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4. Sales and Operations Planning. Homework problems: 1,2,3,4,5,10,11,18. 4.1 . Sales and Operations Planning.

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slide1

4. Sales and Operations Planning

Homework problems: 1,2,3,4,5,10,11,18.

4 1 sales and operations planning
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
4 1 sales and operations planning in the firm
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
4 1 sales and operations planning in the firm1
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.
4 1 sales and operations planning in the firm2
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.
classical marketing manufacturing conflict
Classical Marketing/Manufacturing Conflict

Marketing Orientation (customer focus)

Manufacturing Orientation (efficiency/cost focus)

  • Capacity planning and long range sales forecasting
  • Production scheduling
  • Delivery and distribution
  • Quality assurance
  • Breadth of product line
  • Cost control
  • New product introduction

Excess capacity is costly

Stability

Inventory to smooth production

High quality is difficult unless features are simple

Narrow

Blame unreasonable marketing demands

New products provide production turmoil

4 1 the sales operations planning process
4.1. The Sales & Operations Planning Process
  • Not all sales and operations planning process are the same. Fig.4.2
  • Run the sales forecasting reports: updating forecast/actual sales, plan/actual production, and plan/actual inventories, etc. after the month end.
  • 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.
  • Supply/capacity planning: check capacity/resource availability for the newly developed SOP and modify operations plan, if necessary.
  • The pre-SOP meeting: involving various functional departments to resolve problems, identify areas that need top management intervention /decision.
  • The executive SOP meeting: finalize SOP, authorize spending, reach consensus, assess the impact of SOP on business plan, and performance.
4 1 the sales operations planning process1
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.

figure 4 5 chase plan explanations
Figure 4.5 Chase Plan explanations
  • In October:
  • Sales=$30 per unit. Thus, $10 millions=333k units ($10 m/$30).
  • Operations: employee productivity= 8 units/day; 22 days in October. Thus, 333k units requires 1892 employees (333k/(8x22).
  • 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.

  • In December (history): daily sales for next period=253k/20days=12,650;

Days of Supply (DoS)= 215k/12,650=16.99=17 days.

figure 4 5 chase plan explanations1
Figure 4.5 Chase Plan explanations
  • Past 3 months (history):
  • Sales = actual sales are short of forecast; cumulative difference of -100k is about 40% (100k/253k) of January sales.
  • Operations: actual exceeded plan, cumulative difference is about 45% (115k/253k) of January operations plan.
  • Inventory: increased from 3 to 17 days of supply
  • The need to adjust the operations plan to bring sales and operations into balance!!!
figure 4 5 chase plan explanations2
Figure 4.5 Chase Plan explanations
  • Costs:
  • Chase Plan implies that planned operations=planned sales from January to December. Thus, operations plan in January=253k implies 1581 employees (253k/(8x20)).
  • Hires: 144.3 employees = 1,581 – 1,437 (in Dec.); hiring cost=144.3 x $200 = $28,850.
  • Inventory: $6440k x 2%=$128,800;
  • Layoffs in June: 909.1 x $500=$454,545.
figure 4 6 chase with 5 dos explanations
Figure 4.6 Chase with 5 DoS explanations
  • To figure out January operations plan, we calculate daily sales for the next period (Feb.)=280,000/21 days=13,333 units/day.
  • 5 DoS = 5 x 13,333 = 66,666=67k units, which is our ending inventory for January.
  • January operations = 253k(sales) – 216k(beg. Inv.) + 67k (ending Inv.) = 105,000 units.
  • 105,000/(8x20) = 656.25 employees. Thus, layoffs=780.8 (1437-656.25).
  • Layoff cost = 780.8 x $500=$390,375.
  • Inventory cost = $2,000k x 2%=$40,000.

Homework: Check February numbers out !!!

figure 4 7 level plan explanations
Figure 4.7 Level Plan explanations
  • Level operations strategy is to maintain a constant workforce. The key task is to figure out how many employees would be required. January numbers:
  • Total production = 4333k (12 months sales) – 215k (beg. Inv.) + 67k (5 DoS ending Inv. in Dec.) = 4185k units.
  • Annual employee output = 8x243 days=1994 units/yr.
  • # of employee needed = 4185k/1994 = 2152.8 employees.
  • Hiring=2152.8-1437 (Dec.)=715.8; cost=715.8x$200=$143160.
  • Operations plan = 2153x8x20 = 344k units.
  • Inventory = 215 (Dec. ending) + 344(Jan. production )- 253 (Jan. sales) = 306k.
  • DoS = 306k/(280/21)= 23 days; (280/21=daily sales in Feb.)

Homework: Check February numbers out !!!

figure 4 10 mixed plan explanations
Figure 4.10 Mixed Plan explanations
  • Adding employees in April, July and August and laying off in December to better respond to future demand.
  • Chase and Level are two opposite (and extreme) strategies. Mixed operating plan usually outperform chase and level strategies in total costs.
  • Mixed operating plan can be optimized using Integer Programming.
slide15

Problem #2 on p. 113

History

Plan

Sales

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 DoSInv:

5

Inventory

Plan

(units)

1270

1270

1270

(000$)

2223

2223

2223

Actual

(units)

2265

2730

3944

Days of Supply

10

15

13

4 2 management obligations in the sop process
4.2. Management Obligations in the SOP Process
  • Top Management Role
  • The 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.
4 2 management obligations in the sop process1
4.2. Management Obligations in the SOP Process
  • Functional Roles
  • Under 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)
slide18
SBU

SBU 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

slide19

Scion xD(Subcompact)

Scion xB (Urban Utility)

Standard: AC, power windows/lock, airbags, ABS, remote entry, etc. starting from $12,500.

Scion tC(Sports Coupe)

4 2 management obligations in the sop process2
4.2. Management Obligations in the SOP Process
  • Controlling the Operations Plan
  • Checkingthe performance against both sales and operation plans, analyze and communicate the sources of variation.
  • Periodic Reporting
  • MPS ↔ operations plan, weekly
  • Inventory and backlog, weekly
  • Capacity utilization, weekly Delivery performance, daily
  • Identify source of deviations