Powerpoint Presentation - Operations and Supply Chain

McGraw-Hill/Irwin

Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved

Chapter 16

Sales and Operations Planning

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Learning Objectives

Understand what sales and operations planning is and how it coordinates manufacturing, logistics, service, and marketing plans.

Construct aggregate plans that employ different strategies for meeting demand.

Describe what yield management is and why it is an important strategy for leveling demand.

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What is Sales and Operations Planning?

• 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 consists of a series of meetings, finishing with a high-level meeting where key intermediate-term decisions are made
• This must occur at an aggregate level and also at the detailed individual product level

By aggregate we mean at the level of major groups of products

LO 1

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Types of Planning

• Long-range planning: planning focusing on a horizon greater than one year

Generally is done annually

• Intermediate-range planning: planning focusing on a period from 3 to 18 months

Time increments that are weekly, monthly, or quarterly

• Short-range planning: planning covering a period from one day to six months

Daily or weekly time increments

LO 1

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The Aggregate Operations Plan

• Specify the optimal combination of

Production rate (units completed per unit of time)

Workforce level (number of workers)

Inventory on hand (inventory carried from previous period)

• Product group or broad category (aggregation)
• This planning is done over an intermediate-range planning period of 3 to18 months

LO 1

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Production Planning Strategies

Chase strategy

Match the production rate by hiring and laying off employees

Must have a pool of easily trained applicants to draw on

Stable workforce—variable work hours

Vary the number of hours worked through flexible work schedules or overtime

Level strategy

Demand changes are absorbed by fluctuating inventory levels, order backlogs, and lost sales

LO 1

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Production Planning Strategies Continued

• Pure strategy: when just one of these approaches is used to absorb demand fluctuations
• Mixed strategy: when two or more of the approaches are used
• In addition to these strategies, managers also may choose to subcontract some portion of production

Similar to the chase strategy, but hiring and laying off are translated into subcontracting

LO 1

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Relevant Costs

Basic production costs

The fixed and variable costs incurred in producing a given product type in a given time period

Costs associated with changes in the production rate

Hiring, training, and laying off personnel

Inventory holding costs

Backorder costs

LO 1

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Level Scheduling

• A level schedule holds production constant over a period of time
• It is something of a combination of the strategies we have mentioned here
• For each period, it keeps the workforce constant and inventory low, and depends on demand to pull products through

LO 1

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Advantages of Level Scheduling

The entire system can be planned to minimize inventory and work-in-process

Product modifications are up-to-date because of the low amount of work-in-process

There is a smooth flow throughout the production system.

Purchased items from vendors can be delivered when needed, often directly to the production line

LO 1

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Requirements to Use Level Scheduling

Production should be repetitive (assembly-line format)

The system must contain excess capacity

Output of the system must be fixed for a period of time

There must be a smooth relationship among purchasing, marketing, and production

The cost of carrying inventory must be high

Equipment costs must be low

The workforce must be multi-skilled

LO 1

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Yield Management

• Yield management: 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

Can be a powerful approach to making demand more predictable

• Has existed as long as there has been limited capacity for serving customers
• Its widespread scientific application began with American Airlines’ computerized reservation system (SABRE)

LO 3

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Yield Management Most Effective When…

Demand can be segmented by customer

Fixed costs are high and variable costs are low

Inventory is perishable

Product can be sold in advance

Demand is highly variable

LO 3

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Yield Management at a Hotel

• Hotels offer one set of rates during the week and another set during the weekend
• The variable costs associated with a room are low in comparison to the cost of adding rooms to the property
• Available rooms cannot be transferred from night to night
• Blocks of rooms can be sold to conventions or tours
• Potential guests may cut short their stay or not show up at all

LO 3

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Operating Yield Management Systems

• Pricing structures must appear logical to the customer and justify the different prices
• Must handle variability in arrival or starting times, duration, and time between customers
• Must be able to handle the service process
• Must train employees to work in an environment where overbooking and price changes are standard occurrences that directly impact the customer
• The essence of yield management is the ability to manage demand

LO 3