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Chapter 14 Sales and Capacity Planning. Lecture Outline The Sales and Operations Planning Process Strategies for Adjusting Capacity Strategies for Managing.

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Presentation on theme: "Chapter 14 Sales and Capacity Planning. Lecture Outline The Sales and Operations Planning Process Strategies for Adjusting Capacity Strategies for Managing."— Presentation transcript:

1 Chapter 14 Sales and Capacity Planning

2 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 Copyright 2011 John Wiley & Sons, Inc.14-2

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 Copyright 2011 John Wiley & Sons, Inc.14-3

4 Sales and Operations Planning Process Copyright 2011 John Wiley & Sons, Inc.14-4

5 Monthly S&OP Planning Process Copyright 2011 John Wiley & Sons, Inc.14-5

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 Copyright 2011 John Wiley & Sons, Inc.14-6

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.14-7

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 Copyright 2011 John Wiley & Sons, Inc.14-8

9 Level Production Copyright 2011 John Wiley & Sons, Inc.14-9 Demand Units Time Production

10 Chase Demand Copyright 2011 John Wiley & Sons, Inc.14-10 Demand Units Time Production

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 14-11 Copyright 2011 John Wiley & Sons, Inc.

12 Quantitative Techniques For AP Pure Strategies Mixed Strategies Linear Programming Transportation Method Other Quantitative Techniques Copyright 2011 John Wiley & Sons, Inc.14-12

13 Pure Strategies Copyright 2011 John Wiley & Sons, Inc.14-13 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 QUARTERSALES FORECAST (LB) Spring80,000 Summer50,000 Fall120,000 Winter150,000

14 Level Production Strategy Copyright 2011 John Wiley & Sons, Inc.14-14 Level production = 100,000 pounds (50,000 + 120,000 + 150,000 + 80,000) 4 Spring80,000100,00020,000 Summer50,000100,00070,000 Fall120,000100,00050,000 Winter150,000100,0000 400,000140,000 Cost of Level Production Strategy (400,000 X $2.00) + (140,00 X $.50) = $870,000 SALESPRODUCTION QUARTERFORECASTPLANINVENTORY

15 Chase Demand Strategy Copyright 2011 John Wiley & Sons, Inc.14-15 Spring80,00080,00080020 Summer50,00050,00050030 Fall120,000120,000120700 Winter150,000150,000150300 10050 SALESPRODUCTIONWORKERSWORKERSWORKERS QUARTERFORECASTPLANNEEDEDHIREDFIRED Cost of Chase Demand Strategy (400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

16 Level Production with Excel Copyright 2011 John Wiley & Sons, Inc.14-16 Inventory at end of summer Input by user =400,000/4 Cost of level production = inventory costs + production costs

17 Chase Demand with Excel Copyright 2011 John Wiley & Sons, Inc.14-17 Workforce requirements calculated by system No. of workers hired in fall Production input by user; production =demand Cost of chase demand = hiring + firing + production

18 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.14-18

19 General Linear Programming (LP) Model LP gives an optimal solution, but demand and costs must be linear Let W t = workforce size for period t P t =units produced in period t I t =units in inventory at the end of period t F t =number of workers fired for period t H t = number of workers hired for period t Copyright 2011 John Wiley & Sons, Inc.14-19

20 LP MODEL Copyright 2011 John Wiley & Sons, Inc.14-20 Minimize Z =$100 (H 1 + H 2 + H 3 + H 4 ) + $500 (F 1 + F 2 + F 3 + F 4 ) + $0.50 (I 1 + I 2 + I 3 + I 4 ) + $2 (P 1 + P 2 + P 3 + P 4 ) Subject to P 1 - I 1 = 80,000(1) DemandI 1 + P 2 - I 2 = 50,000(2) constraintsI 2 + P 3 - I 3 = 120,000(3) I 3 + P 4 - I 4 = 150,000(4) Production1000 W 1 = P 1 (5) constraints1000 W 2 = P 2 (6) 1000 W 3 = P 3 (7) 1000 W 4 = P 4 (8) 100 + H 1 - F 1 = W 1 (9) Work forceW 1 + H 2 - F 2 = W 2 (10) constraintsW 2 + H 3 - F 3 = W 3 (11) W 3 + H 4 - F 4 = W 4 (12)

21 Setting up the Spreadsheet Copyright 2011 John Wiley & Sons, Inc.14-21 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

22 Setting up the Spreadsheet Copyright 2011 John Wiley & Sons, Inc.14-22 Click these boxes

23 The LP Solution Copyright 2011 John Wiley & Sons, Inc.14-23 Optimal production plan Cost of optimal solution Solution is a mix of inventory, hiring and firing Extra report options

24 Level Production for Quantum Copyright 2011 John Wiley & Sons, Inc.14-24 Level = 12,000/12 = 1,000 Input by user Excel calculates these Cost of level production

25 Chase Demand for Quantum Copyright 2011 John Wiley & Sons, Inc.14-25 Input by user Excel calculates these Cost of chase demand No. workers hired in Feb.

26 LP Solution for Quantum Copyright 2011 John Wiley & Sons, Inc.14-26 Solver found this solution Constraint equations in these cells Optimal solution

27 Transportation Method Copyright 2011 John Wiley & Sons, Inc.14-27 19001000100500 215001200150500 316001300200500 430001300200500 Regular production cost $20/unit Overtime production cost $25/unit Subcontracting cost $28/unit Inventory holding cost$3/unit-period Beginning inventory300 units EXPECTEDREGULAROVERTIMESUBCONTRACT QUARTERDEMANDCAPACITYCAPACITYCAPACITY

28 Transportation Tableau Copyright 2011 John Wiley & Sons, Inc.14-28

29 Transportation Tableau Copyright 2011 John Wiley & Sons, Inc.14-29

30 Burruss Production Plan Copyright 2011 John Wiley & Sons, Inc.14-30 190010001000500 215001200150250600 3160013002005001000 4300013002005000 Total7000480065012502100 REGULARSUB-ENDING PERIODDEMANDPRODUCTIONOVERTIMECONTRACTINVENTORY

31 Copyright 2011 John Wiley & Sons, Inc. Period 2s ending inventory Regular production for period 1 Cost of solution Excel and Transportation Method 14-31

32 Other Quantitative Techniques Linear decision rule (LDR) Search decision rule (SDR) Management coefficients model Copyright 2011 John Wiley & Sons, Inc.14-32

33 Hierarchical Nature of Planning Copyright 2011 John Wiley & Sons, Inc.14-33 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

34 Disaggregation Copyright 2011 John Wiley & Sons, Inc.14-34 Breaking an aggregate plan into more detailed plans Create Master Production Schedule for Material Requirements Planning

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.14-35

36 Available-to-Promise (ATP) Quantity of items that can be promised to customer Difference between planned production and customer orders already received Copyright 2011 John Wiley & Sons, Inc.14-36 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) – (CO until the next period of planned production) Capable-to-promise quantity of items that can be produced and mad available at a later date

37 ATP Copyright 2011 John Wiley & Sons, Inc.14-37

38 ATP Copyright 2011 John Wiley & Sons, Inc.14-38

39 ATP Copyright 2011 John Wiley & Sons, Inc.14-39 ATP in April = (10+100) – 70 = 40 ATP in May = 100 – 110 = -10 ATP in June = 100 – 50 = 50 = 30 = 0 Take excess units from April

40 Copyright 2011 John Wiley & Sons, Inc.14-40 Rule Based ATP Product Request 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? Available-to- promise Allocate inventory Revise master schedule Trigger production Lose sale Yes No Yes No Yes No Yes No Yes No

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 Copyright 2011 John Wiley & Sons, Inc.14-41

42 Copyright 2011 John Wiley & Sons, Inc.14-42 Yield Management

43 Copyright 2011 John Wiley & Sons, Inc.14-43 Yield Management

44 Copyright 2011 John Wiley & Sons, Inc.14-44 NO-SHOWSPROBABILITYP(N < X) 0.15.00 1.25.15 2.30.40 3.30.70 Optimal probability of no-shows P(n < x) = =.517 C u C u + C o 75 75 + 70.517 Hotel should be overbooked by two rooms

45 Copyright 2011 John Wiley & Sons, Inc.14-45 Copyright 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permission Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.


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