Ch 19 - Sales and Operations Planning

Question 1

A story…

Answer 1

Consider the dilemma of the executive staff at Southwest Manufacturing Company at their monthly planning meeting. Things are tough and it seems that everyone is complaining.
∙ The president has been reviewing reports from marketing. “We keep running out of product. How can we sell stuff if we don’t have it when the customer wants it? And the response time on customer questions is terrible. It is often days between when the question comes in and when we get around to responding. This cannot continue.”

∙ The supply chain executive responds, “Our forecast from marketing was terrible last month. They sold 30 percent more than they had forecast. How do you expect us to keep this stuff in stock?”

∙ Marketing chimes in with, “We had a great month, what are you complaining about? We told you mid-month that things were going well.” The plant manager replies, “There is no way that we can react that quickly. What are you expecting from us? Our schedules are fixed six weeks into the future. You want us to be efficient, don’t you?”

∙ The president asks, “Should we just bump everything up 30 percent for next month? I sure don’t want to run out again.” ∙ Marketing responds, “Only if you are willing to keep running that 2-for-1 deal that we were running last month. Our customers pass that discount on to their customers and that keeps sales going. I am not sure that we are making much money when we discount like that.”

∙ This wakes up the finance guy, “Oh, so now I understand why we have such a big negative revenue variance. We can’t give the stuff away anymore.”

This struggle between those selling the product, those supplying the product, and those keeping track of the money goes on month after month. The problem is one of matching supply with demand at a price that makes the firm profitable. It is a difficult balancing act and one that plays out at most companies. Today, many companies are using a business process called sales and operations planning (S&OP) to help avoid such problems. This chapter defines S&OP and discusses how to make it work.

Question 2

Aggregate operation plans

Answer 2

The aggregate operations plan, which translates annual and quarterly business plans into broad labor and output plans for the intermediate-term (3 to 18 months). The objective of the aggregate operations plan is to minimize the cost of resources required to meet demand over that period.

Question 3

What is the goal and benefit of sales and operations planning?

Answer 3

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 is designed to coordinate the key business activities related to marketing and sales with the operations and supply chain activities that are required to meet demand over time.

Question 4

What does a sales and operation process look like?

Answer 4

The sales and operations planning process consists of a series of meetings, finishing with a high-level meeting where key intermediate-term decisions are made. The end goal is an agreement between various departments on the best course of action to achieve the optimal balance between supply and demand. The idea is to put the operational plan in line with the business plan.

Question 5

An Overview of Sales and Operations Planning Activities

Answer 5

The term sales and operations planning was coined by companies to refer to the process that helps firms keep demand and supply in balance. In operations management, this process traditionally was called aggregate planning. The new terminology is meant to capture the importance of cross-functional work. Typically, this activity requires an integrated effort with cooperation from sales, distribution and logistics, operations, finance, and product development.

Marketing focus on the demand side, forecasting sales.
Production function/Product families focus on the supply side, forecasting material flows and usage?
Matching customer orders to supply can be a cross collaborative process made by the production and marketing funtion = team work.

This are different for each company; depend on organizational structure etc.

Question 6

Long range planning

Answer 6

One year or more.

done in two major areas. The first is the design of the manufacturing and service processes that produce the products of the firm, and the second is the design of the logistics activities that deliver products to the customer.

Question 7

Intermediate-range planning

Answer 7

Involves a time period of usually 3 to 18 months.

Intermediate-term activities include forecasting and demand management, as well as sales and operations planning. The determination of expected demand is the focus of forecasting and demand management. From these data, detailed sales and operations plans for meeting these requirements are made. (here we see the call for cooperation across functional units)

Question 8

Short range planning

Answer 8

From a day to six months.

Short-term details are focused mostly on scheduling production and shipment orders. These orders need to be coordinated with the actual vehicles that transport material through the supply chain. On the service side, short-term scheduling of employees is needed to ensure that adequate customer service is provided and fair worker schedules are maintained.

Question 9

What does process planning deal with?

Answer 9

Process planning deals with determining the specific technologies and procedures required to produce a product or service.

Question 10

What does strategic planning deal with?

Answer 10

Strategic capacity planning deals with determining the long-term capabilities (such as size and scope) of the production systems.

Question 11

What does supply network planning deal with (logistics; outbound and inbound)?

Answer 11

From a logistics point of view, supply network planning determines how the product will be distributed to the customer on the outbound side, with decisions relating to the location of warehouses and the types of transportation systems to be used. On the inbound side, supply network planning involves decisions relating to outsourcing production, the selection of parts and component suppliers, and related decisions.

Question 12

An example of how the sales and operation planning process is interactive and integrative. Coordination of activities!

Answer 12

Intermediate-term activities include forecasting and demand management, as well as sales and operations planning. The determination of expected demand is the focus of forecasting and demand management. From these data, detailed sales and operations plans for meeting these requirements are made. The sales plans are inputs to sales force activities, which are the focus of marketing books. The operations plan provides input into the manufacturing, logistics, and service planning activities of the firm. Master scheduling and material requirements planning are designed to generate detailed schedules that indicate when parts are needed for manufacturing activities. Coordinated with these plans are the logistics plans needed to move the parts and finished products through the supply chain.

Question 13

Some words on the planning process and the different time dimensions…

Answer 13

…Long term planning considers the organizational activities on a longer time horizon, more concerned about future investments, strategic level; navigate the business and assure a profitable future.

… Intermediate planning examine expectations of sales, forecast of sales, which material to use etc.

… Short term planning is about tactics and operations; more detailed action plans such as scheduling, timing etc.

Question 14

The Aggregate Operations Plan

Answer 14

The aggregate operations plan is concerned with setting production rates by product group or other broad categories for the intermediate term (3 to 18 months).

The main purpose of the aggregate plan is to specify the optimal combination of production rate, workforce level, and inventory on hand.

Here is a formal statement of the aggregate planning problem: “Given the demand forecast Ft for each period t in the planning horizon that extends over T periods, determine the production level P t, inventory level It, and workforce level Wt for periods t = 1, 2, . . . , T that minimize the relevant costs over the planning horizon.”

The form of the aggregate plan varies from company to company. In some firms, it is a formalized report containing planning objectives and the planning premises on which it is based. In other companies, particularly smaller ones, the owner may make simple calculations of workforce needs that reflect a general staffing strategy.

Question 15

Production rate

Answer 15

Production rate refers to the number of units completed per unit of time (such as per hour or per day).

Question 16

Workforce level

Answer 16

Workforce level is the number of workers needed for production (production = production rate × workforce level).

Question 17

Inventory on hand

Answer 17

Inventory on hand is unused inventory carried over from the previous period.

Question 18

How are aggregated plans derived?

Answer 18

The process by which the plan itself is derived also varies. One common approach is to derive it from the corporate annual plan.

Another approach is to develop the aggregate plan by simulating various master production schedules and calculating corresponding capacity requirements to see if adequate labor and equipment exist at each workcenter.

Question 19

How does the corporate plan relate to the aggregate plans?

Answer 19

A typical corporate plan contains a section on manufacturing that specifies how many units in each major product line need to be produced over the next 12 months to meet the sales forecast. The planner takes this information and attempts to determine how best to meet these requirements with available resources. Alternatively, some organizations combine output requirements into equivalent units and use this as the basis for the aggregate plan. For example, a division of General Motors may be asked to produce a certain number of cars of all types at a particular facility. The production planner would then take the average labor hours required for all models as a basis for the overall aggregate plan. Refinements to this plan, specifically model types to be produced, would be reflected in shorter-term production plans.

The corporate plan chart usually shows which activities the business carries out or aims to carry out.

Question 20

The Production Planning Environment

Answer 20

In general, the external environment is outside the production planner’s direct control, but in some firms, demand for the product can be managed. Through close cooperation between marketing and operations, promotional activities and price cutting can be used to build demand during slow periods. Conversely, when demand is strong, promotional activities can be curtailed and prices raised to maximize the revenues from those products or services that the firm has the capacity to provide. The current practices in managing demand will be discussed later in the section titled “Yield Management.”

The internal factors themselves differ in their controllability. Current physical capacity (plant and equipment) is usually nearly fixed in the short run; union agreements often constrain what can be done in changing the workforce; physical capacity cannot always be increased; and top management may limit the amount of money that can be tied up in inventories. Still, there is always some flexibility in managing these factors, and production planners can implement one or a combination of the production planning strategies discussed here.

Question 21

There are essentially three production planning strategies. These strategies involve trade-offs among the workforce size, work hours, inventory, and backlogs.

Answer 21

1. Chase strategy. Match the production rate to the order rate by hiring and laying off employees as the order rate varies. The success of this strategy depends on having a pool of easily trained applicants to draw on as order volumes increase. There are obvious motivational impacts. When order backlogs are low, employees may feel compelled to slow down out of fear of being laid off as soon as existing orders are completed.
2. Stable workforce—variable work hours. Vary the output by varying the number of hours worked through flexible work schedules or overtime. By varying the number of work hours, you can match production quantities to orders. This strategy provides workforce continuity and avoids many of the emotional and tangible costs of hiring and firing associated with the chase strategy.
3. Level strategy. Maintain a stable workforce working at a constant output rate. Shortages and surpluses are absorbed by fluctuating inventory levels, order backlogs, and lost sales. Employees benefit from stable work hours at the costs of potentially decreased customer service levels and increased inventory costs. Another concern is the possibility of inventoried products becoming obsolete.
4. When just one of these variables is used to absorb demand fluctuations, it is termed a pure strategy. A simple strategy that uses just one option, such as hiring and firing workers, for meeting demand.
5. Two or more used in combination constitute a mixed strategy. As you might suspect, mixed strategies are more widely applied in industry. A more complex strategy that combines options for meeting demand.

Changing parameters of the strategies: the size of the workforce, the utilization of the workforce, fixed output rate.

Question 22

Subcontracting

Answer 22

managers also may choose to subcontract some portion of production. This strategy is similar to the chase strategy, but hiring and laying off are translated into subcontracting and not subcontracting

Question 23

Four costs are relevant to the aggregate production plan. These relate to the production cost itself, as well as the cost to hold inventory and to have unfilled orders. More specifically, these are:

Answer 23

1. Basic production costs These are the fixed and variable costs incurred in producing a given product type in a given time period. Included are direct and indirect labor costs and regular as well as overtime compensation.
2. Costs associated with changes in the production rate Typical costs in this category are those involved in hiring, training, and laying off personnel. Hiring temporary help is a way of avoiding these costs.
3. Inventory holding costs A major component is the cost of capital tied up in inventory. Other components are storing, insurance, taxes, spoilage, and obsolescence.
4. Backordering costs Usually, these are very hard to measure and include costs of expediting, loss of customer goodwill, and loss of sales revenues resulting from backordering.

Question 24

Budgets

Answer 24

To receive funding, operations managers are generally required to submit annual, and sometimes quarterly, budget requests. The aggregate plan is key to the success of the budgeting process. Recall that the goal of the aggregate plan is to minimize the total production-related costs over the planning horizon by determining the optimal combination of workforce levels and inventory levels. Thus, the aggregate plan provides a justification for the requested budget amount. Accurate medium-range planning increases the likelihood of (1) receiving the requested budget and (2) operating within the limits of the budget.

Question 25

A cut-and-try approach charting and graphic methods to develop aggregate plans, what does that mean?

Answer 25

A cut-and-try approach involves costing out various production planning alternatives and selecting the one that is best. Elaborate spreadsheets are developed to facilitate the decision process. Sophisticated approaches involving linear programming and simulation are often incorporated into these spreadsheets

Question 26

Aggregate Planning Applied to Services: Tucson Parks and Recreation Department

Answer 26

With services, inventory is typically not an issue. Sometimes a few extra employees are added as a buffer to cover employee vacations and other needs.

Question 27

YIELD MANAGEMENT

Answer 27

Why is it that the guy sitting next to you on the plane paid half the price you paid for your ticket? Why was a hotel room you booked more expensive when you booked it six months in advance than when you checked in without a reservation (or vice versa)? The answers lie in the practice known as yield management. Yield management can be defined as 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. Yield management can be a powerful approach to making demand more predictable, which is important to aggregate planning.

Question 28

From an operational perspective, yield management is most effective when:

Answer 28

1. Demand can be segmented by customer.
2. Fixed costs are high and variable costs are low.
3. Inventory is perishable.
4. Product can be sold in advance.
5. Demand is highly variable.

Hotels illustrate these five characteristics well. They offer one set of rates during the week for the business traveler and another set during the weekend for the vacationer. The variable costs associated with a room (such as cleaning) are low in comparison to the cost of adding rooms to the property. Available rooms cannot be transferred from night to night, and blocks of rooms can be sold to conventions or tours. Finally, potential guests may cut short their stay or not show up at all.

Question 29

Operating Yield Management Systems, A number of interesting issues arise in managing yield:

Answer 29

1. Pricing structures must appear logical to the customer and justify the different prices. Such justification, commonly called rate fences, may have either a physical basis (such as a room with a view) or a nonphysical basis (like unrestricted access to the Internet). Pricing also should relate to addressing specific capacity problems
2. handling variability in arrival or starting times, duration, and time between customers. This entails employing maximally accurate forecasting methods (the greater the accuracy in forecasting demand, the more likely yield management will succeed); coordinated policies on overbooking, deposits, and no-show or cancellation penalties; and well-designed service processes that are reliable and consistent.
3. managing the service process. Some strategies include scheduling additional personnel to meet peak demand, increasing customer self-service, creating adjustable capacity, utilizing idle capacity for complementary services, and cross-training employees to create reserves for peak periods.
4. training workers and managers to work in an environment where overbooking and price changes are standard occurrences that directly impact the customer. Companies have developed creative ways of mollifying overbooked customers. A golf course company offers $100 putters to players who have been overbooked at a popular tee time. Airlines, of course, frequently give overbooked passengers free tickets for other flights.