Sales and Operations Planning (Aggregate Planning) Chapter 10

Chapter Objectives Be able to: Distinguish among strategic planning, tactical planning, and detailed planning and control. Describe why sales and operations planning (S&OP) is important to an organization and its supply chain partners. Generate multiple alternative sales and operations plans for a firm. Describe the differences between top-down and bottom-up S&OP and discuss the strengths and weaknesses of level, chase, and mixed production strategies. Discuss the organizational issues that arise when firms decide to incorporate S&OP into their efforts. Examine how S&OP can be used to coordinate activities up and down the supply chain. Apply optimization modeling techniques to the S&OP process.

Sales and Operations Planning Sales and operations planning (S&OP) – A process to develop tactical plans by integrating marketing plans for new and existing products with the management of the supply chain. Brings together all the plans for the business into one integrated set of plans. Also called Aggregate planning. © 2010 APICS Dictionary

S&OP Planning Levels Strategic planning Tactical planning Detailed planning and control Figure 10.1

Goals of S&OP To indicate how the organization will use its tactical capacity resources to meet expected customer demand. To strike a balance between the various needs and constraints of the supply chain partners. To serve as a coordinating mechanism for the various supply chain partners. To express the business’s plans in terms that everyone can understand.

Major Approaches Top-down planning – An approach to S&OP in which a single, aggregated sales forecast drives the planning process. Bottom-up planning – An approach to S&OP that is used when the product/service mix is unstable and resource requirements vary greatly across the offerings.

Choosing an Approach Figure 10.2

Planning Values Planning values – Values that decision makers use to translate a sales forecast into resource requirements and to determine the feasibility and costs of alternative sales and operations plans.

Top-Down Planning Developing a top-down plan: Develop the aggregate sales forecast and planning values. Translate the sales forecast into resource requirements. Generate alternative production plans.

Top-Down Example – Pennington Cabinets 12 month sales forecast

Top-Down Example – Pennington Cabinets Table 10.3

Top-Down Example – Pennington Cabinets Forecast exceeds capacity in peak months Figure 10.3

Top-Down Example – Pennington Cabinets Translate the Sales Forecast into Resource Requirements For example: April 800 * 20 = 16,000 hrs 16,000/160 = 100 wkrs Table 10.4

Alternative Production Plans Level production plan – A S&OP plan in which production is held constant and inventory is used to absorb the differences between production and the sales forecast. Chase production plan – A S&OP plan in which production is changed in each time period to match the sales forecast. Mixed production plan - A S&OP plan that varies both production and inventory levels in an effort to develop the most effective plan.

Level Production Plan Table 10.5

Level Production Plan Actual Workers Regular Production Hold workforce constant at 105 (average workforce over 12-month planning horizon) Regular Production 105 x (160 hours per month/20 hours per set) = 840 sets per month or 10,080 sets per year

Level Production Plan Hiring and Layoffs Hire 5 workers in January to bring the workforce up to 105 from the initial level of 100. Layoff 5 workers at the end to bring the workforce back to its starting level. Ensures equal comparison of alternative plans under the same beginning and ending conditions.

Level Production Plan Inventory Levels

Level Production Plan Cost of the Plan

Chase Production Plan Actual workforce production and overtime production vary so that total production essentially matches sales for each month. Inventory never builds up because total production “chases” sales. There are more hires and layoffs and overtime production costs.

Chase Production Plan Table 10.6

Chase Production Plan Cost of the plan

Mixed Production Plan By varying the production and inventory levels, the best plan can be developed. The number of potential mixed plans is essentially limitless. For example, overtime may be limited to 12 cabinet sets per month in October and November.

Mixed Production Plan Table 10.7

Mixed Production Plan Cost of the Plan

Bottom-Up Planning Steps are similar to top-down planning. Main difference is that the resource requirements for each product or service must be evaluated individually and then added up across all products or services to get a picture of overall requirements.

Bottom-Up Example Although machine hour requirements are similar, labor requirements differ greatly. Table 10.8

Bottom-Up Example Table 10.9

Bottom-Up Example The difference in labor requirements becomes important when the product mix changes. Even though the aggregate forecast across both product lines is 700 units each month, the product mix changes, as can be seen in the labor hours needed each month.

Bottom-Up Example Load Profile – A display of future capacity requirements based on released and/or planned orders over a given span of time. © 2010 APICS Dictionary Figure 10.4

Net cash flow = cash inflows – cash outflows Cash Flow Analysis Net cash flow – The net flow of dollars into or out of a business over some time period. Net cash flow = cash inflows – cash outflows

Cash Flow Analysis Different sales scenarios can have a significant effect on cash flow as shown above. Figure 10.5

Choosing between Plans What impact will the plan have on key suppliers and transportation providers? What are the cash flows like? Do the supply chain partners and the firm itself have the space needed to hold any planned inventories? Does the plan contain significant changes in the workforce? How flexible is the plan?

Fine-Tuning the Plan Figure 10.6

Rolling Planning Horizons Rolling planning horizon – A planning approach in which an organization updates its sales and operations plan regularly, such as on a monthly or quarterly basis. Figure 10.7

Implementing S&OP Developing the foundation Build managerial support and infrastructure to make it a success. Integrating and streamlining the process Update the plan and use the results for decision-making. Gaining a competitive advantage Make S&OP a core competency.

Service Considerations Making sales match capacity Making capacity (typically the workforce) match sales

Making Sales Match Capacity Yield management – An approach that services commonly use with highly perishable “products” in which prices are regularly adjusted to maximize total profit. Total profit = (average profit per service unit sold) * (# of service units sold)

Making Capacity Match Sales Tiered workforce – A strategy used to vary workforce levels in which additional full-time or part-time employees are hired during peak demand periods, while a smaller permanent staff is maintained year-round. Offloading – A strategy for reducing and smoothing out workforce requirements that involves having customers perform part of the work themselves.

S&OP Optimization Modeling Optimization model – A class of mathematical models used when the user seeks to optimize some objective function subject to some constraints. Understand the pattern of resource decisions – labor, inventory, machine time, etc. - that will result in the lowest total cost while still meeting the sales forecast.

Sales and Operations Planning Case Study Covolo Diving Gear, Part 2

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