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SCM 304 Principles of Supply Chain Management
Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved
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Sales and Operations Planning (Aggregate Planning)
Chapter 10
1
You will learn
Distinguish among strategic planning, tactical planning, and detailed planning and control.
Describe why sales and operations planning (S&OP) is important to an organization and its supply chain partners.
Generate multiple alternative sales and operations plans for a firm.
Describe the differences between top-down and bottom-up S&OP and discuss the strengths and weaknesses of level, chase, and mixed production strategies.
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Introduction (1 of 2)
It is critical to coordinate operations and supply chain decisions with other functional areas and the firm’s supply chain partners
Areas such as strategy, new product development, capacity planning, and process choice
Concept of cross-functional and interfirm coordination known as sales and operations planning (S&OP) (sometimes called aggregate planning)
Source: quora.com
Introduction (2 of 2)
Sales and Operations Planning (S&OP) – A process to develop tactical plans by integrating marketing plans for new and existing products with the management of the supply chain.
© 2016 APICS Dictionary
Brings together all the plans for the business into one integrated set of plans.
Also called Aggregate Planning.
Source: stock.adobe.com
S&OP in the Planning Cycle (1 of 4)
Planning takes place at several levels, each covering a certain period of time into the future:
Strategic planning - highest levels of the firm
Tactical planning - usually 12 to 24 months
Detailed planning and control - weeks down to just a few hours
Figure 10.1 Different Levels of Planning
S&OP in the Planning Cycle (2 of 4)
The three approaches differ in
the time frame covered
the level of planning detail required
the degree of flexibility managers have to change capacity.
Strategic planning - has the longest time horizon, and the least amount of specific information
Detailed planning and control – has the shortest time horizon, and the most amount of information
Tactical planning - fills the gap between these extremes
S&OP is aimed squarely at helping businesses develop superior tactical plans
S&OP in the Planning Cycle (3 of 4)
S&OP indicates how the organization will use its tactical capacity resources to meet expected customer demand.
Examples: the size of the workforce, inventory, number of shifts, and even availability of subcontractors
S&OP strikes a balance between the various needs and constraints of the supply chain partners.
Considers customer demand AND the capabilities of all suppliers, production facilities, and logistics service providers that work together to provide the product or service.
Balanced costs, delivery, quality, and flexibility
S&OP in the Planning Cycle (4 of 4)
S&OP serves as a coordinating mechanism for the various supply chain partners.
Examples: marketing operations, finance, suppliers and logistics providers
What everyone should—and should not—do
S&OP expresses the business’s plans in terms that everyone can understand.
Finance personnel think of business activity in terms of cash flows while supply chain managers focus on the activities of producing products or services
Find a format that is easy to understand by all partners
Major Approaches to S&OP (1 of 7)
Top-down planning – An approach to S&OP in which a single, aggregated sales forecast drives the planning process.
Bottom-up planning – An approach to S&OP that is used when the product/service mix is unstable and resource requirements vary greatly across the offerings.
Planning values – Values that decision makers use to translate a sales forecast into resource requirements and to determine the feasibility and costs of alternative sales and operations plans.
Major Approaches to S&OP (2 of 7)
Figure 10.2 Determining the Appropriate Approach to S&OP
Major Approaches to S&OP (3 of 7)
Top-Down Planning Process
Develop the aggregate sales forecast and planning values.
Aggregate sales forecast to be used in next two steps
Translate the sales forecast into resource requirements.
Moves the analysis from “sales” numbers to the “operations and supply chain” numbers needed for tactical planning
Some typical resources include labor hours, equipment hours, and material dollars
Generate alternative production plans.
Management determines the feasibility and costs for various production plans -> level, chase, and mixed
Example 10.2 – Pennington Cabinets (1 of 3)
Example 10.2 – Pennington Cabinets (1 of 3)
Pennington Cabinets is a manufacturer of several different lines of kitchen and bathroom cabinets that are sold through major home improvement retailers.
Pennington’s Marketing Vice President has come up with the following combined sales forecast for the next 12 months.
| Month | Sales Forecast (Cabinet Sets) |
| January | 750 |
| February | 760 |
| March | 800 |
| April | 800 |
| May | 820 |
| June | 840 |
| July | 910 |
| August | 910 |
| September | 910 |
| October | 880 |
| November | 860 |
| December | 840 |
Example 10.2 – Pennington Cabinets (2 of 3)
14
Example 10.2 – Pennington Cabinets (3 of 3)
The sales forecast shows an expected peak from July through September
Pennington can produce up to 848 cabinet sets a month, using regular production time.
Pennington won’t be able to meet expected demand in the peak months with just regular production.
Figure 10.3 Graphing Expected Sales Levels versus Capacity
Example 10.3 – Pennington Cabinets (1 of 2)
The next step for Pennington is to translate the sales forecast into resource requirements.
The key resource Pennington is concerned about is labor, although other resources could be examined, depending on the needs of the firm.
Translating sales into labor hours and, ultimately, workers needed allows Pennington to see how demand drives resource requirements.
Example 10.3 – Pennington Cabinets (2 of 2)
For example:
April’s Demand
= 800 cabinets * 20 hours per cabinet
= 16,000 hrs
16,000/160 hours
= 100 workers
Table 10.4 Translating Sales into Resource Requirements at Pennington Cabinets
| Month | Sales Forecast | Sales (In Labor Hours) | Sales (In Workers) |
| January | 750 | 15,000 | 93.75 |
| February | 760 | 15,200 | 95.00 |
| March | 800 | 16,000 | 100.00 |
| April | 800 → | 16,000 → | 100.00 |
| May | 820 | 16,400 | 102.50 |
| June | 840 | 16,800 | 105.00 |
| July | 910 | 18,200 | 113.75 |
| August | 910 | 18,200 | 113.75 |
| September | 910 | 18,200 | 113.75 |
| October | 880 | 17,600 | 110.00 |
| November | 860 | 17,200 | 107.50 |
| December | 840 | 16,800 | 105.00 |
Major Approaches to S&OP (4 of 7)
Once a firm has translated the sales forecast into resource requirements, the next step is to generate alternative production plans.
Three common approaches are level production, chase production, and mixed production plans.
The fundamental difference among the three is how production and inventory levels are allowed to vary.
Major Approaches to S&OP (5 of 7)
Level production plan – A S&OP plan in which production is held constant and inventory is used to absorb differences between production and the sales forecast.
Chase production plan – A S&OP plan in which production is changed in each time period to match the sales forecast.
Mixed production plan - A S&OP plan that varies both production and inventory levels in an effort to develop the most effective plan.
Example 10.4 – Pennington Cabinets (1 of 7)
Table 10.5 Level Production Plan for Pennington Cabinets
| Month | Sales Forecast | Sales (In Labor Hours) | Sales (In Workers) | Actual Workers | Regular Production | Allowable Overtime Production | Overtime Production | Hirings | Layoffs | Inventory/ Back Orders |
| Blank | Blank | Blank | Blank | 100.00 | Blank | Blank | Blank | Blank | Blank | 100.00 |
| January | 750 | 15,000 | 93.75 | 105.00 | 840.00 | 84.00 | 0 | 5.00 | 0.00 | 190.00 |
| February | 760 | 15,200 | 95.00 | 105.00 | 840.00 | 84.00 | 0 | 0.00 | 0.00 | 270.00 |
| March | 800 | 16,000 | 100.00 | 105.00 | 840.00 | 84.00 | 0 | 0.00 | 0.00 | 310.00 |
| April | 800 | 16,000 | 100.00 | 105.00 | 840.00 | 84.00 | 0 | 0.00 | 0.00 | 350.00 |
| May | 820 | 16,400 | 102.50 | 105.00 | 840.00 | 84.00 | 0 | 0.00 | 0.00 | 370.00 |
| June | 840 | 16,800 | 105.00 | 105.00 | 840.00 | 84.00 | 0 | 0.00 | 0.00 | 370.00 |
| July | 910 | 18,200 | 113.75 | 105.00 | 840.00 | 84.00 | 0 | 0.00 | 0.00 | 300.00 |
Example 10.4 – Pennington Cabinets (2 of 7)
[Table 10.5 Continued]
| Month | Sales Forecast | Sales (In Labor Hours) | Sales (In Workers) | Actual Workers | Regular Production | Allowable Overtime Production | Overtime Production | Hirings | Layoffs | Inventory/ Back Orders |
| August | 910 | 18,200 | 113.75 | 105.00 | 840.00 | 84.00 | 0 | 0.00 | 0.00 | 230.00 |
| September | 910 | 18,200 | 113.75 | 105.00 | 840.00 | 84.00 | 0 | 0.00 | 0.00 | 160.00 |
| October | 880 | 17,600 | 110.00 | 105.00 | 840.00 | 84.00 | 0 | 0.00 | 0.00 | 120.00 |
| November | 860 | 17,200 | 107.50 | 105.00 | 840.00 | 84.00 | 0 | 0.00 | 0.00 | 100.00 |
| December | 840 | 16,800 | 105.00 | 105.00 | 840.00 | 84.00 | 0 | 0.00 | 0.00 | 100.00 |
| Blank | Blank | Blank | Blank | Blank | Blank | Blank | Blank | 0 | 5 | Blank |
| Totals: | 10,080 | Blank | Blank | Blank | 10,080 | Blank | 0 | 5 | 5 | 2,870 |
Example 10.4 – Pennington Cabinets (3 of 7)
Level Production Plan
Actual Workers
Hold workforce constant at 105 (average workforce required over the 12-month planning horizon)
Regular Production
105 workers × (160 hours per month/20 hours per set) = 840 sets per month or 10,080 sets for the year
Example 10.4 – Pennington Cabinets (4 of 7)
Level Production
Hiring and Layoffs – Ensure equal comparison of alternative plans under the same beginning and ending conditions by bringing the workforce back to its starting level at the end of the plan.
Hire 5 workers in January to bring the workforce up to 105 from the initial level of 100.
Layoff 5 workers at the end of December to bring the workforce back to its starting level.
Example 10.4 – Pennington Cabinets (5 of 7)
Level Production
Inventory Levels
Example 10.4 – Pennington Cabinets (6 of 7)
For January, the ending inventory is:
Example 10.4 – Pennington Cabinets (7 of 7)
Cost of the Level Production Plan
| Regular Production Costs | blank |
| 10,080 cabinet sets × ($2,000) = | $20,160,000 |
| Hiring and Layoff Costs | blank |
| 5 hirings × ($1,750) + 5 layoffs × ($1,500) = | $16,250 |
| Inventory Holding Costs | blank |
| 2,870 cabinet sets × ($40) = | $114,800 |
| Total: | $20,291,050 |
Example 10.5 – Pennington Cabinets (1 of 5)
Table 10.6 Chase Production Plan for Pennington Cabinets
| Month | Sales Forecast | Sales (In Labor Hours) | Sales (In Workers) | Actual Workers | Regular Production | Allowable Overtime Production | Overtime Production | Hirings | Layoffs | Inventory/Back Orders |
| Blank | Blank | Blank | Blank | 100.00 | Blank | Blank | Blank | Blank | Blank | 100.00 |
| January | 750 | 15,000 | 93.75 | 94.00 | 752.00 | 75.20 | 0 | 0.00 | 6.00 | 102.00 |
| February | 760 | 15,200 | 95.00 | 95.00 | 760.00 | 76.00 | 0 | 1.00 | 0.00 | 102.00 |
| March | 800 | 16,000 | 100.00 | 100.00 | 800.00 | 80.00 | 0 | 5.00 | 0.00 | 102.00 |
| April | 800 | 16,000 | 100.00 | 100.00 | 800.00 | 80.00 | 0 | 0.00 | 0.00 | 102.00 |
| May | 820 | 16,400 | 102.50 | 103.00 | 824.00 | 82.40 | 0 | 3.00 | 0.00 | 106.00 |
| June | 840 | 16,800 | 105.00 | 105.00 | 840.00 | 84.00 | 0 | 2.00 | 0.00 | 106.00 |
| July | 910 | 18,200 | 113.75 | 106.00 | 848.00 | 84.80 | 62 | 1.00 | 0.00 | 106.00 |
Example 10.5 – Pennington Cabinets (2 of 5)
[Table 10.6 Continued]
| Month | Sales Forecast | Sales (In Labor Hours) | Sales (In Workers) | Actual Workers | Regular Production | Allowable Overtime Production | Overtime Production | Hirings | Layoffs | Inventory/Back Orders |
| August | 910 | 18,200 | 113.75 | 106.00 | 848.00 | 84.80 | 62 | 0.00 | 0.00 | 106.00 |
| September | 910 | 18,200 | 113.75 | 106.00 | 848.00 | 84.80 | 62 | 0.00 | 0.00 | 106.00 |
| October | 880 | 17,600 | 110.00 | 106.00 | 848.00 | 84.80 | 32 | 0.00 | 0.00 | 106.00 |
| November | 860 | 17,200 | 107.50 | 106.00 | 848.00 | 84.80 | 12 | 0.00 | 0.00 | 106.00 |
| December | 840 | 16,800 | 105.00 | 105.00 | 840.00 | 84.00 | 0 | 0.00 | 1.00 | 106.00 |
| Blank | Blank | Blank | Blank | Blank | Blank | Blank | Blank | 0 | 5 | Blank |
| Totals: | 10,080 | Blank | Blank | Blank | 9,856 | Blank | 230 | 12 | 12 | 1,256 |
Example 10.5 – Pennington Cabinets (3 of 5)
Chase Production Plan
Actual workforce production and overtime production vary so that total production essentially matches sales for each month.
Because total production “chases” sales, inventory never builds up, as it did under the level production plan.
From July through November, monthly sales are higher than the maximum regular production level of 848.
Under the chase approach, Pennington will need to make up the difference through overtime production.
Example 10.5 – Pennington Cabinets (4 of 5)
While the chase production plan keeps inventory levels low, it results in more hirings and layoffs and in overtime production costs.
Because Pennington can’t hire fractional workers, the company can’t always exactly match production to sales.
They end up with slightly more cabinet sets in inventory at the end of the planning period.
Example 10.5 – Pennington Cabinets (5 of 5)
Cost of the Chase Production Plan
| Regular Production Costs | blank |
| 9,856 cabinet sets × ($2,000) = | $19,712,000 |
| Overtime Production Costs | blank |
| 230 cabinet sets × ($2,062) = | $474,260 |
| Hiring and Layoff Costs | blank |
| 12 hirings × ($1,750) + 12 layoffs × ($1,500) = | $39,000 |
| Inventory Holding Costs | blank |
| 1,256 cabinet sets × ($40) = | $50,240 |
| Total: | $20,275,500 |
Example 10.6 – Pennington Cabinets (1 of 4)
Table 10.7 Mixed Production Plan for Pennington Cabinets
| Month | Sales Forecast | Sales (In Labor Hours) | Sales (In Workers) | Actual Workers | Regular Production | Allowable Overtime Production | Overtime Production | Hirings | Layoffs | Inventory/Back Orders |
| Blank | Blank | Blank | Blank | 100.00 | Blank | Blank | Blank | Blank | Blank | 100.00 |
| January | 750 | 15,000 | 93.75 | 100.00 | 800.00 | 80.00 | 0 | 0.00 | 0.00 | 150.00 |
| February | 760 | 15,200 | 95.00 | 100.00 | 800.00 | 80.00 | 0 | 0.00 | 0.00 | 190.00 |
| March | 800 | 16,000 | 100.00 | 103.00 | 824.00 | 82.40 | 0 | 3.00 | 0.00 | 214.00 |
| April | 800 | 16,000 | 100.00 | 106.00 | 848.00 | 84.80 | 0 | 3.00 | 0.00 | 262.00 |
| May | 820 | 16,400 | 102.50 | 106.00 | 848.00 | 84.80 | 0 | 0.00 | 0.00 | 290.00 |
| June | 840 | 16,800 | 105.00 | 106.00 | 848.00 | 84.80 | 0 | 0.00 | 0.00 | 298.00 |
| July | 910 | 18,200 | 113.75 | 106.00 | 848.00 | 84.80 | 0 | 0.00 | 0.00 | 236.00 |
Example 10.6 – Pennington Cabinets (2 of 4)
[Table 10.7 Continued]
| Month | Sales Forecast | Sales (In Labor Hours) | Sales (In Workers) | Actual Workers | Regular Production | Allowable Overtime Production | Overtime Production | Hirings | Layoffs | Inventory/Back Orders |
| August | 910 | 18,200 | 113.75 | 106.00 | 848.00 | 84.80 | 0 | 0.00 | 0.00 | 174.00 |
| September | 910 | 18,200 | 113.75 | 106.00 | 848.00 | 84.80 | 0 | 0.00 | 0.00 | 112.00 |
| October | 880 | 17,600 | 110.00 | 106.00 | 848.00 | 84.80 | 12 | 0.00 | 0.00 | 92.00 |
| November | 860 | 17,200 | 107.50 | 106.00 | 848.00 | 84.80 | 12 | 0.00 | 0.00 | 92.00 |
| December | 840 | 16,800 | 105.00 | 106.00 | 848.00 | 84.80 | 0 | 0.00 | 0.00 | 100.00 |
| Blank | Blank | Blank | Blank | Blank | Blank | Blank | Blank | 0 | 6 | Blank |
| Totals: | 10,080 | Blank | Blank | Blank | 10,056 | Blank | 24 | 6 | 6 | 2,210.00 |
Example 10.6 – Pennington Cabinets (3 of 4)
By varying the production and inventory levels, the best plan can be developed.
The number of potential mixed plans is essentially limitless.
For example, overtime may be limited to 12 cabinet sets per month in October and November.
Example 10.6 – Pennington Cabinets (4 of 4)
Cost of the Mixed Production Plan
| Regular Production Costs | blank |
| 10,056 cabinet sets × ($2,000) = | $20,112,000 |
| Overtime Production Costs | blank |
| 24 cabinet sets × ($2,062) = | $49,488 |
| Hiring and Layoff Costs | blank |
| 6 hirings × ($1,750) + 6 layoffs × ($1,500) = | $19,500 |
| Inventory Holding Costs | blank |
| 2,210 cabinet sets × ($40) = | $88,400 |
| Total: | $20,269,388 |
Major Approaches to S&OP (6 of 7)
Bottom-Up Planning Process
Steps are similar to top-down planning.
Main difference is that the resource requirements must be evaluated individually for each product or service and then added up across all products or services to get a picture of overall requirements.
Major Approaches to S&OP (6 of 6)
Cash Flow Analysis
The Finance Department is responsible for making sure that the business has the cash it needs to carry out the sales and operations plan and that any excess cash is put to good use.
Net cash flow – The net flow of dollars into or out of a business over some time period.
Source: sciencedirect.com/topics/engineering/net-cash-flow
Organizing for and Implementing S&OP (1 of 4)
Questions to ask when choosing between alternative plans:
What impact will the plan have on supply chain partners such as key suppliers and transportation providers?
What are cash flows like?
Do the supply chain partners and the firm itself have the space needed to hold any planned inventories?
Does the plan contain significant changes in the workforce?
How flexible is the plan?
Organizing for and Implementing S&OP (2 of 4)
Figure 10.6 Fine-Tuning the Sales and Operations
Example 10.9 – Pennington Cabinets
Table 10.12 Summary of Alternative Plans at Pennington Cabinets
| Blank | Level Plan | Chase Plan | Mixed Plan |
| Regular production costs | $20,160,000 | $19,712,000 | $20,112,000 |
| Overtime production costs | 0 | $474,260 | $49,488 |
| Hiring and layoff costs | $16,250 | $39,000 | $19,500 |
| Inventory costs | $114,800 | $50,240 | $88,400 |
| Total costs | $20,291,050 | $20,275,500 | $20,269,388 |
| Key factors | Flat production level. Inventory levels grow as high as 370 cabinet sets. | Minimal inventory. Significant overtime required in peak months. | Reasonably stable production. Inventory levels grow, but not as high as under a pure level approach. Some overtime required. |
Organizing for and Implementing S&OP (3 of 4)
Rolling planning horizon – A planning approach in which an organization updates its sales and operations plan regularly, such as on a monthly or quarterly basis.
Figure 10.7 Updating the Sales and Operations Plan
Organizing for and Implementing S&OP (4 of 4)
Implementing S&OP in an organization is a three-phase process:
Developing the foundation
Integrating and streamlining the process
Gaining a competitive advantage
Service Considerations (1 of 2)
Making Sales Match Capacity
Yield management – An approach that services commonly use with highly perishable “products” in which prices are regularly adjusted to maximize total profit.
When demand levels are lower than expected, yield management systems boost demand by lowering the price, but only if the expected result is an increase in total profit.
When demand levels are higher than expected, prices are raised, but only if the expected result is higher total profit.
Total profit = (average profit per service unit sold) (number of service units sold)
Service Considerations (2 of 2)
Making Capacity Match Sales
Tiered workforce – A strategy used to vary workforce levels, in which additional full-time or part-time employees are hired during peak demand periods, while a smaller permanent staff is maintained year-round.
Offloading – A strategy for reducing and smoothing out workforce requirements that involves having customers perform part of the work themselves.
Linking S&OP throughout the Supply Chain
The S&OP process should consider not only the impact on various parties within the firm, but also the impact on outside parties – the firm’s supply chain partners.
Figure 10.8 Linking S&OP Up and Down the Supply Chain
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