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

2. 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

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

4. 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.

5. 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.

6. 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

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

8. Other Names
Aggregate Planning
Production Planning
Staffing Planning

9. 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

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

11. 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

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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. Inventory levels...
Level strategy
Chase strategy
Combination strategy

20. Level Strategy

21. Level Strategy

22. Chase Strategy

23. 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)

24. 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

25. 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

26. Combination Strategy

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

28. 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

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

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

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

32. 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

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

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

35. Affect strategy will have on customers
Backorders
Not accepting orders

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

37. 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 ,