To recall, we started with Logistics and its components that go into
making logistics an inevitable part of management and today, without logistics
no business worth the name can hope to survive and sustain itself. We also
spent some time on the evolution of logistics with its integral parts; we
looked into Demand forecasting, Purchasing, Requirement planning and production
planning. We have looked into the objectives and necessities of production
planning beginning with effective utilization of resources and reaching up to
consumer satisfaction. Now, we have to
spend some time on the last objective of production planning: Reduction in the production costs.
By planning optimum utilization of resources and minimizing wastage
along with a focus on optimum size of inventories, production planning tries to
achieve effective reduction in production costs.
First, what is production cost? A good business man must be all the
time aware of the production cost to calculate the profit his company makes
after sale. How much money a business puts into manufacturing a good or
providing service is the production cost. Naturally, depending on the kind of
business, production cost involves a huge variety of expenses like the salary
and wages you pay to labour, the money you spent on raw materials, the cost of
machineries you need to manufacture the good the company markets and so many
general overheads.
The unit cost of production can be arrived at by dividing the total
cost of the units produced during the day by the number of units produced for
the day. Here, we must also understand
the difference between the manufacturing cost and the production cost. Production cost includes all the expenses in
connection with business activity of the organization; but, manufacturing cost
includes only the expenses of actually producing the product. For example, the advertising budget comes
under production cost while the cost of the raw materials comes under
manufacturing cost, to put it simply. These two costs put together point to total
expenses of operating the manufacturing company and the income, the revenue it
generates must exceed the total expenses if the company aims at achieving
profitability.
We will see more of it in our next session.