413ch4

Report
4. Sales and Operations Planning
Homework problems: 1,2,3,4,5,10,11,18.
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4.1. Sales and Operations Planning
Sales and operations planning is a process that provides
management with the ability to strategically direct its
business to achieve competitive advantage. The process
brings together all the plans for business (sales,
marketing, financial, manufacturing, sourcing, product
development) into one integrated set of plans by product
group/family.
Sales and operations plan (S&OP) is an agreed-upon
plan that comes from the planning process. It is
developed at the product family level and forms the basis
for shorter term manufacturing plans.
Sales and operations planning could precede/direct MPC
decision making or it could be affected by other MPC
systems. Fig. 4.1
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4.1. Sales and Operations Planning in the Firm
From the manufacturing perspective, operations (production)
plan is the planned production; it is not a forecast of demand.
It specifies the overall level of manufacturing output planned
to be produced, usually stated in terms of aggregate units of
output per month for each product family. Various units of
measure can be used to express the plan: units, tonnage,
standard hours, # of workers, etc.
Within an agreed-upon operations plan, manufacturing is
responsible for “hitting the plan.”
Sales and operations plan (S&OP) is called “top
management’s handle on the business” as it provides the
critical links to activities outside MPC system boundaries,
and provides important visibility of the critical interactions
between sales, marketing, production, and finance. Fig. 4.1
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4.1. Sales and Operations Planning in the Firm
The four fundamentals in sales and operations
planning are demand, supply, volume, and mix.
Assuring the balance between demand and supply
through effective coordination of the plans (sales vs.
operations) of the different functional area with the
active top management involvement.
Volume concerns overall sales rates, production rates,
aggregate inventories, and order backlogs.
Once the volume decision is made, mix concerns
detailed decisions about which individual products to
make, in what sequence, and for which customer
orders.
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4.1. Sales and Operations Planning in the Firm
One of the major payoffs of S&OP is better integration
between functional areas. Suppose that actual inventory
levels do not agree with planned inventory levels and
production does hit the plan (schedule), what could be
the problem?
Marketing/sales →
Demand management →
Recall marketing/manufacturing classical conflicts
Without the S&OP, the job will or may get done but at
the expense of extra inventory, excess capacity, longer
lead time, poor customer service, missed new sales
opportunities, etc.
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Classical Marketing/Manufacturing Conflict
Marketing Orientation
(customer focus)
Manufacturing Orientation
(efficiency/cost focus)
1. Capacity planning
and long range
sales forecasting
Excess capacity is costly
2. Production
scheduling
Stability
3. Delivery and
distribution
Inventory to smooth
production
4. Quality assurance
High quality is difficult
unless features are simple
5. Breadth of product
line
Narrow
6. Cost control
Blame unreasonable
marketing demands
7. New product
introduction
New products provide
production turmoil
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4.1. The Sales & Operations Planning Process

1.
2.
3.
4.
5.
Not all sales and operations planning process are the same. Fig.4.2
Run the sales forecasting reports: updating forecast/actual sales,
plan/actual production, and plan/actual inventories, etc. after the
month end.
Demand planning: considering the actual sales, production, and
inventories from the past month to develop a new management
forecast (sales, production, inventory) for the next 12 months,
override the statistical forecasts when appropriate, by involving senior
marketing and sales management in the process.
Supply/capacity planning: check capacity/resource availability for the
newly developed SOP and modify operations plan, if necessary.
The pre-SOP meeting: involving various functional departments to
resolve problems, identify areas that need top management
intervention /decision.
The executive SOP meeting: finalize SOP, authorize spending, reach
consensus, assess the impact of SOP on business plan, and
performance.
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4.1. The Sales & Operations Planning Process
Considering the chase, level, and mixed operations plan
(Figures 4.3 through 4.7 and 4.10)
Basic tradeoffs:
Costs of changing
workforce level (hiring &
firing), hours worked (over
& under time), subcontract
Inventory carrying costs
Backorder costs
Level strategy can be either constant workforce or
constant work hours (variable workforce)
Example. Problem #2 on page 113.
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Figure 4.5 Chase Plan explanations
In October:
1. Sales=$30 per unit. Thus, $10 millions=333k units ($10 m/$30).
2. Operations: employee productivity= 8 units/day; 22 days in October.
Thus, 333k units requires 1892 employees (333k/(8x22).
3. Inventory: daily sales for the next period= 400k/20 days=20k units/day.
DoS=days of supply=ending Inventory/daily sales=60k/20k=3 DoS.
Homework: Check November numbers out!
Note: In the History part, actual Sales and actual Inventory are used, but
in the Plan (future) part, expected values are used.
4. In December (history): daily sales for next period=253k/20days=12,650;
Days of Supply (DoS)= 215k/12,650=16.99=17 days.
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Figure 4.5 Chase Plan explanations
Past 3 months (history):
1. Sales = actual sales are short of forecast; cumulative
difference of -100k is about 40% (100k/253k) of January
sales.
2. Operations: actual exceeded plan, cumulative difference is
about 45% (115k/253k) of January operations plan.
3. Inventory: increased from 3 to 17 days of supply
4. The need to adjust the operations plan to bring sales and
operations into balance!!!
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Figure 4.5 Chase Plan explanations
1.
2.
3.
4.
Costs:
Chase Plan implies that planned operations=planned sales
from January to December. Thus, operations plan in
January=253k implies 1581 employees (253k/(8x20)).
Hires: 144.3 employees = 1,581 – 1,437 (in Dec.);
hiring cost=144.3 x $200 = $28,850.
Inventory: $6440k x 2%=$128,800;
Layoffs in June: 909.1 x $500=$454,545.
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Figure 4.6 Chase with 5 DoS explanations
1. To figure out January operations plan, we calculate daily
sales for the next period (Feb.)=280,000/21 days=13,333
units/day.
2. 5 DoS = 5 x 13,333 = 66,666=67k units, which is our
ending inventory for January.
3. January operations = 253k(sales) – 216k(beg. Inv.) + 67k
(ending Inv.) = 105,000 units.
4. 105,000/(8x20) = 656.25 employees. Thus, layoffs=780.8
(1437-656.25).
5. Layoff cost = 780.8 x $500=$390,375.
6. Inventory cost = $2,000k x 2%=$40,000.
Homework: Check February numbers out !!!
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Figure 4.7 Level Plan explanations
1. Level operations strategy is to maintain a constant
workforce. The key task is to figure out how many
employees would be required. January numbers:
2. Total production = 4333k (12 months sales) – 215k (beg.
Inv.) + 67k (5 DoS ending Inv. in Dec.) = 4185k units.
3. Annual employee output = 8x243 days=1994 units/yr.
4. # of employee needed = 4185k/1994 = 2152.8 employees.
5. Hiring=2152.8-1437 (Dec.)=715.8; cost=715.8x$200=$143160.
6. Operations plan = 2153x8x20 = 344k units.
7. Inventory = 215 (Dec. ending) + 344(Jan. production )- 253
(Jan. sales) = 306k.
8. DoS = 306k/(280/21)= 23 days; (280/21=daily sales in Feb.)
Homework: Check February numbers out !!!
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Figure 4.10 Mixed Plan explanations
1. Adding employees in April, July and August and
laying off in December to better respond to future
demand.
2. Chase and Level are two opposite (and extreme)
strategies. Mixed operating plan usually outperform
chase and level strategies in total costs.
3. Mixed operating plan can be optimized using
Integer Programming.
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Problem #2 on p. 113
History
Sales
Forecast
Actual
Oct
Nov
Dec
(M$)
12.50
10.00
(units)
5000
(units)
Diff: Month
Pla
n
Jan
Feb
Mar
16.25
5.00
5.00
7.50
4000
6500
2000
2000
3000
4384
3626
6065
-616
-374
-435
-990
-1425
5000
4000
6500
72
70
114
23
19
19
20
21
23
5649
4091
7279
649
91
779
740
1519
Cumulative
Operations
Plan
(units)
(# employ)
# Work Days/Mo.
Actual
(units)
Diff: Month
Cumulative
Target DoS Inv:
5
Inventory
Plan
Actual
(units)
1270
1270
1270
(000$)
2223
2223
2223
(units)
2265
2730
3944
10
15
13
Days of Supply
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4.2. Management Obligations in the SOP Process
 Top Management Role
The SOP process is inter-functional and needs to be
coordinated at the top management level. SOP is also
referred to as the “game planning.”
Top management must be committed to the SOP process and
establish or modify the performance measurement and
reward structure to align them with the sales and operations
plan. Recall the traditional performance measure and reward
as well as marketing/manufacturing conflicts.
Resolve the trade-offs between functions before the game
plan is finalized.
One of the game planning process’ intention is to not only
produce coordinated and integrated plans, budgets,
objectives, and goals that are used by managers to make
decisions but also provide the basis for evaluating
performance.
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4.2. Management Obligations in the SOP Process
 Functional Roles
Under the normal situations, the primary obligation for
ALL functions is to “hit the plan”. That is, sell what’s in
the sales plan, produce what’s in the operations plan; no
more and no less.
In the uncertain environment (opportunities and threats),
the obligation is to “interface and communicate” so that a
mismatch between functions won’t be created. e.g.,
opportunities for selling more arises, what are the
implications for production and finance?
Traditional organizational (functional) units vs. strategic
business units (SBUs)
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SBU
SBU is an approach to strategic planning that develops a
plan based on products or markets (less on
organizational units). A company’s products are typically
grouped into SBUs with each SBU evaluated in terms of
strengths and weaknesses vis-à-vis similar business
units made and marketed by competitors. These SBU
units are evaluated in terms of their competitive
strengths, their relative advantages, life cycle, and cash
flow, etc.
e.g., GE’s lighting, appliance, medical, finance, etc.
Dell’s PC, server, printer, etc.
Toyota’s Lexus, Scion
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Scion tC (Sports Coupe)
Scion xD (Subcompact)
Scion xB (Urban Utility)
Standard: AC, power windows/lock, airbags, ABS, remote entry, etc. starting from $12,500. 19
4.2. Management Obligations in the SOP Process
Controlling the Operations Plan
Checking the performance against both sales and
operation plans, analyze and communicate the sources
of variation.
Periodic Reporting
MPS ↔ operations plan, weekly
Inventory and backlog,
weekly
Capacity utilization,
weekly
Delivery performance,
daily
Identify source of deviations
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Problem #15 on p. 119
ABC Sales and Operations Planning Spreadsheet
Sales
Forecast
History
Apr
(M$)
$22.50
(units)
1.50
(units)
0.78
-0.72
Plan
May
$25.50
1.70
1.95
0.25
-0.47
Jun
$28.50
1.90
1.63
-0.27
-0.74
Jul
$31.50
2.10
Aug
$34.50
2.30
Sep
$37.50
2.50
1.50
75
20
1.51
0.01
1.70
77
22
1.70
0.00
0.01
1.90
86
22
1.88
-0.02
-0.01
1.39
139
10
2.92
139
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3.20
139
23
(units) 250000
(000$) $2,625
250000
$2,625
250000 -459999
159001
856001
$2,625
$0 $1,669,508 $8,988,008
Actual
(units) 250001
Days of Supply
9.6
250000
3.9
250001
4.6
Actual
Diff: Month
Cumulative
Operations
Plan
(units)
(# employ)
# Work Days/Mo.
Actual
(units)
Diff: Month
Cumulative
Inventory
Plan
-6.6
2.1
Sum
6900000
7506000
54
250001 Beg inv
833333 Tgt inv for DOS in Sept
583333 Additional inv required
7483333 3 month total build
138580 Build per day
139 Implied constant labor
10.3
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