Chapter 13

sales and operations planning

determine the resource and production levels needed to meet demand over a specified time horizon

matches supply and demand at both aggregate and individual product levels
aggregate refers to major groups of products

objectives: establish a company-wide game plan for allocating resources and develop a cost-efficient strategy for meeting demand

sales and operations planning activities overview

sales and operations planning was coined by companies to refer to aggregate planning
captures the importance of cross-functional work
aggregation on the supply side is by product families, and on the demand side by customer groups

competing objectives

sales: aggregate forecasts, many product variations, rapid response, high service, maximize revenue
operations: detailed forecasts, few product variations, long production runs, stable production schedules, maximize output, minimize costs

benefits of sales and operations planning

better organizational teamwork
faster and better-aligned decision-making
greater accountability for performance
better business visibility

s&op process

a structured approach to balancing supply and demand

aggregate production planning

balances production, inventory, resources, and demand
specifies production rates, inventory, employment levels, backlogs, possible subcontracting, and other resources needed to meet the sales plan

aggregate production planning costs

holding inventory: cost of having inventory on hand
regular production: cost of average labor and benefits
overtime: cost of working more hours than standard
hiring: cost of finding, acquiring, and training new employees
fire/layoff: cost of separation packages
backorder/lost sales: cost of expediting supply and lost goodwill
subcontracting: cost per unit and loss of control

aggregate planning strategies - level

produce at a constant rate and use changing inventory levels to buffer supply and demand

creating a level aggregate plan

p = level production rate
di = demand in period i
ei = desired ending inventory level
bi = beginning inventory
n = number of planning periods

aggregate planning strategies - chase

change production to match demand, inventory remains relatively stable and low

aggregate planning strategies - chase methods

hire and fire employees: produce all units internally by hiring in high-demand months and firing in low-demand months
use overtime: produce the required quantity in the lowest-demand month and use overtime to meet other months' demand
subcontract: produce the required quantity in the lowest-demand month and use subcontracting for other months

aggregate planning strategies - hybrid

combination of level and chase strategies

real companies using sales and operations planning

disney world: a master at forecasting aggregate demand
welch’s: uses an s&op model for primary production facilities

example - the good and rich candy company

produces chocolate candies with seasonal demand peaks in winter and valleys in summer
goal: determine whether level production or chase strategy is more economical

example - forecasted demand for chocolate candies

spring: 80,000 lb
summer: 50,000 lb
fall: 120,000 lb
winter: 150,000 lb
hiring cost: $100 per worker
firing cost: $500 per worker
regular production cost: $2 per pound
inventory carrying cost: $0.50 per pound per quarter
production per employee: 1,000 pounds per quarter
beginning workforce: 100 workers
beginning inventory: 0

level production = (80,000 + 50,000 + 120,000 + 150,000) / 4 = 100,000 pounds per quarter
cost = (400,000 x $2) + (140,000 x $0.50) = $870,000

chase demand calculation
cost = (400,000 x $2) + (100 x $100) + (50 x $500) = $835,000

initial step - level production strategy

calculate constant output rate
average demand over the planning horizon

initial step - chase strategy

determine required workforce size

practical considerations - advantages

reduces the cost of preparing detailed forecasts and individual item productivity assessments
aids production planners
allows management to see the big picture

practical considerations - disadvantages

difficulty in defining an aggregate unit of production
rarely reflects political and operational realities

sales and operations planning summary

balancing supply and demand is difficult
s&op is a cross-functional process
a sales and operations plan will either influence demand to match supply or match supply to demand
s&op must be a dynamic, responsive process
multiple costs must be considered
three basic strategies: level, chase, and hybrid
services use yield management