5.6 Production Planning
The last one!!
The cost of STOCKS
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Stocks are materials and goods required to allow
the production and supply of products to the
customers.
The cost of storing and warehousing stocks is
commonly calculated at 4%-10%.
This can be an area of great cost-savings to business.
Types of STOCK

Retail business:
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Goods on display
Goods in the warehouse waiting to be shelved
Goods on the shelves waiting to be sold
Type of STOCK
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Service business (Banks, Insurance)
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Office supplies
Stationery
Type of STOCK
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Manufacturing business
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1. Raw materials & components
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2. Work-in-Progress (Work-in-Process)
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Purchased from outside suppliers. They are held until ready to
be used in the production process.
The raw materials and components currently being finished into
the final good. Batch production has high levels of WIP stock.
3. Finished Goods

Items that have completed the production process and are ready
to sell.
Stock-holding Costs
What costs are associated with holding stocks?
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Opportunity Cost
Working capital tied up in the cost of stocks that could be
used elsewhere (pay off loans, pay vendors, left in bank
earning interest)
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Storage Cost
Warehouse costs (air conditioning, refrigeration, security,
insurance)
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Risk of Waste and Obsolescence
If stocks are not sold quickly, they may become out-dated,
obsolete, damaged, or deteriorate.
Costs of not holding ENOUGH Stock
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Lost sales
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Idle production resources
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Expensive equipment not operating
Paying labor that is not working
Special orders could be expensive
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Including future potential orders
Payment penalties if you cannot meet delivery dates
Unexpected special orders could be expensive or impractical to
deliver
Small order quantities means:
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Expensive delivery
No economy of scale – discounts on large orders
Economic Order Quantity (EOQ)

Economic Order Quantity is the optimum
quantity of stock to re-order taking into
account delivery costs and stock-holding
costs.
Controlling Stock Levels
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Buffer Stocks
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The minimum amount of stock that should be
on-hand to ensure production can take place
in the event of delivery delays or unexpected
production increases.
Maximum Stock Level
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The most stock that can be held due to space
limitations, financial costs, or deterioration
Controlling Stock Levels
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Re-Order Quantity
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The number of units to be ordered each time
an order must be placed with a supplier.
This will be influenced by the EOQ.
Lead Time

The time it takes between ordering and
delivery
Controlling Stock Levels

Re-Order Stock Level
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The level at which reordering of more stock is
triggered.
It takes into consideration buffer stock and lead times
of new stock arrival.
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Material Requirements Planning Systems
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Re-Order Stock levels can be set in computerized
production planning systems (MRP) to trigger
automatic ordering to suppliers.
EDI – Electronic Data Interchange is a common
computerized communication system between
production factory and supplier
Just-in-Case Stocking (JIC)

Just-in-Case stocking holds high
stocking levels in case there is a problem
with receiving from suppliers or an
unexpected increase in sales.
JIC
Large
Inventory
Factory Production
Advantages/Disadvantages of JIC
Advantages
Disadvantages
Easy
to meet unexpected increase in
demand by increasing production
High
Raw-material
“hold-ups” will not lead
to stopping production
High
Economies
of scale are realized with
bulk buying discounts
Risks
Stocks
“Getting
of finished products are
plentiful so they can be displayed for
potential customers
Stocks
opportunity costs of working
capital tied up in stock costs
stocks
storage costs
of damaged stocks or outdated
it right” is less important
because of replacement stocks which
increases costs
of finished good can meet
Space to store stock cannot be used
sudden increased of consumer
for other purposes
demand because they are finished and
warehoused
Stockpiles
of inventory can meet
expected increases such as seasonal
items
Just-in-Time Stocking (JIT)

Just-in-Time stocking aims to avoid
holding extra stocks and requires suppliers
to send stock when needed on the
production on the line.
JIT
Inventory
Factory Production
Advantages/Disadvantages of JIT
Advantages
Disadvantages
Opportunity cost is reduced because
less is invested in stocks
Any
Costs
Delivery

of storage are reduced
failure to receive stocks can lead
to production delays
costs increase as smaller
quantities are delivered
Storage
space can be used for other
productive purposes
Administration
Less
opportunity for stock to become
outdated or damaged
Reduction
More
Significant
flexibility in production is
required which leads to adapting to
changing customer needs
Multi-skilled
motivated
workers may be more
costs rise because
more attention is needed to multiple
orders
in bulk discounts pricing
because of smaller orders
dependence on outside
factors – the quality and dependability
of outside suppliers
JIT not suitable to everyone
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What if costs of halting production because of
no stocks is TOO expensive or risky?
Expensive computer systems are needed and
small firms may not be able to justify the cost
for potential cost savings.
Raw material costs or delivery costs may
actually rise making future production more
expensive with newer raw materials.