1. McGraw-Hill/Irwin Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved Chapter 16 Sales and Operations Planning

2. 16-2 Learning Objectives 1.Understand what sales and operations planning is and how it coordinates manufacturing, logistics, service, and marketing plans. 2.Construct aggregate plans that employ different strategies for meeting demand. 3.Describe what yield management is and why it is an important strategy for leveling demand.

3. 16-3 What is Sales and Operations Planning? Sales and operations planning is a process that helps firms provide better customer service, lower inventory, shorten customer lead times, stabilize production rates, and give top management a handle on the business The process consists of a series of meetings, finishing with a high-level meeting where key intermediate-term decisions are made This must occur at an aggregate level and also at the detailed individual product level –By aggregate we mean at the level of major groups of products LO 1

4. 16-4 Types of Planning Long-range planning: planning focusing on a horizon greater than one year –Generally is done annually Intermediate-range planning: planning focusing on a period from 3 to 18 months –Time increments that are weekly, monthly, or quarterly Short-range planning: planning covering a period from one day to six months –Daily or weekly time increments LO 1

5. 16-5 The Aggregate Operations Plan Specify the optimal combination of –Production rate (units completed per unit of time) –Workforce level (number of workers) –Inventory on hand (inventory carried from previous period) Product group or broad category (aggregation) This planning is done over an intermediate- range planning period of 3 to18 months LO 1

6. 16-6 Production Planning Strategies 1.Chase strategy Match the production rate by hiring and laying off employees Must have a pool of easily trained applicants to draw on 2.Stable workforce—variable work hours Vary the number of hours worked through flexible work schedules or overtime 3.Level strategy Demand changes are absorbed by fluctuating inventory levels, order backlogs, and lost sales LO 1

7. 16-7 Production Planning Strategies Continued Pure strategy: when just one of these approaches is used to absorb demand fluctuations Mixed strategy: when two or more of the approaches are used In addition to these strategies, managers also may choose to subcontract some portion of production –Similar to the chase strategy, but hiring and laying off are translated into subcontracting LO 1

8. 16-8 Relevant Costs 1.Basic production costs The fixed and variable costs incurred in producing a given product type in a given time period 2.Costs associated with changes in the production rate Hiring, training, and laying off personnel 3.Inventory holding costs 4.Backorder costs LO 1

9. 16-9 Level Scheduling A level schedule holds production constant over a period of time It is something of a combination of the strategies we have mentioned here For each period, it keeps the workforce constant and inventory low, and depends on demand to pull products through LO 1

10. 16-10 Advantages of Level Scheduling 1.The entire system can be planned to minimize inventory and work-in-process 2.Product modifications are up-to-date because of the low amount of work-in- process 3.There is a smooth flow throughout the production system. 4.Purchased items from vendors can be delivered when needed, often directly to the production line LO 1

11. 16-11 Requirements to Use Level Scheduling 1.Production should be repetitive (assembly- line format) 2.The system must contain excess capacity 3.Output of the system must be fixed for a period of time 4.There must be a smooth relationship among purchasing, marketing, and production 5.The cost of carrying inventory must be high 6.Equipment costs must be low 7.The workforce must be multi-skilled LO 1

12. 16-12 Yield Management Yield management: the process of allocating the right type of capacity to the right type of customer at the right price and time to maximize revenue or yield –Can be a powerful approach to making demand more predictable Has existed as long as there has been limited capacity for serving customers Its widespread scientific application began with American Airlines’ computerized reservation system (SABRE) LO 3

13. 16-13 Yield Management Most Effective When… 1.Demand can be segmented by customer 2.Fixed costs are high and variable costs are low 3.Inventory is perishable 4.Product can be sold in advance 5.Demand is highly variable LO 3

14. 16-14 Yield Management at a Hotel Hotels offer one set of rates during the week and another set during the weekend The variable costs associated with a room are low in comparison to the cost of adding rooms to the property Available rooms cannot be transferred from night to night Blocks of rooms can be sold to conventions or tours Potential guests may cut short their stay or not show up at all LO 3

15. 16-15 Operating Yield Management Systems Pricing structures must appear logical to the customer and justify the different prices Must handle variability in arrival or starting times, duration, and time between customers Must be able to handle the service process Must train employees to work in an environment where overbooking and price changes are standard occurrences that directly impact the customer The essence of yield management is the ability to manage demand LO 3