities
and threats for
production planning?

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1. Explain the impact of a low labour BUSINESS MANAGEMENT
productivity rate on the critical path.
2. During which activities would it be BMT: Critical path analysis
and production planning
Business Management Toolkit

advisable for the baker to perform stock

(inventory) management? Explain your
answer.
View the critical path activities and diagram for a
3. With reference to the critical path diagram, bakery and answer the questions from this slide.
explain the impact of high capacity
utilization on the bakery business if they
operate from 3:00am to 7:00pm each day.
4. Given the impact of high capacity
utilization on the bakery, what is the
likelihood the bakery will outsource some
of their bread-making to an external
supplier (i.e., choose CTB instead of
CTM)? Explain your answer.

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Critical BUSINESS MANAGEMENT
path
diagram
for baking
bread at a
bakery
Activity Description Duration (minutes) Dependency
A Measure ingredients 1 -
B Mix ingredients 3 A
C First dough rising 60 B
D Prepare baking tray 1 -
E Pre-heat oven 10 -
F Knead dough. Form a loaf and place on baking tray. 2 C&D
G Second dough rising 15 F
H Cooking time 40 E&G
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BUSINESS MANAGEMENT

• Global supply chains have been impacted severely since

Concepts in BM: being the COVID-19 pandemic.
change, creativity • Many retailers have struggled to keep their shelves fully
and sustainability stocked. However, Amazon is staying one step ahead of
the global supply chain crisis by using creative solutions to
ensure their adaptability to change and sustainability of
their business.
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BUSINESS MANAGEMENT

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• Hoang textbook
• Review Questions
• Page 561

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