Sales and Operations Planning (Aggregate Planning) ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Sales and Operations Planning Strategic and tactical considerations Top-down planning Bottom-up planning Optimization techniques ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Back to Pennington Cabinet Strategic Capacity Level: Five machines, nine assembly teams Company produces make-to-stock cabinets for sale at Lowe’s, etc. Effective capacity: 5,000 jobs per year OR about 420 jobs per month ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Pennington (continued) Raw Demand for next 6 months: January 150 jobs February 250 March 350 April 450 May 600 June 650 What are our options . . . ? Class discussion before proceeding, what would the students do? ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Pennington (again) . . . Raw Demand Need 450 600 Monthly capacity = 420 300 April ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Sales and Operations Planning (SOP) Purpose: Select capacity options over the intermediate time horizon Capacity options: Workforces Shifts Overtime Subcontracting Inventories etc. ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Short-Range Plan (days, weeks out) Long-Range Plan (years out) Time Horizon View . . . Short-Range Plan (days, weeks out) SOP (months out) Long-Range Plan (years out) Capacity levels considered “frozen” in the short-term Changes in adjustable capacity possible fixed ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

SOP continued (2 - 18 months out) “Big Picture” approach to planning Outside of time frame  strategic planning Inside of time frame  tactical planning “Big Picture” approach to planning Families or groups (aggregation) of: Products Resources Technologies or skills Provide “rough” estimates ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Position in the Overall Business Planning Cycle Decisions Time Frame Product and process “Bricks and Mortar” 18+ months Employment and overall inventory levels What demand to meet? 2 to 18 months Specific products and times Scheduling of people and equipment Less than 2 months Long-Range Plans SOP Short-Range ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Inputs to the Process SOPs Demand Management Strategic Capacity Levels Forecasts of customer demand Need for spares, etc. Pricing Strategic Capacity Levels Existing buildings Processes SOPs External Capacities Suppliers Subcontractors ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Advantages of SOP Negotiated process Functional coordination “Agreed” demand Functional coordination Budgets and cash flow analyses Reduces operations task to “meeting the plan” ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

SOP Approaches Top-Down Bottom-Up Similar products OR stable mix Standards available for planning time, cost requirements from history and/or planning documentation Can “Average” product Bottom-Up Different products AND unstable mix Requires forecasts and production data for individual products Can be extremely data- intensive ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Top-Down Planning Develop the aggregate sales forecast and planning values. Translate the sales forecast into resource requirements. Personnel, equipment, materials Generate alternative production plans. Chase, level, mixed Select the best of the plans. Lowest cost, best fit to capability ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Top-Down Example I (Product Data) % of Total Labor/Unit A100 10% 40 hours B200 50% 20 hours C300 20% 15 hours D400 5% 10 hours E500 F600 ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Top-Down Example II (“Average” Products) % of Total Labor/Unit A100 10% 40 hours B200 50% 20 hours C300 20% 15 hours D400 5% 10 hours E500 F600 10%(40) + 60%(20) + 20%(15) + 10%(10) = 20 hours ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Top-Down Example III (Conditions or Constraints) Agreed upon demand to be met for upcoming 12 month period Can vary workforce and inventory levels No backordering “Average” unit requires 20 worker hours Each worker works 160 hours per month Class discussion about where these conditions or constraints can come from: Top management, company culture, general policy, desired service level for customers, etc. ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Top-Down Example IV (Demand Forecast for 12 months) March 1592 September 2504 April 1400 October May 1200 November 3000 June 1000 December July 1504 January August 1992 February Class discussion about where these conditions or constraints can come from: Top management, company culture, general policy, desired service level for customers, etc. ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Top-Down Example V (Other tidbits of data …) Hiring cost = $300 Firing cost = $200 Inventory holding cost = $6 / unit / month Start and end with 227 workers (goal) Start and end with about 1000 units in inventory (goal) ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Detail of First Six Months from Level Strategy Demand Demand in Employee Hours Employees to Meet Production Plan Actual Employees Actual Production Firings Hirings Ending Inventory March 1592 31840 199 252 2016 25 1424 April 1400 28000 175 2040 May 1200 24000 150 2856 June 1000 20000 125 3872 July 1504 30080 188 4384 August 1992 39840 249 4408 Taken in part from Note: We develop a level strategy by setting “Actual Employees” equal to the average required for the 12 month planning period ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Detail of First Six Months from Chase Strategy Demand Demand in Employee Hours Employees to Meet Production Plan Actual Employees Actual Production Firings Hirings Ending Inventory March 1592 31840 199 28 1000 April 1400 28000 175 24 May 1200 24000 150 25 June 20000 125 July 1504 30080 188 63 August 1992 39840 249 61 Taken in part from the Excel file Ch12-SOP_Chase.xls using Note: We develop a chase strategy by setting “Actual Employees” equal to the number needed in each period ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Another View ... ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Cost Details from the Spreadsheets ... Level strategy Chase strategy ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Top-Down Example (Other Issues …) Are complete costs shown? Expand out for budget and cash flow analysis “Input” (suppliers) and “output” (logistics and warehousing) considerations Lead time, materials availability, storage space? Variations in actual production Scrap, rework, equipment breakdowns Input and output considerations such as lead-time, availability, storage space, etc. ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Top-Down Example (Expand the options …) We can now subcontract production Maximum subcontract of 1400 units per month Cost is $5 more per unit than internal production cost Will this option: 1) increase costs? 2) decrease costs? 3) have no effect on costs? Plan will decrease costs by holding employment steady and using subcontracting last three months (536, 688, and 1176), finishing with 1000 units in inventory – total cost is $136,704. ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Second Approach: “Bottom-Up” SOP Products with very different requirements Requires forecasts and production data for individual products Can be extremely data-intensive ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield