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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

1. Capacity planning and long range sales forecasting

2. Production scheduling

3. Delivery and distribution

4. Quality assurance

5. Breadth of product line

6. Cost control

7. New product introduction

Excess capacity is costly

Stability

Inventory to smooth productionHigh quality is difficult unless features are simple

Narrow

Blame unreasonable marketing demands

New products provide production turmoil

Marketing Orientation (customer focus)

Manufacturing Orientation (efficiency/cost focus)

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4.1. The Sales & Operations Planning Process Not all sales and operations planning process are the same. Fig.4.2

1. Run the sales forecasting reports: updating forecast/actual sales, plan/actual production, and plan/actual inventories, etc. after the month end.

2. 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.

3. Supply/capacity planning: check capacity/resource availability for the newly developed SOP and modify operations plan, if necessary.

4. The pre-SOP meeting: involving various functional departments to resolve problems, identify areas that need top management intervention /decision.

5. 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 explanationsIn 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 explanationsPast 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 explanationsCosts:

1. Chase Plan implies that planned operations=planned sales from January to December. Thus, operations plan in January=253k implies 1581 employees (253k/(8x20)).

2. Hires: 144.3 employees = 1,581 – 1,437 (in Dec.); hiring cost=144.3 x $200 = $28,850.

3. Inventory: $6440k x 2%=$128,800;4. Layoffs in June: 909.1 x $500=$454,545.

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Figure 4.6 Chase with 5 DoS explanations1. 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 explanations1. 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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History PlanSales Oct Nov Dec Jan Feb Mar

Forecast (M$) 12.50 10.00 16.25 5.00 5.00 7.50

(units) 5000 4000 6500 2000 2000 3000

Actual (units) 4384 3626 6065

Diff: Month -616 -374 -435

Cumulative -990 -1425

Operations

Plan (units) 5000 4000 6500

(# employ) 72 70 114

# Work Days/Mo. 23 19 19 20 21 23

Actual (units) 5649 4091 7279

Diff: Month 649 91 779

Cumulative 740 1519

Target DoS Inv: 5

Inventory

Plan (units) 1270 1270 1270

(000$) 2223 2223 2223

Actual (units) 2265 2730 3944

Days of Supply 10 15 13

Problem #2 on p. 113

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4.2. Management Obligations in the SOP Process

Top Management RoleThe 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 RolesUnder 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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SBUSBU 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.

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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, weeklyInventory and backlog, weeklyCapacity utilization, weeklyDelivery performance, daily

Identify source of deviations

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Problem #15 on p. 119

ABC Sales and Operations Planning SpreadsheetHistory Plan

Sales Apr May Jun Jul Aug Sep SumForecast (M$) $22.50 $25.50 $28.50 $31.50 $34.50 $37.50

(units) 1.50 1.70 1.90 2.10 2.30 2.50 6900000Actual (units) 0.78 1.95 1.63Diff: Month -0.72 0.25 -0.27Cumulative -0.47 -0.74OperationsPlan (units) 1.50 1.70 1.90 1.39 2.92 3.20 7506000

(# employ) 75 77 86 139 139 139# Work Days/Mo. 20 22 22 10 21 23 54Actual (units) 1.51 1.70 1.88Diff: Month 0.01 0.00 -0.02 250001 Beg invCumulative 0.01 -0.01 833333 Tgt inv for DOS in Sept 583333 Additional inv requiredInventory 7483333 3 month total buildPlan (units) 250000 250000 250000 -459999 159001 856001 138580 Build per day

(000$) $2,625 $2,625 $2,625 $0 $1,669,508 $8,988,008 139 Implied constant labor

Actual (units) 250001 250000 250001Days of Supply 9.6 3.9 4.6 -6.6 2.1 10.3