Sales and Operations Planning Study Guide

Sales and Operations Planning (S&OP) Fundamentals

Overview and Learning Objectives

Sales and Operations Planning (S&OP) is a critical business process designed to help firms coordinate manufacturing, logistics, service, and marketing plans. The primary objectives are to provide superior customer service, lower inventory levels, shorten customer lead times, stabilize production rates, and provide top management with a comprehensive view of the business.

Key Learning Objectives

  • LO19–1: Comprehend the nature of sales and operations planning and its role in coordinating various business functions.

  • LO19–2: Proficiency in constructing and evaluating aggregate plans utilizing diverse strategies to satisfy demand.

  • LO19–3: Understanding yield management and its significance as a strategic tool.

Defining the S&OP Process

S&OP is an integrated process consisting of a series of meetings. These culminate in a high-level meeting where key intermediate-term decisions are finalized.

Levels of Aggregation

Planning must occur at two distinct levels:

  1. Aggregate Level: This involves planning for major groups or families of products.

  2. Detailed Level: This involves planning for individual products.

Functional Aggregation

  • Supply Side: Aggregation is performed by grouping items into product families.

  • Demand Side: Aggregation is performed by grouping customers into groups of customers.

Planning Horizons and Activities

Planning activities are categorized based on the time horizon they cover:

1. Long-Range Planning

  • Horizon: Greater than 11 year.

  • Frequency: Usually performed annually.

  • Activities: Process planning, strategic capacity planning, and supply network planning.

2. Intermediate-Range Planning (Aggregate Planning)

  • Horizon: Typically 33 to 1818 months.

  • Time Increments: Weekly, monthly, or quarterly.

  • Activities: Forecasting and demand management, and sales and operations (aggregate) planning. This encompasses the sales plan and the operations plan for manufacturing, logistics, and services.

3. Short-Range Planning

  • Horizon: Period from 11 day to 66 months.

  • Time Increments: Daily or weekly.

  • Activities:     * Master scheduling and Material Requirements Planning (MRP).     * Order scheduling.     * Vehicle dispatching, capacity planning, and loading.     * Workforce scheduling (weekly and daily).     * Warehouse receipt planning.

Aggregate Operations Plans

Core Components

An aggregate operations plan specifies the optimal combination of three key variables:

  1. Production Rate: The number of units completed per unit of time (e.g., units per month).

  2. Workforce Level: The number of workers required in a specific period.

  3. Inventory on Hand: The amount of inventory carried over from the previous period.

Production Planning Environment

The planning system must account for factors both external and internal to the firm.

External Factors (Outside direct control)

  • Competitors' behavior

  • Raw material availability

  • Market demand

  • External capacity (e.g., subcontractors)

  • Economic conditions

Internal Factors

  • Current physical capacity

  • Current workforce

  • Inventory levels

  • Activities required for production

Managing Demand Variability

While the external environment is often uncontrollable, firms can attempt to manage demand. A common strategy for firms facing cyclical demand fluctuations is the use of complementary products. In services, these cycles are often measured in hours rather than months.

Production Planning Strategies

Pure vs. Mixed Strategies

  • Pure Strategy: Uses only one of the following approaches.

  • Mixed Strategy: Combines two or more approaches.

Core Strategies

  1. Chase Strategy: Matching the production rate to the order rate by hiring and laying off employees. This requires a pool of easily trained applicants.

  2. Stable Workforce — Variable Work Hours: Maintaining a constant workforce while varying the number of hours worked through flexible schedules or overtime.

  3. Level Strategy: Maintaining a constant production rate where demand changes are absorbed by fluctuating inventory levels, order backlogs, or lost sales.

  4. Subcontracting: Similar to the chase strategy, but hiring and laying off are replaced by utilizing external subcontractors to meet demand.

Relevant Costs in Aggregate Planning

  1. Basic Production Costs: Fixed and variable costs of producing a product (labor, material, overhead).

  2. Costs Associated with Changes in Production Rate: Costs for hiring, training, and laying off personnel.

  3. Inventory Holding Costs: Capital tied up in inventory, insurance, taxes, spoilage, and storage.

  4. Backorder Costs: Costs related to expediting, loss of customer goodwill, and lost sales revenue.

Aggregate Planning Techniques

Methodologies

  1. Cut-and-Try Approach: Involves costing out various production planning alternatives and selecting the best one. This is often facilitated by elaborate spreadsheets.

  2. Linear Programming: Uses mathematical analysis to determine an optimal plan.

  3. Simulation: Employs what-if analysis using simulated demand to evaluate the effectiveness of alternative plans.

Case Study: JC Company (Cut-and-Try)

In a cut-and-try scenario, material costs are often considered irrelevant if the inventory holding cost is expressed in \$/unit.

Inventory and Production Requirement Logic

  • Ending Inventory Calculation: Beginning Inventory+extProductionRequirement−extDemandForecast\text{Beginning Inventory} + ext{Production Requirement} - ext{Demand Forecast}.

  • Safety Stock: Often set as a percentage of demand (e.g., 0.25imesextDemandForecast0.25 imes ext{Demand Forecast}).

  • Production Requirement: Demand Forecast+extSafetyStock−extBeginningInventory\text{Demand Forecast} + ext{Safety Stock} - ext{Beginning Inventory}.

Evaluation of Alternative Plans for JC Company

  • Plan 1: Exact Production; Vary Workforce. New workers are hired or laid off each month to match production requirements exactly. Hiring costs and layoff costs are incurred.     * Example data: For January, Production Requirement is 1,8501,850 units. Total hours required (at 55 hr/unit) is 9,2509,250. At 176176 hours/month/worker, the workforce required is 5353.     * Costs for Plan 1: Hiring (5,6005,600), Layoff (6,7506,750), Straight time (160,000160,000). Total: $172,350\$172,350.

  • Plan 2: Constant Workforce; Vary Inventory and Stockout. The workforce is set to meet the average demand over the horizon. Inventory builds during low demand and stockouts occur during high demand.     * Costs for Plan 2: Inventory (948948), Shortage (1,5401,540), Straight time (160,000160,000). Total: $162,488\$162,488.

  • Plan 3: Constant Low Workforce; Subcontract. Workforce is sized for the minimum demand (April). All demand exceeding this is subcontracted.     * Costs for Plan 3: Subcontract (60,00060,000), Straight time (100,000100,000). Total: $160,000\$160,000.

  • Plan 4: Constant Workforce; Overtime. Using a constant workforce and compensating for high demand in the first two months with overtime ($12,210\$12,210), then building inventory for later months.     * Costs for Plan 4: Inventory (1,2811,281), Overtime (12,21012,210), Straight time (152,000152,000). Total: $165,491\$165,491.

Level Scheduling

Definition and Strategy

Level scheduling maintains a constant production rate over a period. It is a hybrid strategy that keeps workforce levels constant and inventory low by relying on demand to "pull" products through the system.

Advantages

  1. Minimizes inventory and Work-In-Process (WIP).

  2. Ensures product modifications are up-to-date due to low WIP.

  3. Creates a smooth flow throughout the production system.

  4. Allows for Just-In-Time (JIT) delivery of purchased items from vendors directly to the production line.

Requirements for Success

  • Production should be repetitive (assembly-line format).

  • The system must contain excess capacity.

  • Output must be fixed for a specific period.

  • Smooth relationships between purchasing, marketing, and production are essential.

  • High inventory carrying costs and low equipment costs.

  • A multi-skilled workforce.

Yield Management

Definition

Yield management is the process of allocating the right type of capacity to the right type of customer at the right price and time to maximize revenue (yield). It is a method to make demand more predictable.

Success Factors

  • Demand can be segmented by customer.

  • Fixed costs are high, and variable costs are low.

  • Inventory is perishable (e.g., a hotel room for a specific night).

  • The product can be sold in advance.

  • Demand is highly variable.

Strategic Levers of Yield Management

Yield management effectiveness depends on price variability and duration predictability.

Price \ Duration

Predictable

Unpredictable

Fixed

Movies, Stadiums/Arenas

Restaurants, Golf courses, Continuing care hospitals

Variable

Hotels, Airlines, Rental cars, Cruise lines

Convention centers, Internet service providers

System Requirements and Logic

  1. Logical Pricing: Structures must be logical to the customer and justify price differences.

  2. Variability Handling: Management of arrival times, duration, and time between customers.

  3. Service Process: The system must be capable of handling the actual service delivery.

  4. Employee Training: Staff must be trained for environments where overbooking and price changes are standard.

  5. Core Essence: The ability to actively manage demand.