1. i2 U Intelligent Supply Chain Management Course Module Nine: Sales & Operations Planning

2. © 2001 i2 Technologies Inc CONFIDENTIAL 2 Supply Chain Management Key Processes Sales & Operations Planning Demand Planning Inventory Planning Supplier Scheduling Production Scheduling Inventory Deployment Transportation Scheduling Demand Fulfillment Supply Chain Execution Monitoring Strategic Supply Chain Planning Master Supply Planning Procurement ProductionDistribution Transportation Impact of decisions _ + Number of decisions + _ Specificities by industries Length of Planning horizon Fully Integrated top-down directions Fully Integrated bottom-up feed back Reaction to changing supply conditions

3. © 2001 i2 Technologies Inc CONFIDENTIAL 3 After Completing This Module, You are Expected to: u Identify the types of decisions being made during the S&OP process u Understand the interactions between the S&OP process and the Strategic Planning process on one side, and the tactical planning processes on the other side u Explain the negative consequences of not having a consistent S&OP process in place u Understand how linear programming tools can allow companies to reach maximum financial optimization u Explain vertical planning integration vs. horizontal planning integration u Identify S&OP key enablers and their resulting business value u Identify S&OP excellence criteria u Define a typical tactical planning / S&OP workflow

4. © 2001 i2 Technologies Inc CONFIDENTIAL 4 Sales & Operations Planning Process Positioning hours days weeks months year + buy make move sell store operational tacticalstrategic scheduling

5. © 2001 i2 Technologies Inc CONFIDENTIAL 5 Sales & Operations Planning Process Workflow (Typically Monthly) Validate Master Plans changes, publish and disaggregate to lower levels w Company game plan w Monthly updated budget Review Master Supply Plans u Identify supply constraints and opportunities u Review new product introduction schedule u Updated supply plans and mismatches with demand Review Master Demand Plans u Top down / bottom-up forecasting u Consensus forecast (sales, marketing, finance) Review past performance of demand and supply plans + Supply Chain KPIs u Identify root causes u Review business assumptions

6. © 2001 i2 Technologies Inc CONFIDENTIAL 6 Typical Decisions Taken During a Sales & Operations Planning Process u Marketing actions to boost lagging demand (compared to business plan) u Increases in capacity to satisfy increasing demand (internal, subcontract) u Decisions on new product introduction (anticipation or postponement) u Redefinition of inventory policies u Sourcing decisions u Financial optimization (selection of the most profitable plan among a population of possible solutions)

7. © 2001 i2 Technologies Inc CONFIDENTIAL 7 Sales and Operations Planning Process: Functions Involved ä Capacity constraints ä Current plan ä Use of inventory Manufacturing ä Weekly actual sales ä Upcoming promotions Sales ä Valid demand forecasts ä Upcoming promotions Marketing ä Price information ä Availability of inputs Sourcing & Procurement Sourcing & Procurement ä Cash flow analysis ä Profitability measures ä Adherence to budgets Finance 24Hours24Hours Agreement on Updated Master Schedule & Update to Master Production Schedule Agreement on Updated Master Schedule & Update to Master Production Schedule

8. © 2001 i2 Technologies Inc CONFIDENTIAL 8 BUDGET MARKETING R&D PRODUCTION M+3 PURCHASING FINANCE M+6M+9M+12 What You Get if You Don’t Have an Effective S&OP Process in Place

9. © 2001 i2 Technologies Inc CONFIDENTIAL 9 Monthly S&OP processes M+1 MARKETING R&D PRODUCTION PURCHASING FINANCE M+2M+3M+4 M Peace Restored With an Efficient S&OP Process

10. © 2001 i2 Technologies Inc CONFIDENTIAL 10 Sales & Operations Planning Financial Optimization Linear Programming Through the use of Linear Programming based solutions

11. © 2001 i2 Technologies Inc CONFIDENTIAL 11 Linear Programming Defined u Mathematical models for solving linear optimization problems through minimization or maximization of a linear function subject to linear constraints – APICS Dictionary u An optimization technique that identifies the optimal trade off between: – Potential sales revenues – Inventory carrying costs – Production and logistics costs

12. © 2001 i2 Technologies Inc CONFIDENTIAL 12 Which source is more cost effective? Linear Programming Typical Usage SUPPLIERS PLANTS DCs CUSTOMERS Considering… u Transportation costs u Inventory carrying costs u Standard Production costs u Overtime costs

13. © 2001 i2 Technologies Inc CONFIDENTIAL 13 What is the best production Curve in a seasonal business? Linear Programming Typical Usage Time DemandDemand OvertimeInventory build up

14. © 2001 i2 Technologies Inc CONFIDENTIAL 14 Linear Programming Typical Usage Max total capacity What is the most profitable product mix? time

15. © 2001 i2 Technologies Inc CONFIDENTIAL 15 The Problem With Linear Programming u Linear Programming reduces the Supply Chain financial optimization to a mathematical equation u Supply Chains rarely are amenable to being treated as a mathematical equation! u Pure Linear Programming doesn’t work for Supply Chain Management. It must be complemented by other algorithms to fit specific business conditions

16. © 2001 i2 Technologies Inc CONFIDENTIAL 16 Required Capabilities in an LP-Based S&OP Solution u Ability to respect business preferences even if they are not cost optimal u Ability to evenly deploy limited supply through inventory bands u Ability to communicate seamlessly with an interactive planning environment

17. © 2001 i2 Technologies Inc CONFIDENTIAL 17 Bounding Financial Optimization Through Hierarchical Optimization u Optimize objectives in a user-customizable sequence that reflects business preferences like : – E.g. 1) maximize customer service 2) minimize non-preferred lanes 3) ship on time but as late as possible 4) minimize cost u Another positive consequence of hierarchical optimization is the limitation of planning nervousness

18. © 2001 i2 Technologies Inc CONFIDENTIAL 18 Hierarchical Optimization: Restriction of the Solution Space 1 2 3 4 Traditional Linear Programming => Reduction of the magnitude of the changes generated

19. © 2001 i2 Technologies Inc CONFIDENTIAL LP Based Global Optimizers Enable Fast Financial Analysis of Alternative Plans u How much money do we forego by setting a minimum volume production requirement for Product A? (Is this strategic long term contract worthwhile?) u How much additional cash flow could we generate with more capacity at this critical resource? u How much cash flow would we generate by increasing demand for Product B?

20. © 2001 i2 Technologies Inc CONFIDENTIAL 20 Financial analysis provided at the end of the solve

21. © 2001 i2 Technologies Inc CONFIDENTIAL 21 Product mix decisions made by the solver considering both margin / unit and run rate at constrained resources

22. © 2001 i2 Technologies Inc CONFIDENTIAL 22 How to Use LP-Based Global Solvers? u Identify adequate periodicity to run the solvers (e.g., monthly, weekly...) u Solve minor de-synchronizations with local problem solving capabilities (manual re-planning, heuristics) u Keep the original plan generated by the solver visible as a soft constraint, and set a tolerance for deviation u Execute global solver only if a problem is flagged on this soft constraint

23. © 2001 i2 Technologies Inc CONFIDENTIAL 23 Optimized Sales & Operations Planning Process Key Enablers and Related Benefits Linear Programming optimization capabilities Hierarchical optimization and inventory bands capabilities Global solvers embedded into an interactive planning environment Unleashing the benefits of LP logic for global Supply Chain optimization   Total Supply Chain costs (best possible financial trade off between inventory, transportation, and production costs)

24. © 2001 i2 Technologies Inc CONFIDENTIAL 24 Major Roadblocks to Remove to Enable a Fully Optimized S&OP Process u Lack of senior executive involvement and leadership u Lack of integration between the different layers of planning

25. © 2001 i2 Technologies Inc CONFIDENTIAL 25 One of S&OP Toughest Challenge: Vertical Planning Integration of Various Levels of Data Granularity Strategic Tactical Operational Horizontal Communication Vertical Communication

26. © 2001 i2 Technologies Inc CONFIDENTIAL 26 Vertical Integration is Generally a Huge Problem Rigid……Hard Coded……Pre-defined……Inflexible……Limited Capability Modeling Strategic Planning Models Tactical Planning Models Operational Planning Models Multiple planning engines representing different aggregation levels and probably different product lines One top level planning engine used for corporate level capacity planning Legacy Systems Hard Coded Data Adapters Other Sources X X Multiple planning engines representing different plants and probably different product lines

27. © 2001 i2 Technologies Inc CONFIDENTIAL 27 Integration of Strategic, Tactical and Operational Planning Variable time buckets and levels of aggregation must allow near-term detailed execution plans to mesh seamlessly with longer term master plans Yesterday's Plan Today's Plan yesterday today near-term long-term

28. © 2001 i2 Technologies Inc CONFIDENTIAL 28 Sales and Operations Planning Integrated Approach u Use of a single, consistent data repository that describes the relationship between levels of aggregation. Typical process: – Starts at the 30,000 feet view in terms of financial plans in dollar terms market segment/product families/product group level major manufacturing resource group level – then goes down to the dirty details to schedules by the hour by the machine by the items in number of fractional units to distribution plans by the truck by the load by the standard packs of items – then goes back to the 30,000 feet view to measure the impact of operational issues on overall business plans

29. © 2001 i2 Technologies Inc CONFIDENTIAL 29 Sales & Operations Planning Excellence Criteria (1/3) u There is a Sales & Operations Planning process in place that maintains a valid, current operating plan in support of customer requirements and the business plan. This process includes a formal meeting each month run by the general manager and covers a planning horizon adequate to plan resources effectively. u There is a concise written S&OP policy that covers the purpose, process and participants u Sales & Operations Planning is truly a process and not just a meeting. Preliminary activities include: Sales plan update by Sales & Marketing, new product development update by R&D, new production plan by Manufacturing, etc… u The process includes both a review of past performance and future plans for sales, production, inventory, backlog, shipments, and new product activity. u Key performance measures (delivery performance, forecast accuracy, velocity, inventory turns, schedule adherence, capacity utilization,...) are reviewed during the process. Agreed targets are aggressive but realistic. Any significant deviation triggers appropriate root cause analysis and corrective actions.

30. © 2001 i2 Technologies Inc CONFIDENTIAL 30 Sales & Operations Planning Excellence Criteria (2/3) u Inventory and/or delivery lead time (backlog) strategies are reviewed each month as part of the process u During the S&OP process, the Master Plans (Sales, Inventory and Supply) are systematically compared with the company’s business plans. In case of differences, the plans are realigned. u Simulation is actively used to convert operating data into projected financial results quickly for the purpose of decision making and contingency planning. u Financial optimization (based on Linear Programming algorithms) is used to make decisions such as sourcing decisions, product mix decisions, or production rate decisions. The Linear Programming logic is coupled with adequate heuristics that ensure compliance with business rules that are not necessarily aligned with pure cost minimization. u Any information regarding Supply Chain activities used in financial reporting is directly obtained from the Supply Chain Planning system. This should be the case, for example, for the projected inventory balance (finished goods, WIP, purchased items) and for the total cost of future purchases by period.

31. © 2001 i2 Technologies Inc CONFIDENTIAL 31 Sales & Operations Planning Excellence Criteria (3/3) u Projected production costs integrate the impact of planned overtime, additional shifts, outsourcing, …. u When the annual budget is created, the future sales registered in the budget equals the consensus forecast used to drive all Supply Chain operations. u Inventory analysis (month on hand coverage by item) is based on future demand or requirements. The provision for slow moving inventories derives directly from these analysis u A cash flow plan is generated at least monthly using data coming from the planning system, offset by the payment conditions. u Product costing uses bills of materials compatible with the ones used in the planning process. Where applicable, a single bill serves all relevant purposes.

32. © 2001 i2 Technologies Inc CONFIDENTIAL 32 Typical S&OP / Tactical Planning Workflow Negotiate additional capacity Analyze % completed vs planned Check problem window Negotiate additional materials Run LP solver to turn the above feasible plan in an optimal plan Generate allocations by sales channels for products with limited supply Generate new sales forecast Recalculate safety stocks Propagate new sales forecast in authority domain

33. © 2001 i2 Technologies Inc CONFIDENTIAL 33