Fundamentals of Production Planning and Control Chapter 3 Sales & Operations Planning

S&OP necessary to coordinate activities among departments Hiring new medical salespersons causes increased sales If using a chase strategy, low production can be used for training programs New product introductions need capital and production time to inventories

Strategies for meeting objectives of S&OP Internal Strategies External Strategies

Internal Strategies Hire/fire workers Temporary workers Overtime/slack time Subcontracting Inventory Backlog Do not meet demand Change production rates Hire and Fire – As the name implies, this strategy focus on altering the number of workers. Temporary workers – In some industries, this alternative is becoming increasingly popular. Overtime/slack time – The overtime alternative has been common in many companies for a number of years. Recently, companies in some environments are recognizing that it occasionally may be a wise move to continue to keep and pay workers, but to not expect them to produce product unless there is demand for that product. Subcontracting – Also called “outsourcing” in some environments, this option has also become popular in some companies in recent years. Basically, it means that the company will contract with a supplier or other contractor to produce some or all of a required output. Inventory – This is a very common option in manufacturing companies. Basically, the implication is that inventory will be produced during time of low demand and used to meet demand during times of high demand. Backlog – As the name implies, this means the company will take the customer order even if it does not have inventory or capacity to meet the immediate demand, but will promise delivery when capacity is available. Do not meet demand – Again, as the name implies, this options means the company will simply decline to take a customer order if they do not have the inventory or capacity to meet the order requirements. Change production rates – This option is rarely used, since it has a potentially negative impact on the workers. It implies the capability to slow down or speed up the rate of production. It can potentially have a negative impact on both morale and output quality.

External Strategies Pricing Promotions Advertising Reservations “Package” offerings Pricing – As the name implies, this involves changing the price of the product or service. Generally, lowering price will increase demand while raising prices will decrease demand. Promotions – Offering special incentives (“rebates”, for example) are occasionally used to increase demand. Advertising – A very common strategy used to increase customer awareness and increase demand. Reservations – Often used when capacity is scarce or very expensive (such as in some restaurants, in doctor’s offices, dentist’s offices, etc.), this approach smoothes demand, allowing both better customer service and more effective utilization of the scarce or expensive resource. “Package” offerings – A special type of promotion, the package offers tend to link popular items with less popular items to smooth the overall demand.

Tools for S&OP Optimization techniques Computer simulation Simulating with a spreadsheet Optimization techniques can be used to find an optimal combination of products to maximize profits It is difficult to model complex environments Takes a high skill level – use at Ohio Edison Computer simulation can be used to simulate the production environment in a computer simulation Requires simulation software and expertise Difficult to build an appropriate model. Simulating with a spreadsheet Difficult to build but can be reused

Objective of S&OP Plan for and coordinate resources, including type, quantity, and timing Operations Marketing/Sales Product Development Finance Information Technology Human Resources.

Other Names Aggregate Planning Production Planning Staffing Planning

Level of Aggregation Aggregate products that have similar processes Markets Product Family Aggregate to common unit of measure Units Dollars Common Raw Material Labor Hours Aggregate along family lines Common unit of measure that can be understood by top management and used by middle management Dollars Common raw material Labor hours Forecasts are more accurate in aggregate

Opposing Objectives Meet all customer demand on-time Minimize inventory investment Maintain steady workforce

Human resource needs Number of people Skill level Timing of need Hiring/firing Overtime Temporary workers Skill level Timing of need Training programs Use times of slow production for training

Sales and marketing activities Sales promotions Advertising Pricing New product introductions Expansion of markets Reservations for service industry

S&OP Inputs Output Strategic Plan Forecasts Business Plan Usually expressed in dollars May be part of the budget cycle Stated in dollars to guide the finances of the organization

3.1 Determine type, quantity, and timing of resources Inventory levels Cash flow Human Resource Needs Capital needs Production outputs Capacity Planning Sales and marketing activities

3.2 Design of S&OP Aggregate demand along family lines 23” bearings v. 60” bearings can be in hours or tons Forecasting is important in identifying the demand factors can impact this aggregation / forecast

Things to Decide Time horizon Time buckets Level of aggregation Time horizon – time needed to make acquire additional resources Bricks & Mortar could be several years Service industry may be weeks or months depending on skill level of employees needed Time buckets– aggregate as much as possible to the point where useful resource plans can be made. Aggregate along family lines Common unit of measure that can be understood by top management and used by middle management Dollars Common raw material Labor hours Forecasts are more accurate in aggregate Aggregation

3.3 Approaches to S&OP Primary focus is to establish decisions about… sales volumes service levels production rates inventory levels Make-to-stock view Make-to-stock - identify inventory levels Make-to-order - identify backlog level

3.4 Strategies for S&OP Develop the plan mathematical calculations can work are sometimes clumsy and expensive simulate the environment simulate the demand using computer models Find the best trade-off approach

Inventory levels... Level strategy Chase strategy Combination strategy

Level Strategy

Level Strategy

Chase Strategy

Example: Chase Strategy Use strategies to alter demand rates Use workforce changes to meet demand Carry little inventory (or none in a service industry) (must be used in a service industry)

Example: Chase Strategy ABC Company is considering its S&OP for the next four quarters. The CEO has decided that “inventory is bad” and therefore, as a company you should be carrying little to no inventory. The following costs have been identified. See Problem 1. Problem 1a

Example: Chase Strategy Number of employees 30 Production Rate 100 Units per month Subcontract Cost $30 additional cost per unit Hire Cost $3,000 per employee Fire cost $5,000

Combination Strategy

Time Horizon If considering capital needs could be several years Service could be months or years depending on the skill level involved

Time buckets Aggregate as much as possible to the point where useful resource plans can be made Could use weeks or months in short term plan Maybe years for longer term planning

Example: Chase Strategy Consider the option of hiring and firing employees to meet demand.

Example: Chase Strategy Consider subcontracting production to maintain a steady workforce.

Example: Level Strategy Maintain level workforce Carry inventory to cover periods of high demand

Example: Level Strategy ABC Company has decided that they would like to consider carrying inventory. They could hire a set of workers at the beginning of the year and then build inventory. See Problem 2. Problem 1b

Qualitative Issues Affect strategy will have on workforce Affect strategy will have on customers Forecast error

Affect strategy will have on workforce Layoffs impact moral Hiring new employees doesn’t payoff overnight Psychological affect of Temporaries

Affect strategy will have on customers Backorders Not accepting orders

Forecast error Must provide “wiggle room” in terms of capacity Buffer inventory, buffer capacity

Homework Problems 8, and 9 Use an Excel Spreadsheet – don’t do calculations by hand Don’t wait until the last minute – this takes some time ,