Business Operations: Production, Costs, and Inventory Management

Posted on Dec 17, 2024 in Economy

The Production Process

The production process involves applying a technological process to transform production factors into finished products. Factors constitute production inputs, and outputs are finished products.

Average Maturation Period

This consists of a process in which production factors are acquired and can be inventoried. They are stored to join the transformation process. The finished products are stored before sale and shipment. The average maturation period elapses from when a monetary unit is invested until it is recovered through product sales. The average economic maturation period is the time the company takes to recover the money invested in acquiring materials for production. It is the average time between when the company pays for the materials necessary to produce and when it is charged.

Productivity

The total output is the total output generated by the company, given a quantity of productive factors. The performance of a productive process or average productivity is related to the quantity of the product obtained and the quantity of productive factors employed.

Cost

Cost is the value of inputs used in the company’s production. There is no distinction between short and long-term costs. The distinction between long-term and short-term relates to the possibility of modifying the utilization of so-called fixed factors.

Fixed Costs

These stem from using fixed factors and do not depend on the volume of production. They remain unchanged by changing the quantity produced.

Variable Costs

These are given by the value of consumed variable factors, such as labor and raw materials, and depend on the quantity of production.

Direct Costs

These are directly associated with production and can be assigned specifically to each product, such as the amount of raw materials used or the number of hours an employee works directly on each product.

Indirect Costs

These affect the overall production process. They are common to various products and cannot be assigned directly to a product.

Inventories

Inventories are all the materials and products the company has stored, primarily to facilitate the continuity of the production process and supply orders placed by consumers.

The procurement cycle of an enterprise is the period between the realization of the purchase and the time the goods sold are delivered to customers.

Types of Inventories

  • Inventories of raw materials: To avoid possible mismatches between the rate of the production system and the raw materials needed from the suppliers.
  • Semi-finished goods inventories: The work of the various phases of production does not always coincide.
  • Inventories of finished products: The sales pace does not usually match that of manufacturing, so you generally have a certain level of inventories of finished goods.

The Costs of Inventories

  • Maintenance costs: Costs associated with maintaining some inventory. Examples are hiring or depreciation of premises for storage, control costs of goods, obsolescence of stored materials, and immobilized financial resources.
  • Cost of order: Costs incurred for each material replenishment order or for each order prepared. As the size of the stores increases, the number of orders to be made annually is reduced, so the annual cost of orders is reduced by the level of inventories.
  • Stock split costs: Costs incurred when the company has no inventory and cannot continue manufacturing or when a rupture takes place in the warehouse of finished products, and the company is temporarily unable to meet customer demands.

Inventory Management

Inventory management is determining the optimum quantity of stock to be maintained and the pace of orders to meet the needs of the company’s production and marketing.

  • Maximum stock: The largest amount of stock to be kept in the warehouse.
  • Minimum stock: The smallest quantity of stock that can be kept in the store, below which there is a risk of stock rupture.

Reorder Point

The stock level at which an order is placed to replenish the store, considering the time it takes for the provider to serve.

Wilson Model

The Wilson model determines the optimal order that minimizes inventory management costs. The cases that must be taken to implement this model are:

  1. The product demand, the total quantities purchased from the supplier, or manufactured in the production area is constant and known throughout the period. Stock breaks are not allowed.
  2. The batch supplied to the company, bought from suppliers, or made by the production department is of constant quantity.
  3. The product price and supply are constant and known.