Production Planning
Production - From Order to Export
Once an order has been received, careful planning is essential to make sure that the final shipment will be the best quality you can make and is shipped on time. This module will walk you through some of the things you need to consider during the production process: from the time of a purchase order is received to being ready to ship your order.
This module covers the following topics:
Reviewing and Confirming a Purchase Order
Receiving and Confirming a Purchase Order
A purchase order is a written contract issued by a buyer to a seller. The purchase order is often called a PO. It details the products that the buyer wants to purchase and contains product description, quantities, payment terms, delivery dates and shipping details. It may be sent by fax or by email.
A purchase order is a legal offer to buy products; however no contract exists until the seller confirms acceptance of the purchase order. Once the seller accepts, they will be expected to deliver the products respecting the product details, shipping date and price indicated in the purchase order. This is why before confirming the purchase order, it is important to review it carefully to make sure all of the conditions of the order are acceptable and that you will be able to deliver the product as specified. If there are any questions or concerns about the purchase order, or something needs to be amended, it is important to communicate this clearly to the buyer. It is better to be clear in the beginning than to have problems arise later on.
Steps in receiving and confirming a purchase order:
1. Carefully review the purchase order:
- Are the prices correct?
- Are there any doubts or concerns about what products are being ordered or any changes to the product that have been requested?
- Can you produce the order on time for the delivery date requested? Do you have materials and labor needed to fill the order on time?
- Are the payment terms and payment method acceptable?
- Are there any special instructions regarding labeling, packaging or shipping that you need to be aware of or that may add to your costs or the time needed to produce the order?
- Can you obtain all of the needed exporting documents?
2. Communicate any concerns, questions or problems:
If there is anything that you are concerned about in the purchase order, tell the buyer immediately. If any changes need to be made to the purchase order, it is better to call or send an email explaining the change than to send a confirmed purchase order with something altered on it or to not communicate the need at all. With a phone call or email, you can be assured that the buyer is aware of the change and the reason for it and can issue a corrected purchase order.
3. Confirm the purchase order:
Once you have seen that everything in the purchase order is acceptable, and you are certain that you can meet the order deadline and specifications, send a letter (by fax or email) to confirm your acceptance of the order. Include the purchase order number in your acceptance of the order. Confirmation of the order should be timely. If you are unable to confirm the order within 24-48 hours of receiving it, then at a minimum communicate to the buyer that you have received the order and that you will send the confirmation shortly.
4. Buyer's acknowledgement and requesting pre-payment:
Make sure to ask the buyer to acknowledge that they have received your confirmation of the purchase order and understand you are starting production. If the purchase order specifies a pre-payment to start the production of the order, you will need to write to the buyer to request the deposit so that you can start the order. The request for the pre-payment can be sent at the same time you confirm the order. In most fair trade contracts, buyers prefinance orders, but you often have to request it to receive it; it is not sent automatically.
Purchase orders can vary in format, but they should always include the following information:
- Buyer's name and address
- Purchase order number
- Date purchase order issued
- Seller's name and address
- Product description: this should be a detailed description of product, including measurements, size, color, materials. some buyers will include a photograph.
- Buyer's product code number
- Deller's product code number
- Quantity ordered, price per unit, total cost per item
- Total amount of all items on the purchase order
- Method of shipping and shipping information
- Final shipping/delivery date
- Method of payment and payment terms
- Special instructions for labeling, packaging, packing, documents, insurance (if needed)
- Buyer's signature
CASE STUDIES |
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RAPID REVIEW |
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Production Planning
Production Planning
Before you receive an order it is important to know what your production capacity is, meaning how much of a product you can make in a given time. Production planning will help you to make the best use of the resources you have, including your time, and will help you to produce quality products by the required date.
The best place to start with production planning is to understand everything that happens in your production process. What are all of the steps in making the product? Who is involved? What materials and tools are needed? How long will it take to acquire the raw materials? How much time is needed for each step? When will quality be checked?
Production Flow Chart
A good first step to analyze your production is to map out the process so that each step is clear. One way is to make a flow chart. This can be done as a flow chart or in a table format. Here are two examples. one as a flow chart and the other in table format:
Make a flow chart for one of your products. Once you have mapped out your production process, answer these questions:
- How long does each step take?
- Are there any areas where problems or delays tend to occur?
- Are there steps that could be improved?
- What are the factors that limit your production capacity - labor? materials? quality control? money? tools or equipment?
- How could these limitations be addressed?
Having a flow chart helps show how the steps in the production process are interconnected. If problems occur in one stage in the process, it will affect the steps that follow. This is why quality control in many stages along the production process is important, to catch and correct costly errors before they occur.
Add to your flow chart when quality will be checked and what will happen to products that fail quality inspection.
Production Calendar
Another useful tool for organizing production and making sure deadlines are met is a production calendar. Once you receive a purchase order, you will know the expected delivery date. A production calendar will help organize production so that it is completed by the delivery date and will help keep the different steps moving forward on time. It is important to program extra time into the process, since obstacles are likely to arise and things may not go as smoothly as hoped. It is important to be flexible, and to find alternatives when things don't go as planned.
View Sample Production Calendar
Work Orders
For many organizations that sell handcrafts, orders are made by small producers who work in their homes. They might make the product from start to finish, or they might do one step in the production process, like the printing of cloth or the embroidery after the product has been sewn. Work orders are one way to communicate clearly to the artisans who will be making part or all of the product what work has to be done and the date it needs to be completed.
When writing a work order, be as specific about what you need as possible. Give detailed descriptions with exact sizes or measurements; include swatches, thread samples or photographs so colors and design are exact. If you save a counter sample of all samples sent to a potential buyer, the counter sample can be used as a control to compare against items produced for an order. The control sample is the easiest way for the artisan to see if the details and quality are exact. Another useful tool is to ask for a production sample from the artisan once they begin to produce the order. With a production sample, you see if the product is being made correctly and make any corrections before it is too late.
Make sure the group has sufficient time to make the products and that their deadline to complete the products is well in advance of the shipping deadline in case production is delayed. It is also important to know the needs and capacity of the group. Training might be needed to learn a new technique, or to learn to make quality consistent.
Sourcing Materials
Before you accept a purchase order, you should make sure that the materials you need to produce the order are available and that you will be able to get them on time to produce the order. Having a reliable source for your materials that will deliver the quality you need is an important aspect of your production planning. It is good to have multiple suppliers, in case one goes out of business, or runs out of the materials you need. Organizations that have funds often keep a stock of raw materials that they use regularly. Purchasing in large quantities lowers the cost of materials and insures a supply of needed materials. Careful planning is needed, however, to not purchase materials that won't be used.
CASE STUDY |
| An organization received an order for baskets and sent a work order to a group of women basket makers. The work order included the exact dimensions that the baskets should be, but when the order was finished, the baskets were all too small. When asked why this happened, the women explained that they did not have any rulers or tape measurers in their village to measure the baskets, so they made their best estimate. The women were given tape measurers and trained to use them, and the problem was resolved. Another group of basket makers was having difficulty replicating a basket pattern requested in an order. Not all of the women were able to make the new basket pattern and they were worried they would not be able to fulfill the order on time. The group organized a training where the more experienced basket makers who could weave the new design taught the other women how to do it. This cooperative helped the women to learn the new pattern and they were able to complete the order. |
RAPID REVIEW |
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Quality Management
Quality Management
Quality is an important aspect in the production process and requires careful attention. Quality management begins with purchasing of raw materials that meet quality standards and continues through the final packing of the finished product. The export market pays close attention to quality. If products are poorly made, materials are of low quality, or the quality is inconsistent, buyers will be reluctant to place an order. Once an order is made, careful attention needs to be given to maintaining the quality that is expected. If a product is not made to the correct specifications, arrives damaged, or has poor craftsmanship, it is unlikely that the buyer will purchase again.
Importance of good quality products
The international crafts market is very competitive. Buyers have such a wide range of products to choose from, so good quality makes a big difference in their decision about what to buy. Customers are also used to a high level of quality and will return items they have purchased if they feel unsatisfied with the product. Quality can mean different things to different people, but in the export market buyers pay close attention to details. If you watch a customer in a store looking at products, they will check small details: fabric will be inspected for flaws, zippers and fasteners will be checked to make sure they work properly, the item will be observed on the inside and outside to make sure that the everything was finished well.
Impact of bad quality
The costs of poor quality are great. Entire shipments of products may be rejected because they were made improperly. These mistakes are costly for the artisan on several levels. The artisan may not be paid for those products, or will be paid at a reduced rate, and the buyer may lose confidence in them and choose to not re-order from them. On the buyer's end, they can lose thousands of dollars in sales if a product comes in wrong and their final customer is unsatisfied. Poor quality thus results in both the loss of orders and the loss of reputation.
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Importance of good quality products |
Risks of bad quality products |
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§ People want to buy the products § The products last - do not break § The customer is pleased and will buy in the future ensuring regular orders. § The customer will tell their friends to buy the product i.e., word of mouth marketing. § The market is more and more competitive so we cannot afford for customers to be dissatisfied. |
§ Lose customers § Buyers stop buying products § Buyers cancel the order § Loss of money § Loss of reputation
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From Report on Quality Management Workshop, Asha Handicrafts, June 18, 2008
Quality Control Step-by-Step
Quality control step-by-step
1. Raw materials. The first step in maintaining quality is careful selection of the materials to be used. Materials should be of the same quality as the sample that was sent to the buyer. If the same materials are unavailable or need to be substituted, the buyer must be notified. All materials should also be examined for quality. Wood should be properly dried or final products will crack. Textiles should be checked for color fastness and shrinking. Fittings and fasteners should function properly and withstand use. All materials used should be consistent in quality and color. In general, it is not a good idea to compromise quality for cost by using inexpensive, but poorly made materials. Paying a little more for good quality materials will pay off in the long run by building buyer's confidence in your products.
2. Production Process. Your order must match the sample approved by the buyer. To assure this, it is essential to maintain counter samples of the sample sent to the buyer. This will avoid confusion of what the buyer is expecting. Production of the order should be compared to the counter sample several times during the production process, not just once the product is finished. Some buyers may request that a production sample (photo or actual product) be sent to them for their approval to assure that matches their specifications before it is shipped. Quality control throughout production can help identify mistakes and correct them before they result in costly errors. Use a thorough quality control check list for monitoring consistency and quality of your production.
3. Training of artisans. Handcrafts are often made in small workshops, and large orders may be filled by a number of different producers. In this case, extra care must be taken to make sure that the final products are all alike and are the same as the sample. Training and good communication with the artisans is essential. Artisans should understand what is involved in producing crafts for export and how to meet quality requirements. All artisans should be trained in how to check for quality issues as they make the products and be provided with a check list of what to look for when monitoring the quality of their production.
4. Working conditions. Good quality is also a factor of the working conditions of the artisans. Working conditions include things like fair wages, proper work areas and equipment, and worker incentives. The price paid to the artisan can impact the quality of production, as does the time they have to fulfill an order. If artisans have to produce a large order in a short amount of time, this could result in quality being compromised. If artisans are paid a low wage, they have little incentive to invest time into making a good quality item. Artisans also need to have access to funds to purchase raw materials of the quality desired. Some artisan organizations have developed a savings and loan program, to lend money to artisans for the purchase of raw materials when they need it. Most fair trade organizations should offer pre-financing when placing an order, to assure that artisans can cover the costs of purchasing materials and producing the products. Finally, good quality production also depends on workshop conditions. Work areas should be kept clean and artisans should have the minimal tools needed. Sometimes something as simple as making sure the artisans have tape measurers can make a big difference.
5. Proper packing. Quality can also be compromised if products are not properly packed for shipping. A product may have been made well, but be damaged during shipping, resulting in losses. Entire boxes of products can arrive damaged because they were packed when still wet, were packed too tightly or without adequate protection. Quality control also includes packing products so that they are protected from damages until they reach the buyer. Proper packing is the responsibility of the producer. For more on packing, see the Packing and Packaging section.
EFFECTIVE QUALITY CONTROL - REVIEW
- Maintain counter sample originals of the same quality sample sent to buyer.
- Check quality control at multiple points throughout production process.
- Use a thorough quality control check list for monitoring consistency and quality of your production.
- Provide check list for all stages of production and make sure all artisans know how to check for quality issues as they make the products.
Quality Control Problems and Solutions
Here are some quality control problems that occur commonly and some solutions that can help to avoid the problems, or correct them when they exist.
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COMMON QUALITY CONTROL PROBLEMS |
SOLUTIONS
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1. Availability, suitability, quality of raw materials a. e.g. improperly seasoned wood b. Dyes which run, fade or are not consistent c. Improper preparation of materials 2. Methods of construction a. trained, skilled artisans? b. Appropriate tools and technology? 3. Design or engineering 4. Working conditions 5. Climate (mold, bugs, moisture 6. Rushed orders
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1. Training 2. Consultation with artisan producers 3. Control samples a. Always make counter samples b. Supply producers with counter sample c. Keep sample at quality control. inspection site 4. Institute penalty and bonus system 5. Provide proper work conditions a. Proper lighting b. Good ventilation c. Reasonable work hours with frequent breaks 6. Provide clean, dry storage of raw materials and finished products
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CASE STUDY |
| Asha Handicrafts is a non-profit fair trade organization in India that works with dozens of artisan workshops that make a wide range of crafts. They provide regular training for their artisans. Asha felt a quality control workshop was needed to help artisans understand the importance of good quality control. In the workshop, the artisans talked about the quality problems they had experienced, brainstormed possible solutions to resolve those problems, and came up with an action plan to put the solutions into practice. The workshop also included sitting down with each producer to listen to their needs and concerns. The workshop was very successful. Click here to view a list of the problems, solutions, and action items that came out of the workshop. |
Costing & Pricing
Costing and Pricing for Export
Costing and pricing are an important part of the product development processes. It is important that you know what the actual costs of making a product are before you begin negotiating orders with buyers. This section will help you to look at how to calculate production and overhead costs and what you need to keep in mind when determining your selling price.
Costing is the process of calculating all of the expenses involved in making and packing a product.
Pricing is the process of determining the amount of money for which your product will sell.
Why are Pricing and Costing important?
Pricing and Costing are important on-going activities for any business. If a business does not know the true cost of making a product, they may be selling at a loss. If a business prices their product without looking at the current situation in the market, they may price the product too high, and have difficulty selling.
Costing and Pricing are important:
- to be profitable
- to be competitive in the marketplace
- to make good business decisions
- to be successful
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If your price is too... HIGH ...Your product will not sell
If your price is too... LOW....You will lose money |
When should Costing & Pricing be done?
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Determining the Costs of Your Products
Determining the Cost of your Products
The cost of a product includes both direct costs, like materials and labor, and indirect costs (also known as fixed costs or overhead) which include things like rent, wages, electricity and other expenses a business might have even if they are not doing any production. Your profit margin should also be added into the total cost of the product. Let's look at what should be included as direct and indirect costs:
1. Calculate Direct Costs:
Raw Material Costs
- Raw materials used in product (glaze, paint, clay, thread, buttons, cloth, wood for kiln)
- Labels, tags and packaging
- Cartons and packing materials
Labor Costs
- Labor to produce item - this may be calculated by either an hourly or piece rate basis
- Labor for inspection and quality control
- Labor for packaging and packing
Note: Sometimes determining if a fair wage is being paid for the production of a product is not simple. The World of Good Development Organization has developed the Fair Wage Calculator, a tool for fair trade organizations to gauge weather a fair wage is being paid in their local context.
2. Calculate Indirect Costs (Overhead)
- Rent
- Utilities
- Communication (fax, phone, internet)
- Office supplies
- Salaries
- Professional services (like customs broker, accountant)
- Marketing expenses (trade fair, promotional materials)
- Equipment repair
- Transportation (fuel)
- Other expenses
These indirect costs can be calculated by piece or as a percentage of direct costs.
3. Calculate Profit Margin
Your profit is what you earn after all costs have been covered. Most businesses calculate a profit margin of between 10% - 15% of total costs. This margin will also help to protect you against any unexpected costs, such as a sudden increase in the cost of materials, or a change in the exchange rate.
4. Determine Selling Price
Once you have added your costs and your profit, you will have your Ex-Works price (also know as the Ex-Factory price). This is the cost of the product as it leaves the factory or warehouse. However, most export prices are quoted as F.O.B prices (Free On Board). The F.O.B. price includes the Ex-Works price plus all additional costs related to getting the product to the port of export, such as transporting the product from the workshop to the port, export documentation costs, customs fees, bank charges, and other additional costs These charges can add an additional 10%- 25% to the price
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Raw Materials + Labor (wage) + Overhead + Profit (10-15%) =
Ex Works Price + (10 - 25%) = F.O.B Price |
For a more complete explanation of different export pricing terms, see the Definition of Export Pricing Terms.