15.3. The Production Plan

What is a production plan?

The aim of the production plan is to organize premises, machinery, labour, and raw materials efficiently, so that the firm can produce the goods required by the customers in the right quantities and at the right time. The production plan will outline the action to be taken both immediately and in the medium-to-long term.

A business may plan to vary the priorities for its product and production process over time. The table below illustrates how this might be achieved:

Production targets and timescales
	Short	Medium	Long
PRODUCT	Maintain current product	Develop variants of the product	Diversify into new products
PRODUCTION	Labour to work extra hours	Buy or hire new equipment	Buy or hire new premises

Types of production

The way in which production is organized will depend upon the method of production adopted by the business. Three possible methods are:

1. Job production: this method is used for producing single or one-off orders, where each order is custom built. For example, personal services, such as hairdressing, painting and decorating, arranging flowers for weddings, are all examples of job production.

2. Flow production: this method involves the manufacture of a product in a continuously moving process. Flow production is used to mass-produce identical products for huge national or international markets.

3. Batch production: this method is used for producing a limited number of identical products to meet a specific order, for example, 1,000 calling cards, 50,000 pre-recorded video cassettes of a particular film, or runs of daily newspaper.

The precise method of production chosen will clearly depend on the answers to a number of questions:

• What is the nature of the product? For example, is it a personalized good or service? Do materials need careful handling?

• What is the size of the market? This will determine the volume of output required.

• What is the nature of demand? Will consumers purchase the product on a regular basis (e.g. washing powder), or infrequently (e.g. furniture and electrical goods)?

• What is the capacity of the business? If necessary, does the business have enough resources to produce on a large scale?

Resource requirements

Once the production method has been chosen and justified, it is possible to decide upon the kind of premises, equipment, raw materials, and labour that will be required to meet production targets:

Premises. Many individuals now run businesses from home, for example, driving instructors, window-cleaners, and sandwich-makers. Operating from home can save money, but care needs to be taken to ensure that running a home business does not infringe local authority planning regulations or the conditions of the householder’s mortgage. Most businesses are operated from leased premises.

It is useful in a production plan to draw a diagram of the premises and the layout of benches, counters, tables, machinery, and other equipment you intend to use.

Machinery. The production plan should identify the machinery and other equipment required, for example, tools and computers, and names of some potential suppliers. This section should indicate whether or not the business intends to hire, lease, or buy equipment, and should also outline the estimated total cost of what it intends to do. The plan should detail the support available for servicing and maintaining the machinery, where this support will come from, and how much it will cost. The impact of any plans to by additional equipment in the future should also be outlined in the plan.

Labour. Will production be labour-intensive or capital-intensive? The production plan should outline the firm’s labour requirements – that is, numbers of employees, their skill levels, and previous experience required. The plan should indicate where these employees are to be found, how they will be recruited, methods of payment, and future training needs.

The cost of labour varies enormously across different regions. The entrepreneur will need to consider the impact of the geographical location of the firm on its labour costs. A business requiring a large amount of unskilled labour might locate in a region with high unemployment and find that it can recruit cheaply. However, a business needing highly specialized labour, for example, those with computer system design skills, may need to locate near similar organizations, and may be forced to pay very high wages to attract staff from rival firms.

Raw materials. If the business needs raw materials, it is important that the entrepreneur identifies suppliers in advance who are able to supply materials of the right quality in the right amounts at the right time, and who are prepared to trade on terms acceptable to the firm. Many suppliers will be cautious of giving credit to new and unknown businesses. Therefore, it is essential that the terms and conditions of supply of materials can be established before the business starts up.

This section should also outline the stock levels that the firm intends to carry. Just In Time production (JIT), as a system designed to reduce the costs of holding stocks of raw materials, work in progress, and finished goods through careful scheduling of the production process, might be useful for considering in this section of the business plan. JIT is sometimes known as supply chain management, because it involves a great deal of work with suppliers to achieve high levels of quality and reliability in supply. Raw materials and components have to arrive at the factory ‘just in time’ to be used, thereby reducing storage costs.

Quality assurance. The production plan should also detail how product quality will be assured. The production of poor-quality products, and the resulting search for weaknesses in production processes, use up valuable time and resources in a business. Errors are costly. Furthermore, should any poor quality products reach consumers, company image and reputation can be damaged.

To prevent errors happening, organizations are increasingly turning to the techniques of Total Quality Management (TQM). This involves building-in quality checks at each and every stage in a production process, the aim being to identify problems and solve them before, rather than after, products have completed the production process.