1. Copyright 2009 John Wiley & Sons, Inc. Beni Asllani University of Tennessee at Chattanooga Sales and Operations Planning Operations Management - 6 th Edition Chapter 14 Roberta Russell & Bernard W. Taylor, III

2. Copyright 2009 John Wiley & Sons, Inc.14-2 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

3. Copyright 2009 John Wiley & Sons, Inc.14-3 Sales and Operations Planning   Determines the resource capacity needed 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 game plan for allocating resources Develop an economic strategy for meeting demand

4. Copyright 2009 John Wiley & Sons, Inc.14-4 Sales and Operations Planning Process

5. Copyright 2009 John Wiley & Sons, Inc.14-5 Meeting Demand Strategies  Adjusting capacity Resources necessary to meet demand are acquired and maintained over the time horizon of the plan Resources necessary 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 Minor variations in demand are handled with overtime or under-time  Managing demand Proactive demand management Proactive demand management

6. Copyright 2009 John Wiley & Sons, Inc.14-6 Strategies for Adjusting Capacity  Level production Producing at a constant rate and using inventory to absorb fluctuations in demand Producing at a constant rate and using inventory to absorb fluctuations in demand  Chase demand Hiring and firing workers to match demand Hiring and firing workers to match demand  Peak demand Maintaining resources for high-demand levels Maintaining resources for high-demand levels  Overtime and under-time Increasing or decreasing working hours Increasing or decreasing working hours  Subcontracting Let outside companies complete the work Let outside companies complete the work  Part-time workers Hiring part time workers to complete the work Hiring part time workers to complete the work  Backordering Providing the service or product at a later time period Providing the service or product at a later time period

7. Copyright 2009 John Wiley & Sons, Inc.14-7 Level Production Demand Units Time Production

8. Copyright 2009 John Wiley & Sons, Inc.14-8 Chase Demand Demand Units Time Production

9. Copyright 2009 John Wiley & Sons, Inc.14-9 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

10. Copyright 2009 John Wiley & Sons, Inc.14-10 Quantitative Techniques For AP   Pure Strategies   Mixed Strategies   Linear Programming   Transportation Method   Other Quantitative Techniques

11. Copyright 2009 John Wiley & Sons, Inc.14-11 Pure Strategies Hiring cost= $100 per worker Firing cost= $500 per worker Inventory carrying cost= $0.50 pound per quarter Inventory carrying cost= $0.50 pound per quarter Regular production cost per pound= $2.00 Regular production cost per pound= $2.00 Production per employee= 1,000 pounds per quarter Production per employee= 1,000 pounds per quarter Beginning work force= 100 workers Beginning work force= 100 workers QUARTERSALES FORECAST (LB) Spring80,000 Summer50,000 Fall120,000 Winter150,000 Example:

12. Copyright 2009 John Wiley & Sons, Inc.14-12 Level Production Strategy 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

13. Copyright 2009 John Wiley & Sons, Inc.14-13 Chase Demand Strategy Spring80,00080,00080020 Summer50,00050,00050030 Fall120,000120,000120700 Winter150,000150,000150300 10050 SALESPRODUCTIONWORKERSWORKERSWORKERS SALESPRODUCTIONWORKERSWORKERSWORKERS QUARTERFORECASTPLANNEEDEDHIREDFIRED Cost of Chase Demand Strategy (400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

14. Copyright 2009 John Wiley & Sons, Inc.14-14 Level Production with Excel

15. Copyright 2009 John Wiley & Sons, Inc.14-15 Chase Demand with Excel

16. Copyright 2009 John Wiley & Sons, Inc.14-16 Mixed Strategy   Combination of Level Production and Chase Demand strategies   Examples of management policies no more than x% of the workforce can be laid off in one quarter inventory levels cannot exceed x dollars   Many industries may simply shut down manufacturing during the low demand season and schedule employee vacations during that time

17. Copyright 2009 John Wiley & Sons, Inc.14-17 Mixed Strategies with Excel

18. Copyright 2009 John Wiley & Sons, Inc.14-18 Mixed Strategies with Excel (cont.)

19. Copyright 2009 John Wiley & Sons, Inc.14-19 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

20. Copyright 2009 John Wiley & Sons, Inc.14-20 LP MODEL 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. Copyright 2009 John Wiley & Sons, Inc.14-21 Setting up the Spreadsheet

22. Copyright 2009 John Wiley & Sons, Inc.14-22 The LP Solution

23. Copyright 2009 John Wiley & Sons, Inc.14-23 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 Hierarchical Nature of Planning  Disaggregation: process of breaking an aggregate plan into more detailed plans

24. Copyright 2009 John Wiley & Sons, Inc.14-24 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 involves selecting products to be jointly managed, creating a single forecast of customer demand, and synchronizing production across supply chain

25. Copyright 2009 John Wiley & Sons, Inc.14-25 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

26. Copyright 2009 John Wiley & Sons, Inc.14-26 Aggregate Planning for Services 1.Most services cannot be inventoried 2.Demand for services is difficult to predict 3.Capacity is also difficult to predict 4.Service capacity must be provided at the appropriate place and time 5.Labor is usually the most constraining resource for services

27. Copyright 2009 John Wiley & Sons, Inc.14-27 Yield Management

28. Copyright 2009 John Wiley & Sons, Inc.14-28 Yield Management (cont.)

29. Copyright 2009 John Wiley & Sons, Inc.14-29 Yield Management: Example 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

30. Copyright 2009 John Wiley & Sons, Inc.14-30 Example: Perishable Inventory  Selling Price: $12.95/unitC u =  Cost: $5/unitC o =  Salvage Value: $0.50/unit Demand ProbabilityP(n<X) 75,0000.15 75,0000.15 80,0000.25 80,0000.25 85,0000.30 85,0000.30 90,0000.20 90,0000.20 95,0000.10 95,0000.10