Sales and Operations Planning (SOP): Integrating Functional Planning Efforts

1. 216-781216-576 Enterprise Planning inSupply Chain Samar Mukhopadhyay Spring 2017

2. Chapter 4Sales and Operations Planning

3. Sales and Operations Planning The Sales and Operations Planning (SOP) process is used to develop an overall business plan to integrate the functional planning efforts within the company. 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 management’s handle on the business.

4. SOP Functions • SOP provides the key communication links for top management to coordinate the various planning activities in a business Strategic Planning Marketing Planning Financial Planning Sales & Operations Planning (Volume) Sales Plan Operations Plan Resource Planning Demand Management MPC Boundary Rough-Cut Capacity Planning Master Production Scheduling (Mix) Front End

5. SOP Fundamentals Balance between supply and demand • The role of SOP is to balance supply and demand at the volume level

6. SOP Communication • The plan must be expressed in terms that are meaningful to non-manufacturing executives • The operations portion of the plan must be stated in terms that MPC functions can use • Aggregate units by product line, dollar value, etc.

7. Value of SOP • The SOP process provides visibility of the interactions 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 the marketplace

8. SOP Process End of month Statistical forecasts Field sales worksheets Management forecast First-pass spreadsheets Capacity constraints Second-pass spreadsheets Decisions and game plan Recommendations and agenda

9. SOP Process – Key Activities • Updating the sales forecast • Reviewing the impact of operations plan changes–can current capacity and materials support the changes? • Identifying alternatives where problems exist • Formulating recommendations for top management • Communicating the information to top management

10. SOP Discipline • For the SOP process to be routine and effective, replanning must occur when conditions indicate the need • Mechanisms for maintaining support for the plans are important • Senior executive involvement is a minimum requirement

11. Communicating SOP Information–Displays • Information can be conveyed in several ways • Charts (monthly forecast, cumulative production, alternative plans) • Tabular displays (easily captured and communicated using spreadsheets)

12. SOP Tabular Display The display includes both history and the plan A planning factor is used to convert sales $ to units Using a chase strategy can lead to large variations in planned production Financial results of the plan are calculated and displayed Planning assumptions are clearly displayed

13. Production Strategies • Chase–production output is changed to match sales quantities • Level–production is constant, resulting in inventory build-up and depletion over time • Mixed–combination of chase and level designed to result in acceptable levels of flexibility and inventory

14. Chase Strategy A spreadsheet with these calculations can be found here.

15. Level Strategy A spreadsheet with these calculations can be found here.

16. 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 between functions • Lead the cultural change

17. Functional Roles • The primary obligation for all functions involved is to “hit the plan” • A cross-functional team approach is important • Executive champion/sponsor–keep top management focused on the process, clear major obstacles, and acquire resources • SOP process owner–provide leadership for the SOP process and implementation • Demand planning team–provide demand data and represent forecasting, marketing, and sales functions • Supply planning team–provide supply system information and represent manufacturing and purchasing functions • Pre-SOP team–manage cross-functional development of SOP • Executive SOP team–upper management representative of each functional area

18. Defining Product Families

19. Integrated Planning • Integration among sales, marketing, and production is 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 • Manufacturing’s job is to achieve the plan–exactly (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

20. Strategic Planning • A direction-setting activity • Can be an extension of budgeting • More recently, plan is based on products and markets rather than organizational units • SOP must support strategic plans

21. 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 to period?

22. Principles • The operations plan is not a forecast. It is a statement of desired production output. • The operations plan is included in the SOP process to maintain agreement with other functional 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.

23. Principles • The MPC system should be used to perform routine activities and provide routine 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 SOP are needed to prompt replanning when necessary.

24. Chapter 4aAdvanced Sales and Operations Planning

25. Advanced Sales and Operations Planning Within the Sales and Operations Planning (SOP) process, modeling procedures can be used to establish overall production and inventory plans. The basic issue is what levels of resources should be provided in each period. Powerful and easily accessible tools are available for solving these models.

26. Linear Programming

27. Characteristics of an LP Problem • A single objective function • Alternative courses of action • Scarce resources • Linear expressions • Divisible variables (Integer values not guaranteed)

28. Formulation of LP 4 Steps • Define decision Variables • Write the Objective Function • Construct the Constraint equations • Add the non-negativity constraints

29. General LP Formulation 1. Variables: X1, X2, ,, Xn 2. Objective Function:Maximize or C1 X1 + C2 X2 + ... + Cn XnMinimize

30. LP Formulation (cont’d) 3. Constraints: a11 X1 + a12 X2 + ... + a1n Xn = b1 a21 X1 + a22 X2 + ... + a2n Xn b2 am1 X1 + am2 X2 + ... + amn Xn bm

31. LP Formulation (cont’d) 4. Non-negativity constraintsX1 ,X2, ... , Xn 0No. of variable = nNo. of constraints = m

32. LP Formulation (cont’d) Ci = Objective function coefficients i = 1,2, ... , n bj = Right hand sides RHS j = 1, 2, ..., m aji= technological coefficients j = 1, 2, ..., m, i = 1,2, ... , n

33. Maximization Example $2 profit/unit4 hr. machine A2 hr. machine B You’re an analyst for a division of Levi, which makes baseball & western hats. There are 3 machines. Machine A has 120 hr. available per week; machine B, 72 hr. and machine C, 10 hrs. How many of each hat should be made? $4 profit/unit6 hr. machine A6 hr. machine B 1 hr. machine C

34. Example (cont’d) Find: How many of each product to be produced each week so as to maximize profit

35. Formulation 1. Decision variables: X1 = No. of baseball hats to be produced per week X2 = No. of western hats to be produced per week

36. Formulation (cont’d) 2. Objective function: Max 2X1 + 4X2 3. Constraints: 4X1 + 6X2 120 (machine A) 2X1 + 6X2 72 (machine B) X2 10 (machine C)

37. Formulation (cont’d) 4. Non-negativity constraint: X1 , X2 0

38. Optimal Solution Solve: 4X1 + 6X2 = 120 2X1 + 6X2 = 72 gives: X1 = 24 and X2 = 4 Maximum profit = $64

39. Linear Programming Overtime Costs Hiring Costs Firing Costs Labor Costs Inventory Costs Idle Time Costs Inventory Constraints Regular Production Constraint Overtime Production Constraint Workforce Change Constraint Initializing Constraints

40. LP Assumptions

41. LP Model and Solution Changing cells (decision variables)

42. LP Settings and Options Minimize total costs Constraints • Ending workforce = actual (72) • Reg. production <= capacity • OT production <= capacity • Monthly inventory >= 2,000 • Ending inventory (August) = actual (16,460) • Hires/Fires must be integers