1. Sales and Capacity Planning
Chapter 14
Sales and Capacity Planning

2. Copyright 2011 John Wiley & Sons, Inc.
Lecture Outline
The Sales and Operations Planning Process
Strategies for Adjusting Capacity
Strategies for Managing Demand
Quantitative Techniques for Aggregate Planning
Hierarchical Nature of Planning
Aggregate Planning for Services
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3. Sales and Operations Planning
Determines resource capacity to meet demand over an intermediate time horizon
Aggregate refers to sales and operations planning for product lines or families
Sales and Operations planning (S&OP) matches supply and demand
Objectives
Establish a company wide plan for allocating resources
Develop an economic strategy for meeting demand
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4. Sales and Operations Planning Process
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5. Monthly S&OP Planning Process
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6. Meeting Demand Strategies
Adjusting capacity
Resources to meet demand are acquired and maintained over the time horizon of the plan
Minor variations in demand are handled with overtime or under-time
Managing demand
Proactive demand management
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7. Strategies for Adjusting Capacity
Level production
Producing at a constant rate and using inventory to absorb fluctuations in demand
Chase demand
Hiring and firing workers to match demand
Peak demand
Maintaining resources for high-demand levels
Copyright 2011 John Wiley & Sons, Inc.

8. Strategies for Adjusting Capacity
Overtime and under-time
Increase or decrease working hours
Subcontracting
Let outside companies complete the work
Part-time workers
Hire part-time workers to complete the work
Backordering
Provide the service or product at a later time period
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9. Copyright 2011 John Wiley & Sons, Inc.
Level Production
Demand
Units
Time
Production
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10. Copyright 2011 John Wiley & Sons, Inc.
Chase Demand
Demand
Units
Time
Production
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11. Strategies for Managing Demand
Shifting demand into other time periods
Incentives
Sales promotions
Advertising campaigns
Offering products or services with counter-cyclical demand patterns
Partnering with suppliers to reduce information distortion along the supply chain
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12. Quantitative Techniques For AP
Pure Strategies
Mixed Strategies
Linear Programming
Transportation Method
Other Quantitative Techniques
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13. Copyright 2011 John Wiley & Sons, Inc.
Pure Strategies
Hiring cost = $100 per worker
Firing cost = $500 per worker
Inventory carrying cost = $0.50 pound per quarter
Regular production cost per pound = $2.00
Production per employee = 1,000 pounds per quarter
Beginning work force = 100 workers
QUARTER SALES FORECAST (LB)
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000
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14. Level Production Strategy
= 100,000 pounds
(50, , , ,000) 4
Spring 80, ,000 20,000
Summer 50, ,000 70,000
Fall 120, ,000 50,000
Winter 150, ,000 0
400, ,000
Cost of Level Production Strategy
(400,000 X $2.00) + (140,00 X $.50) = $870,000
SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY
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15. Copyright 2011 John Wiley & Sons, Inc.
Chase Demand Strategy
Spring 80,000 80,
Summer 50,000 50,
Fall 120, ,
Winter 150, ,
100 50
SALES PRODUCTION WORKERS WORKERS WORKERS
QUARTER FORECAST PLAN NEEDED HIRED FIRED
Cost of Chase Demand Strategy
(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000
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16. Level Production with Excel
Inventory at end of summer
Input by user =400,000/4
Cost of level production = inventory costs + production costs
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17. Chase Demand with Excel
Workforce requirements calculated by system
No. of workers hired in fall
Production input by user; production =demand
Cost of chase demand = hiring + firing + production
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18. Copyright 2011 John Wiley & Sons, Inc.
Mixed Strategy
Combination of Level Production and Chase Demand strategies
Example policies
no more than x% of workforce can be laid off in one quarter
inventory levels cannot exceed x dollars
Some industries may shut down manufacturing during the low demand season and schedule employee vacations during that time
Copyright 2011 John Wiley & Sons, Inc.

19. General Linear Programming (LP) Model
LP gives an optimal solution, but demand and costs must be linear
Let
Wt = workforce size for period t
Pt =units produced in period t
It =units in inventory at the end of period t
Ft =number of workers fired for period t
Ht = number of workers hired for period t
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20. Copyright 2011 John Wiley & Sons, Inc.
LP MODEL
Minimize Z = $100 (H1 + H2 + H3 + H4)
+ $500 (F1 + F2 + F3 + F4)
+ $0.50 (I1 + I2 + I3 + I4)
+ $2 (P1 + P2 + P3 + P4)
Subject to
P1 - I1 = 80,000 (1)
Demand I1 + P2 - I2 = 50,000 (2)
constraints I2 + P3 - I3 = 120,000 (3)
I3 + P4 - I4 = 150,000 (4)
Production W1 = P1 (5)
constraints W2 = P2 (6)
1000 W3 = P3 (7)
1000 W4 = P4 (8)
100 + H1 - F1 = W1 (9)
Work force W1 + H2 - F2 = W2 (10)
constraints W2 + H3 - F3 = W3 (11)
W3 + H4 - F4 = W4 (12)
Copyright 2011 John Wiley & Sons, Inc.

21. Setting up the Spreadsheet
Target cell; cost of solution goes here
Solver will put the solution here
When model is complete, Solve
Click here next
Demand Constraint
Workforce Constraint
Production Constraint
Cells where solution appears
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22. Setting up the Spreadsheet
Click these boxes
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23. Copyright 2011 John Wiley & Sons, Inc.
The LP Solution
Optimal production plan
Cost of optimal solution
Solution is a mix of inventory, hiring and firing
Extra report options
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24. Level Production for Quantum
Input by user
Excel calculates these
Cost of level production
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25. Chase Demand for Quantum
Input by user
Excel calculates these
Cost of chase demand
No. workers hired in Feb.
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26. LP Solution for Quantum
Solver found this solution
Constraint equations in these cells
Optimal solution
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27. Transportation Method
EXPECTED REGULAR OVERTIME SUBCONTRACT
QUARTER DEMAND CAPACITY CAPACITY CAPACITY
Regular production cost $20/unit
Overtime production cost $25/unit
Subcontracting cost $28/unit
Inventory holding cost $3/unit-period
Beginning inventory units
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28. Transportation Tableau
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29. Transportation Tableau
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30. Burruss’ Production Plan
Total
REGULAR SUB- ENDING
PERIOD DEMAND PRODUCTION OVERTIME CONTRACT INVENTORY
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31. Excel and Transportation Method
Period 2’s ending inventory
Regular production for period 1
Cost of solution
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32. Other Quantitative Techniques
Linear decision rule (LDR)
Search decision rule (SDR)
Management coefficients model
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33. Hierarchical Nature of Planning
Items
Product lines or families
Individual products
Components
Manufacturing operations
Resource Level
Plants
Individual machines
Critical work centers
Production Planning
Capacity Planning
Resource requirements plan
Rough-cut capacity plan
Capacity requirements plan
Input/ output control
Sales and Operations Plan
Master production schedule
Material requirements plan
Shop floor schedule
All work centers
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34. Copyright 2011 John Wiley & Sons, Inc.
Disaggregation
Breaking an aggregate plan into more detailed plans
Create Master Production Schedule for Material Requirements Planning
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35. Collaborative Planning
Sharing information and synchronizing production across supply chain
Part of CPFR (collaborative planning, forecasting, and replenishment)
involves selecting products to be jointly managed, creating a single forecast of customer demand, and synchronizing production across supply chain
Copyright 2011 John Wiley & Sons, Inc.

36. Available-to-Promise (ATP)
Quantity of items that can be promised to customer
Difference between planned production and customer orders already received
AT in period 1 = (On-hand quantity + MPS in period 1) –
(CO until the next period of planned production)
ATP in period n = (MPS in period n) –
Capable-to-promise
quantity of items that can be produced and mad available at a later date
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37. Copyright 2011 John Wiley & Sons, Inc.
ATP
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38. Copyright 2011 John Wiley & Sons, Inc.
ATP
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39. Copyright 2011 John Wiley & Sons, Inc.
ATP
Take excess units from April
ATP in April = (10+100) – 70 = 40
ATP in May = 100 – 110 = -10
ATP in June = 100 – 50 = 50
= 30
= 0
Copyright 2011 John Wiley & Sons, Inc.

40. Rule Based ATP Product Request Yes
Is the product available at this location?
Is an alternative product available at an alternate location?
Is an alternative product available at this location?
Is this product available at a different location?
Available-to-promise
Allocate inventory
Capable-to-promise date
Is the customer willing to wait for the product?
Revise master schedule
Trigger production
Lose sale
Yes No
Copyright 2011 John Wiley & Sons, Inc.

41. Aggregate Planning for Services
Most services cannot be inventoried
Demand for services is difficult to predict
Capacity is also difficult to predict
Service capacity must be provided at the appropriate place and time
Labor is usually the most constraining resource for services
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42. Copyright 2011 John Wiley & Sons, Inc.
Yield Management
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43. Copyright 2011 John Wiley & Sons, Inc.
Yield Management
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44. Yield Management Hotel should be overbooked by two rooms
NO-SHOWS PROBABILITY P(N < X)
Optimal probability of no-shows
P(n < x)  = = .517 Cu
Cu + Co 75
.517
Hotel should be overbooked by two rooms
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45. Copyright 2011 John Wiley & Sons, Inc.
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