HL Unit 2 Flashcards
(34 cards)
Inventory
When a business holds stock of raw materials, finished goods, work-in-progress
Why business hold inventories?
Need inputs for production
Work-in-progress is still in the production line, otherwise the production line stops
Finished goods are waiting to be sold, if you don’t have finished goods when customers want to buy
Stock Control Charts (AO4)
What is it? Why is it helpful?
A visual representation to help a business maintain suitable levels of inventory over a period of time
It helps predict future stock levels in order to ensure the business doesn’t run out of inventory
Stock Control Charts (AO4)
Maximum Level: Level of stock that a business can hold as limited by space
Re-order Level : Level of stock that triggers a new order
Re-order Quantity: Amount of stock that is ordered
Lead Tine: Time between order and delivery of order
Buffer Stock (Minimum stock) : Minimum stock level held in case of emergencies
Quantity Used: per week/day
x-axis : weeks
y-axis : stock level
Supply Chain
A system of steps that convert raw materials into the good or service and then to customers
Production and delivery of the good or service
Might involve supplier, producers, wholesalers, retailers
A good supply chain can reduce costs, reduce delivery time to customer, improve quality, reduce waste
Supply Chain vs Place (Distribution Channel)
Supply chain focuses on costs and on minimize cost
Distribution Channel focuses on how to maximize sales and brand image
Just-in-case
Stock management strategy whereby firms hold high levels of stock
High levels of stock means that the business can easily deal with unexpected events
Just-in-case production pros and cons
Pro:
- Less likely to run out of stock,
more potential to bulk buy, purchasing economies of scale
- Can deal with a sudden increase in consumer demand
Cons:
- Dependent on suppliers
- Higher delivery cost
- Need to purchase more resources
Just-in-time
Stock control method where no or limited inventory is held
Inputs arrive just before they are used in the production process
Finished products are delivered to the consumers as soon as they are produced
Lot more deliveries
Just-in-time pros and cons
Pros:
Lower storage costs
Can respond to the market quickly
Stock does not become outdated
Cons:
Vulnerability to supplier delays
Demand Variability Risks : demand is high, not enough stock
When does just-in-time work best?
Stable, predictable demand
Short, reliable supply chains
Flexible and reliable workforce
Good IT systems and software that can model stock and consumer demand
Capacity Utilization Rate (AO4)
(formula sheet)
What does it measure?
Do we want it to be high or low?
Measures how much a businesses produces in relation to the maximum possible
Current Output Level / Maximum Output (Productive Capacity) x 100
E.g. a factory can produce a maximum of 5,000 smartphones per day. It is currently producing 3,000.
CUR = 3,000/5,000 = 60%
In general a high capacity utilization rate is desirable as higher production leads to higher revenue. But not too high
What if Capacity Utilization Rate is too low?
Boost marketing efforts
Move to a factory with lower capacity
Rent out the unused capacity to another business
What if Capacity Utilization Rate is too high?
Machinery and employees are used all the time
Increased possibility of breakdowns
Possibly reduced consumer service quality
Overworked employees
Can’t respond to increased demand
Lose potential sales
Defect Rate (AO4)
What does it measure?
Do we want it to be low or high?
Number of Defects / Total output x 100
A defect product is one which is faulty or below the required quality
A lower defect rate is favourable
Productivity Rate (AO4) formula sheet
Ratio of output to input
Labour productivity (AO4)
Total output / Number of workers
E.g. a car manufacturer produces 1,000 cars per days with 500 workers
Labour productivity = 1,000/500 = 2 cars per worker per day
Capital Productivity (AO4)
How to raise?
Total output / Capital employed
Raising productivity
Train workers, Raise EE motivation, Better management etc
Operating Leverage (AO4)
Operating leverage measures how your fixed-vs.-variable cost mix amplifies profit swings as sales move.
If you have more fixed costs (costs that don’t change with output), then each additional sale contributes more to covering those fixed costs—and once they’re covered, to profit.
That makes profits more sensitive to changes in sales.
Total Contribution
Operating Profit
Q x (P - VC)
Q x (P - VC) - FC
Q x CPU
Q x CPU - FC
Q = 100,000, Price = $3, VC = $0.5, FC = 50,000
Operating Leverage =
100,000 x (3 - 0.5)
100,00- x (3 - 0.5) - 50,000
250,000
200,000
= 1.25
A 1% change in sales → a 1.25% change in profit
A 10% increase in revenue should result in a 12.5% increase in operating income.
Make it or buy decisions, What should a business consider?
Make it or buy it from a supplier
Should consider:
- Cost to buy (price from suppliers)
- Costs to male (Increases fixed and variable costs)
- Quality and reliabilility
- Time to make
Sales Forecasting, what is it, benefits?
Predicting future sales of a business
Benefits:
- Helps decide production numbers
- Less likely to have unsold stock
HR planning
- How many employees are needed
Can help with loan application
- Predictions may help persuade banks
Cash flow management
- Ensure enough cash flow is on hand
Sales forecasting Limitations
- Just a prediction
- Things may change in the future
- External factors may change everything e.g. recession
- Some industries are changing very quickly
- New businesses don’t have past sales numbers
Simple Linear Regression (AO4)
Know how to draw the line of best fit and be able to say if it’s weak/strong correlation
Research and development
The scientific research and techinical development of new products and processes
E.g. Car manufacturer (autonomous driving, fuel efficiency, lighter materials)
E.g. Accounting firm (Use of AI, website interactivity)
