Key Idea: Production planning is having the right materials, the right capacity and the right output at the right cost. This topic is the supply chain, the stock control chart, the measures of how well a factory works, and whether to make or buy.
Supply and stock
- The supply chain runs from raw materials to the customer, locally or across borders.
- Reorder level = buffer stock + lead time × usage.
- Crackers: 700 + 6 weeks × 350 = 2,800 packets.
How well it runs
- Capacity utilization = output ÷ capacity × 100: 1,450 of 1,500 loaves is 96.7%.
- Defect rate = defective units ÷ output × 100: 87 of 8,700 is 1.0%.
- Labour productivity = output ÷ workers; productivity rate = output ÷ input × 100.
Make or buy
- Cost to make = fixed costs + variable cost × quantity.
- Cost to buy = supplier's price × quantity.
- Crackers: make $18,080, buy from Crispwell $17,100.
The words to know
| Word | Means | Do not confuse with |
|---|---|---|
| Lead time | the time between ordering stock and it arriving | the time stock takes to run out |
| Buffer stock | the minimum stock kept in case of delays or extra demand | the reorder level |
| Reorder quantity | the amount ordered each time | the reorder level, which is when to order |
| Capacity utilization | output as a percentage of the most the business could produce | productivity |
| Operating leverage | how strongly profit changes when sales change, because of high fixed costs | financial gearing |
Read the chart or table first, write the formula, then the numbers and the unit. For make or buy, compare the two costs, then add what the numbers leave out: quality, control, reliability.
Exam-style question
Lena's Bakery Ltd uses 350 cracker packets a week. The printer takes six weeks to deliver, and the bakery keeps a buffer stock of 700 packets. Calculate the reorder level for the packets (show all your working).
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Important: At 96.7% capacity there is no room for a big order, a breakdown or maintenance, and rushed bakers make more faulty loaves. High utilization spreads fixed costs, but it has a limit.
Tap each card to check yourself.
What is the maximum stock on the cracker chart? Buffer + reorder quantity: 700 + 4,200 = 4,900 packets.
One risk of a global supply chain? Long lead times and delays at sea or at a border: the packets come from a printer abroad.
Why does a second oven lower capacity utilization? Capacity doubles to 3,000 loaves, so 1,450 loaves fills only 48.3%.
One way to raise labour productivity? Training, better equipment or a better layout: more loaves from the same bakers.
Why might Lena make the crackers even though buying is cheaper? Control of quality and the recipe; and above 20,800 packets making becomes the cheaper option.
Why is high operating leverage risky? With high fixed costs, a fall in sales cuts profit by a larger percentage.
Exam tips
- Read every figure off the stock control chart before calculating.
- Write each formula, then the numbers, then the unit.
- Capacity utilization and defect rate are percentages: say what they mean for the case.
- Make or buy: compare the costs, then weigh quality and control.
- Every point needs a detail from the case.