How to maximise profits by better production planning
Despite the logical link between planning and the profitability of a business, it is not uncommon for businesses to neglect planning. There are several reasons for this, not least of which is that put forward by Sir John Harvey Jones. “Planning is an unnatural process; it is much more fun to do something. The nicest thing about not planning is that failure comes as a complete surprise rather than being preceded by a period of worry and depression.”
What is Operational Planning?
The two most important concepts in operations planning are Capacity and Demand:
- Capacity is a measure of a business’s ability to produce products. In general capacity is defined in terms of the Resource used to generate products. A resource can be one of a wide range of business assets. Very often they are machines in a factory which have very specific capability. However, they could also be people with specific skills or assets not directly associated with the production process such as test facilities or specialised storage.
- Demand is a measure of the total requirement from all customers for all products and services produced by the business. In general businesses do not expect or aim to satisfy all demand. So, for the purposes of this discussion, we will define Demand as a measure of the targeted requirement from all customers for all products produced by the business
Essentially the planning process involves balancing Capacity and Demand.
The reason it is so important to plan by maintaining a balance between capacity and demand is that it is one of the main ways to maximise profit in a business. If the balance is such that Demand exceeds Capacity the business will not have sufficient resource to meet the demand in the timescales promised to the customer. In turn this will mean the business will be lost and profits will be reduced as a result.
If Capacity exceeds Demand then the additional capacity is not adding value to the business and will effectively be an additional cost thereby reducing overall profit from its potential.
In practice it is not desirable to aim to match capacity exactly with demand. It is desirable to allow some excess capacity in order to account for unplanned performance, reduction in resources or short term fluctuations in demand.
Barriers to the planning process
Responsibility for Capacity and Demand are normally managed by two quite separate elements of the business – often Operations manage capacity and Sales or Sales and Marketing manage demand.
In many businesses they have quite different objectives:
- Operations are responsible for managing the resources within the business and have an objective of maximising efficiency of those resources. Excess capacity is seen as inefficient and they will therefore aim to reduce it to the minimum required.
- Sales are responsible for maximising revenue coming into the business and achieving targets set for them by the executive team. Very often their targets are achieved without consideration of whether the business has the capacity to produce the orders or indeed if it is profitable to do so.
So, unless there is a concerted effort for these two departments to communicate and agree on the balance between capacity and demand profitability will be put at risk.
To find out more about our experience in maximising profits through operational planning click here, or to download the full white paper click here.
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