SALES AND OPERATIONS
PLANNING
Learning Objective
• Critique the conflicts in the traditional supply system
• Describe the role and the process of sales and operations planning
• Explain the relevant costs in developing an aggregate plan
• Contrast different types of aggregate production strategies
• Develop alternative aggregate production plan
2
Conflicts of Interest
3
4
Conflicts of Interest
Marketing
Operations
Finance
5
Conflicts in Traditional Supply Systems
Traditional
objectives
Marketing
Increase revenue,
satisfy customers
Operations
Finance
Reduce manufacturing cost
Increase profit &
cashflow, reduce
investment
Customer Service
Production efficiency
Inventory Investment
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I Ain’t Talking to Them!!!
• https://www.youtube.com/watch?v=qo0g_YUOBKc
• How to integrate different departments followed a general goal of an
organization
• Cross-functional Team
• Supply chain management
7
Sales and Operations Planning (S&OP)
Forecasting
MRP
8
Sales and Operations Planning (S&OP)
A process to develop tactical plans by integrating:
Marketing
Operations
Marketing plans
Production plans
Finance
Cashflow plans
9
Sales and Operations Planning (S&OP)
A process to develop tactical plans by integrating:
Marketing
Operations
Marketing plans
Production plans
⇒ Improve Quality
⇒ Better Customer Service
Finance
Cashflow plans
⇒ Decrease Inventory
⇒ Save Money
10
S&OP Benefits
Better
business visibility
Improved forecast
accuracy
Better
teamwork
Enhanced
customer service
12
Aggregate Planning Strategies
• Aggregate production plan specifies:
Production rates
Inventory
Employment levels
Other
resources
13
Aggregate Planning Strategies
14
Aggregate Planning Strategies
• Aggregate production plan:
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Aggregate Planning Strategies
• Aggregate production plan:
Level
Strategy
16
Aggregate Planning Strategies
• Aggregate production plan:
Level
Strategy
Chase Strategy
17
Aggregate Planning Strategies
• Aggregate production plan:
Level
Strategy
Chase Strategy
Hybrid
Strategy
18
Level strategy
19
Level strategy
200
Demand
Production
Inventory
Quantity
150
100
50
0
1
2
3
4
5
6
Time Period
7
8
9
10
11
12
20
Level strategy
•
The firm produces at a constant rate over the year.
21
Level strategy
•
The firm produces at a constant rate over the year.
Use when
• High cost of production.
• Low cost of inventory.
• Required highly skilled workers.
22
Level strategy
•
The firm produces at a constant rate over the year.
Use when
• High cost of production.
• Low cost of inventory.
• Required highly skilled workers.
Disadvantages
• High inventory level & costs.
⇒ Require high storage capacity.
• Risk of inventory obsolescence.
• Backlog and opportunity cost
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•
•
•
•
Level strategy Exercise
Manager T.C. Kim of Plum Engines, Inc., a producer of lawn mowers and leaf blowers, must develop
an aggregate plan given the forecast for engine demand shown in the table.
The department has 15 workers, each produces 10 engines per month. Normal output has a cost of
$60 per engine. Hiring costs $100 per worker and firing costs $200 per worker. The beginning
inventory is 40 engines.
Inventory carrying cost is $2 per engine per month. Ending inventory is set at 40 engines.
Develop a level plan that matches the forecast and compute the total cost of your plan.
Month
Demand
1
120
2
130
3
140
4
120
5
130
6
120
7
140
8
140
Total
1,040
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Level strategy: summary
• Produce a constant amount each period.
•
Production Rate =
•
•
Ending Inventory (1st month) = Beginning inventory + Production - Demand
Total Demand+Ending Inventory −Beginning Inventory
number of period
Ending Inventory (for the rest of the period) = Previous month ending inventory + Production - Demand
• Stable workforce, no hiring/firing, no overtime.
• High inventory costs.
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CHECK ATTENDANCE
26
BREAK-TIME
27
Chase strategy
28
Chase strategy
Demand
Production
Inventory
200
Quantity
150
100
50
0
1
2
3
4
5
6
7
Time Period
8
9
10
11
12
29
Chase strategy
•
The production rate is changed in each period to match the amount of
expected demand.
30
Chase strategy
•
The production rate is changed in each period to match the amount of expected
demand.
Use when
•
•
High cost of inventory
•
Required little in worker’s skills or
training.
•
Or can use part-time workers.
Goods that are quickly become
obsolete.
31
Chase strategy
•
The production rate is changed in each period to match the amount of expected
demand.
Use when
•
•
•
•
High cost of inventory
Goods that are quickly become
obsolete.
Required little in worker’s skills or
training.
Or can use part-time workers.
Disadvantages
• High cost to continually hiring and
firing people.
⇒ Ethical concerns.
• Required high investment in plants,
machines or facilities.
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Chase strategy Exercise
•
•
•
•
Manager T.C. Kim of Plum Engines, Inc., a producer of lawn mowers and leaf blowers, must develop
an aggregate plan given the forecast for engine demand shown in the table.
The department has 15 workers, each produces 10 engines per month. Normal output has a cost of
$60 per engine. Hiring costs $100 per worker and firing costs $200 per worker. The beginning
inventory is 40 engines.
Inventory carrying cost is $2 per engine per month. Ending inventory is set at 40 engines.
Develop a chase plan that matches the forecast and compute the total cost.
Month
Demand
1
120
2
130
3
140
4
120
5
130
6
120
7
140
8
140
Total
1,040
33
Chase strategy: summary
•
Produce a different amount in each period to match the demand.
•
•
Ending Inventory (1st month) = Beginning inventory + Production - Demand
Ending Inventory (for the rest of the period) = Previous month ending inventory + Production - Demand
• Fluctuated workforce (hiring/firing).
• High investment costs (machines, facilities, etc.).
• Low inventory costs.
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Level Vs Chase Strategy
• Responsive Vs Effective
• Inventory Vs Production
• Investment Vs Cut-off (liquidation, cut down resources and labor)
• Reliability Vs Cost
• How to balance the two strategies?
35
Hybrid/Mix strategy
200
Demand
Production
Quantity
150
Inventory
100
50
0
1
2
3
4
5
6
7
8
9
10
11
12
36
Hybrid/Mix strategy
•
Includes some elements of both level and
chase strategies.
37
Hybrid/Mix strategy
•
Includes some elements of both level and
chase strategies.
•
Most firms use hybrid strategies to balance
the advantages.
38
Hybrid/Mix strategy
•
Includes some elements of both level and
chase strategies.
•
Most firms use hybrid strategies to balance
the advantages.
⇒ Aggregate production plans needed to be revised when the external circumstances changes.
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•
•
•
•
Exercise
Togo makes riding lawn mowers and tractors. The company’s expected quarterly demand is given below in the chart.
The company will have 1200 mowers in inventory at the beginning of the month and desires to maintain that
number at the end of each season.
Production cost per unit is $200, Inventory carrying cost per season per unit is $50, hiring a worker costs $100, and
firing one costs $200. The beginning number of workers is 30.
Assume that the productivity is 0.625 units per working hour, with eight hours per day and 50 days per season.
Calculate the cost of the chase and level plans.
Season
Demand
Fall
10,000
Winter
7,000
Spring
7,000
Summer
12,000
Total
36,000
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•
•
•
S&OP Homework
Managers at KMK, Inc., a producer of water bottles, must develop an aggregate plan given the below
forecast.
The department has 20 workers, each produces 100 bottles per month. Normal output has a cost of
$200 per bottle. Hiring costs $250 per worker and firing costs $400 per worker. The beginning
inventory is 2,000 and the company wants to maintain that number as ending inventory. Inventory
carrying cost is $18 per bottle per month.
Develop both chase and level plans that matches the forecast and compute the total cost of both plan
to see which strategy the company should apply?
Month
1
2
3
4
5
6
7
Total
Demand
3,000
6,000
2,000
2,000
4,000
5,000
6,000
28,000
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THANK YOU!