19–1

19–2 Chapter Nineteen Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

19–3 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. LO19–1: Understand what sales and operations planning is and how it coordinates manufacturing, logistics, service, and marketing plans. LO19–2: Construct and evaluate aggregate plans that employ different strategies for meeting demand. LO19–3: Explain yield management and why it is an important strategy.

19–4 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. 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. – Aggregate means at the level of major groups of products.

19–5 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.

19–6 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Sales and operations planning was coined by companies to refer to aggregate planning. The new terminology is meant to capture the importance of cross-functional work. Aggregation on the supply side is done by product families, and on the demand side it is done by groups of customers.

19–7 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Planning focusing on a horizon greater than 1 year, usually performed annually Long-range planning Planning focusing on a period from 3 to 18 months, time increments are weekly, monthly, or quarterly Intermediate-range planning Planning covering a period from 1 day to 6 months with daily or weekly time increments Short-range planning

19–8 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Specifies the optimal combination of – Production rate (units completed per unit of time) – Workforce level (number of workers needed in a period) – Inventory on hand (inventory carried from previous period) Product group or broad category (aggregation) Planning done over an intermediate-range planning period of 3 to 18 months

19–9 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. In general, the external environment is outside the production planner’s direct control. – In some firms, demand can be managed. Complementary products work for firms facing cyclical demand fluctuations. With services, cycles are more often measured in hours than months.

19–10 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.

19–11 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Production planning strategies are the plans for meeting demand. Trade offs involved include workers employed, work hours, inventory and shortages. A pure strategy uses just one of these approaches, a mixed strategy uses two or more. Chase strategy Match the production rate by hiring and laying off employees Must have a pool of easily trained applicants to draw on Stable workforce — variable work hours Vary the number of hours worked through flexible work schedules or overtime Level strategy Demand changes are absorbed by fluctuating inventory levels, order backlogs, and lost sales Sub- contract ing Hiring and laying off are translated into subcontracting

19–12 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Basic production costs Costs associated with changes in the production rate Inventory holding costs Backorder costs Cost Types

19–13 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Involves costing out various production planning alternatives and selecting the one that is best Elaborate spreadsheets developed to facilitate the decision process Cut-and-try approach Use of mathematical analysis to determine an optimal plan Linear programming What-if analysis using simulated demand to evaluate effectiveness of alternative plans Simulation

19–14 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Because inventory holding cost is in $/unit, material cost is not relevant

19–15 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. January ending inventory becomes February beginning inventory. Excel: Aggregate Planning For the Excel template visit

19–16 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Produce to exact monthly production requirements by varying workforce size Produce to meet expected average demand by maintaining a constant workforce Produce to meet the minimum expected demand using a constant workforce and subcontract to meet additional requirements Produce to meet expected demand for all but the first two months using a constant workforce and use overtime to meet additional output requirements

19–17 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Production exactly matches requirements. Workers are added or reduced as needed.

19–18 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Number of workers is set to meet average demand over the time horizon. This then determines production rate and inventory/backorders.

19–19 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Workforce sized to meet minimum demand (April). Demand over minimum is met with subcontracting.

19–20 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Demand in the first two months is high, so overtime is used to compensate. Then, inventory can be built for high demand in June.

19–21 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.

19–22 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.

19–23 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. A level schedule holds production constant over a period of time. It is something of a combination of the strategies mentioned here. For each period, it keeps the workforce constant and inventory low, and depends on demand to pull products through.

19–24 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. – The entire system can be planned to minimize inventory and work-in-process. – Product modifications are up-to- date because of the low amount of work-in-process. – There is a smooth flow throughout the production system. – Purchased items from vendors can be delivered when needed, often directly to the production line. – Production should be repetitive (assembly-line format). – The system must contain excess capacity. – Output of the system must be fixed for a period of time. – There must be a smooth relationship among purchasing, marketing, and production. – The cost of carrying inventory must be high. – Equipment costs must be low. – The workforce must be multi- skilled. Advantages Requirements

19–25 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. 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. Widespread scientific application began with American Airlines’ computerized reservation system (SABRE).

19–26 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Demand can be segmented by customer Fixed costs are high and variable costs are low Inventory is perishable Product can be sold in advance Demand is highly variable

19–27 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. 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.

19–28 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Yield management is most common when price is variable and duration is predictable.

19–29 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. 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.