Topic 5 Operations Management

Topic 5 Operations ManagementProduction PlanningLearning ObjectivesTo understand why businesses hold stocks and the costs of stock holdingAnalyse the advantages and disadvantages of traditional stock-control systemsDiscuss and compare the just-in-case approach and just-in-time (JIT) stock management systemStock / InventoryMaterials and goods required to allow for the production of and supply of products to the customer

All businesses hold stock of some kindManufacturing businesses will hold stocks in three distinct formsRaw materials and components held until they are used in the production processWork in progressFinished goods held until despatched to customersStock holding costsThree costs associated with stock holdingOpportunity cost the working capital which is tied up in stocks could be put to a better alternative useStorage costsRisk of wastage and obsolescence Is stock is held for too long there is a risk of goods deteriorating or becoming outdatedCosts of NOT holding stocksThere are risks of holding very low stock levelsOften called stock-out costsLost sales unable to supply customers from stockIdle production resources If stocks of raw materials and components run out, production will have to stopSpecial orders could be expensive urgent order given to a supplier extra costs may be incurredSmall order quantities missing out on economies of scaleOptimum stock level0Quantity of stock heldCosts ($)Total costs OptimumStock holding costsOut of stocks costsOptimum order sizeManagers may be tempted to order huge quantities of stock in order to gain EoS and to ensure they dont run outBut holding too much stock can cause problems tooOut of date stockEconomic order quantityThe 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 knowBuffering stocks minimum stock to hold so production can continue to take place (higher with reorder uncertainty)Re-order quantity number ordered each timeLead time normal time between order and deliveryRe-order stock level level that triggers a new order to be sent to the supplier

perfect world situation

real world situationShipment delayedHoliday saleHoliday saleJust-in-time Just-in-caseAvoid holding stock byHolding high stock levelsrequiring stock arrivejust-in-case there is a just as they are neededproduction problem,in production & completedunexpected rise in demand,products are produced toor delivery problemorder

STOCK MANAGEMENT SYSTEMS

Just-in-CaseImportant JIT factors:Excellent supplier relationship so supplier can work quickly to fulfill orderMulti-skilled production staff that can switch jobs on short noticeFlexible set up of equipment and machinery (usually expensive, computer-controlled machinery)Accurate demand forecastingLatest IT equipment allows for more success (data base)Excellent employer-employee relations to avoid production breakQuality of utmost importance (no time for mistakes)JIT is not suitable for all firms:Not good if cost of production stoppage from when supplies dont arrive far exceed the costs of holding buffer stock of key componentsIT systems needed may be too expensive for small firmsRising 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)

Just in Time