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Copyri ght 2011 by The McGraw-H il l Companies, Inc. All ri ghts reserved.McGraw-Hill/Irwin

ManufacturingPlanning and Control

MPC 6thEdition

Chapter 4

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4-2

Sales and OperationsPlanning

The Sales and Operations Planning (SOP) process

is used to develop an overall business plan to

integrate the functional planning efforts within thecompany. SOP links strategic goals to production

and coordinates the planning efforts of various

groups such as marketing, finance, operations,

and human resources.

SOP is top managements handle on the business.

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Agenda

What is SOP?

SOP links with MPC

SOP activities and techniques

Critical SOP issues

State-of-the-art SOP

Principles

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SOP Functions

SOP provides the key communication links fortop management to coordinate the variousplanning activities in a business

Strategic Planning

MarketingPlanning

ResourcePlanning

FinancialPlanning

DemandManagement

Rough-CutCapacityPlanning

Sales & OperationsPlanning (Volume)

Sales Plan OperationsPlan

MasterProductionScheduling (Mix)

Front End

MPC Boundary

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SOP Fundamentals

The role of SOP is to balance supply anddemand at the volume level

Demand Supply

Volume Mix

Sales andOperationsPlanning

Balance between supply and demand

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SOP Communication

The plan must be expressed in termsthat are meaningful to non-

manufacturing executives The operations portion of the plan

must be stated in terms that MPCfunctions can use

Aggregate units by product line, dollarvalue, etc.

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Value of SOP

The SOP process provides visibility of theinteractions between sales, marketing,

production, and finance Critical trade-off decisions are documented

Manufacturing performance is controlled in a

clear fashion This leads to better integration among

functional areas and better response to themarketplace

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SOP Process

Run sales forecastreports

Demand planningphase

Supply planning phase

Pre-SOP meeting

Executive SOPMeeting

End ofmonth

Statistical forecasts

Field sales worksheets

Management forecastFirst-pass spreadsheets

Recommendations andagenda

Capacity constraintsSecond-pass spreadsheets

Decisions

and gameplan

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SOP ProcessKeyActivities

Updating the sales forecast

Reviewing the impact of operations plan

changescan current capacity and materialssupport the changes?

Identifying alternatives where problems exist

Formulating recommendations for topmanagement

Communicating the information to topmanagement

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SOP Discipline

For the SOP process to be routineand effective, replanning must occur

when conditions indicate the need Mechanisms for maintaining support

for the plans are important

Senior executive involvement is aminimum requirement

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Communicating SOPInformationDisplays

Information can be conveyed inseveral ways

Charts (monthly forecast, cumulativeproduction, alternative plans)

Tabular displays (easily captured andcommunicated using spreadsheets)

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SOP Tabular DisplayA planningfactor is usedto convertsales $ to units

The displayincludes both

history and the plan

Using a chasestrategy can lead tolarge variations inplanned production

Planningassumptions are

clearly displayed

Financial results ofthe plan arecalculated anddisplayed

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Production Strategies

Chaseproduction output is changedto match sales quantities

Levelproduction is constant, resultingin inventory build-up and depletionover time

Mixedcombination of chase and leveldesigned to result in acceptable levelsof flexibility and inventory

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Chase Strategy

Calculate hires and fires each period

If Employeest> Employeest-1then Hirest= EmployeestEmployeest-1else Firest=Employees t-1- Employeest

Calculate the number of employees required

Employeest= Planned productiont/Employee productivity

Calculate the operations plan (in units)

Planned productiont= Forecast salestInventoryt-1+Inventoryt

Calculate end-of-month inventory targets

Inventoryt= Target days x Expected Demandt+1/Working dayst+1

A spreadsheet with these calculationscan be found here.
http://www.pom.edu/mpc6ehttp://www.pom.edu/mpc6e

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Level Strategy

Calculate ending inventory levels and days of supply

Inventoryt= Inventoryt-1 + Planned productiontForecast demandtDays of supplyt= Inventoryt/(Expected demandt+1/Working dayst+1)

Calculate the number of employees needed

InventoryT= Expected DemandT+1/Working daysT+1Total production required = Total forecast demandBeginning inventory + Ending inventoryT

Planned production each period = Total production required/Number of periodsEmployees required each period = Planned production each period/Employee productivity per day

A spreadsheet with these calculationscan be found here.
http://www.pom.edu/mpc6ehttp://www.pom.edu/mpc6e

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Level Strategy

0

200

400

600

800

1000

1200

1400

1600

Jan Feb Mar Apr May Jun

Demand forecast

Level

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Karma strateji (MixedStrategy)

0

200

400

600

800

1000

1200

1400

1600

Jan Feb Mar Apr May Jun

Demand forecast

mixed

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Example: Chase Strategy

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Example: Level Strategy

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Example: Mixed Strategy

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2011 Pearson Education,Inc. publishing as Prentice

Hall

Roofing Supplier Example 1

Table 13.2

Month Expected DemandProduction

DaysDemand Per Day

(computed)

Jan 900 22 41

Feb 700 18 39

Mar 800 21 38

Apr 1,200 21 57

May 1,500 22 68

June 1,100 20 55

6,200 124

= = 50 units per day6,200

124

Averagerequirement =

Total expected demand

Number of production days

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Hall


Figure 13.3

70

60

50

40

30

0 Jan Feb Mar Apr May June = Month

22 18 21 21 22 20 = Number ofworking days

P

roductionratep

erworkingday

Level production using averagemonthly forecast demand

Forecast demand

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4-24


Hall


Table 13.3

Cost Information

Inventory carrying cost $ 5 per unit per month

Subcontracting cost per unit $20 per unit

Average pay rate $10 per hour ($80 per day)

Overtime pay rate $17 per hour(above 8 hours per day)

Labor-hours to produce a unit 1.6 hours per unit

Cost of increasing daily production rate(hiring and training)

$300 per unit

Cost of decreasing daily production rate(layoffs)

$600 per unit

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Hall


Table 13.3

Cost Information







$300 per unit


$600 per unit

MonthProduction

Days

Productionat 50 Unitsper Day

DemandForecast

MonthlyInventoryChange

EndingInventory

Jan 22 1,100 900 +200 200

Feb 18 900 700 +200 400

Mar 21 1,050 800 +250 650Apr 21 1,050 1,200 -150 500

May 22 1,100 1,500 -400 100

June 20 1,000 1,100 -100 0

1,850

Total units of inventory carried over from onemonth to the next = 1,850 units

Workforce required to produce 50 units per day = 10 workers

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Hall


Table 13.3

Cost Information







$300 per unit


$600 per unit

MonthProduction

Days

Productionat 50 Unitsper Day

DemandForecast

MonthlyInventoryChange

EndingInventory

Jan 22 1,100 900 +200 200

Feb 18 900 700 +200 400

Mar 21 1,050 800 +250 650Apr 21 1,050 1,200 -150 500

May 22 1,100 1,500 -400 100

June 20 1,000 1,100 -100 0

1,850

Total units of inventory carried over from onemonth to the next = 1,850 units

Workforce required to produce 50 units per day = 10 workers

Costs Calculations

Inventory carrying $9,250 (= 1,850 units carried x $5per unit)

Regular-time labor 99,200 (= 10 workers x $80 per

day x 124 days)Other costs (overtime,

hiring, layoffs,subcontracting) 0

Total cost $108,450

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Hall


Figure 13.4

Cumulativedem

andunits

7,000

6,000

5,000

4,000

3,000

2,000

1,000

Jan Feb Mar Apr May June

Cumulative forecastrequirements

Cumulative levelproduction using

average monthlyforecastrequirements

Reductionof inventory

Excess inventory

6,200 units

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Hall


Table 13.2


DaysDemand Per Day

(computed)

Jan 900 22 41

Feb 700 18 39

Mar 800 21 38

Apr 1,200 21 57

May 1,500 22 68

June 1,100 20 55

6,200 124

Minimum requirement = 38 units per day

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2011 Pearson Education,

Inc. publishing as PrenticeHall


70

60

50

40

30



Productionratep

erworkingday

Level productionusing lowest

monthly forecast

demand

Forecast demand

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Table 13.3

Cost Information







$300 per unit


$600 per unit

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Table 13.3

Cost Information

Inventory carry cost $ 5 per unit per month


Average pay rate $ 5 per hour ($40 per day)

Overtime pay rate $ 7 per hour(above 8 hours per day)



$300 per unit


$600 per unit

In-house production = 38 units per dayx 124 days

= 4,712 units

Subcontract units = 6,200 - 4,712= 1,488 units

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Table 13.3

Cost Information

Inventory carry cost $ 5 per unit per month






$300 per unit


$600 per unit


In-house production = 38 units per dayx 124 days

= 4,712 units

Subcontract units = 6,200 - 4,712= 1,488 units

Costs Calculations

Regular-time labor $75,392 (= 7.6 workers x $80 perday x 124 days)

Subcontracting 29,760 (= 1,488 units x $20 perunit)

Total cost $105,152

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Table 13.2


DaysDemand Per Day

(computed)

Jan 900 22 41

Feb 700 18 39

Mar 800 21 38

Apr 1,200 21 57

May 1,500 22 68

June 1,100 20 55

6,200 124

Production = Expected Demand

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70

60

50

40

30



Productionratep

erworkingday

Forecast demand andmonthly production

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Table 13.3

Cost Information







$300 per unit


$600 per unit

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Table 13.3

Cost Information







$300 per unit


$600 per unit

MonthForecast(units)

DailyProdRate

BasicProduction

Cost(demand x

1.6 hrs/unit x$10/hr)

Extra Cost ofIncreasingProduction(hiring cost)

Extra Cost ofDecreasingProduction(layoff cost) Total Cost

Jan 900 41 $ 14,400 $ 14,400

Feb 700 39 11,200 $1,200(= 2 x $600)

12,400

Mar 800 38 12,800 $600

(= 1 x $600)13,400

Apr 1,200 57 19,200$5,700

(= 19 x $300) 24,900

May 1,500 68 24,000 $3,300(= 11 x $300) 24,300

June 1,100 55 17,600 $7,800

(= 13 x $600)25,400

$99,200 $9,000 $9,600 $117,800

Table 13.4

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Comparison of Three Plans

Table 13.5

Cost Plan 1 Plan 2 Plan 3

Inventory carrying $ 9,250 $ 0 $ 0

Regular labor 99,200 75,392 99,200

Overtime labor 0 0 0

Hiring 0 0 9,000

Layoffs 0 0 9,600

Subcontracting 0 29,760 0Total cost $108,450 $105,152 $117,800

Plan 2 is the lowest cost option

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Mathematical Approaches

Useful for generating strategies Transportation Method of Linear

Programming

Produces an optimal plan Management Coefficients Model

Model built around managers experience and

performance

Other Models

Linear Decision Rule

Simulation

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Management Coefficients Model

Builds a model based on managersexperience and performance

A regression model is constructedto define the relationships betweendecision variables

Objective is to remove

inconsistencies in decision making

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Other Models

Linear Decision Rule

Minimizes costs using quadratic cost curves

Operates over a particular time period

Simulation

Uses a search procedure to try different combinations ofvariables

Develops feasible but not necessarily optimal solutions

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Summary of Aggregate

Planning MethodsTechniques

SolutionApproaches Important Aspects

Graphical

methods

Trial and

error

Simple to understand and

easy to use. Manysolutions; one chosenmay not be optimal.

Transportationmethod of linearprogramming

Optimization LP software available;permits sensitivityanalysis and newconstraints; linearfunctions may not berealistic.

Table 13.8

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Summary of Aggregate

Planning MethodsTechniques

SolutionApproaches Important Aspects

Management

coefficientsmodel

Heuristic Simple, easy to implement;

tries to mimic managersdecision process; uses

regression.

Simulation Changeparameters

Complex; may be difficultto build and for managersto understand.

Table 13.8

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Management Obligations

Commit to the SOP process

Establish the SOP framework

Put the right team together

Set meetings

Participate in the process

Modify performance measures and reward

structures to align with the plan

Force resolution of trade-offs betweenfunctions

Lead the cultural change

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Functional Roles

The primary obligation for all functionsinvolved is to hit the plan

A cross-functional team approach is important

Executive champion/sponsorkeep top management focused on theprocess, clear major obstacles, and acquire resources

SOP process ownerprovide leadership for the SOP process andimplementation

Demand planning teamprovide demand data and represent forecasting,

marketing, and sales functions Supply planning teamprovide supply system information and represent

manufacturing and purchasing functions

Pre-SOP teammanage cross-functional development of SOP

Executive SOP teamupper management representative of each

functional area

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Integrated Planning

Integration among sales, marketing, and productionis key

Sales and marketing need to sell what is planned

(overselling is just as bad as underselling) Opportunities need to be evaluated via changes to the SOP

Manufacturings job is to achieve the planexactly(overproduction and underproduction are equally bad)

The end result is good customer service Breakdowns in the plan must be quickly reported by the

functional area responsible

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Strategic Planning

A direction-setting activity

Can be an extension of budgeting

More recently, plan is based onproducts and markets rather thanorganizational units

SOP must support strategic plans

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Operations Plan Control

The SOP process should be widely understood

Planned results for each functional area should

be clearly communicated The seriousness of the plan must also be

reinforced

Key issues

When and how to change the plan?

How stable should the plan be from period toperiod?

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Principles

The operations plan isnt a forecast. It is astatement of desired production output.

The operations plan is included in the SOPprocess to maintain agreement with otherfunctional plans.

Trade-offs required to frame the operations

plan must be made prior to final approval Top management involvement is imperative

in the SOP process. The SOP process

should relate directly to the strategic plan.

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Principles

The MPC system should be used toperform routine activities and provideroutine data, allowing management time

to be devoted to important tasks. The MPC system should facilitate what-

if analysis at the SOP level.

Reviews of performance against SOPare needed to prompt replanning whennecessary.

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QuizChapter 4

The four fundamental issues in Sales and OperationsPlanning are __________.

Sales and Operations Planning balances supply anddemand at the ______ level.

Many key Sales and Operations Planning linkages areoutside the Manufacturing Planning and Control (MPC)system. (True/False)

A strategy which matches monthly supply to forecasted

demand is ________. A strategy which maintains a consistent monthly output is

_________.

The primary obligation for any functional area is to hit the

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