14-Sales & Operations Planning

© 2007 Pearson Education

Sales and Operations Planning

Chapter 14


Planning at Whirlpool

Whirlpool begins production of room air conditioners in the fall and holds them as inventory until they are shipped in the spring.

Building inventory in the slack season allows the company to even out production rates over much of the year and still satisfy demand in the peak periods.

However, when summers are hotter than usual, demand increases dramatically and stockouts can occur.

If Whirlpool increases its output and the summer is hot, it stands to increase its sales and market share. But if the summer is cool, the company is stuck with expensive inventories.

Whirlpool prefers to make its production plans based on the average year, taking into account industry forecasts for total sales and traditional seasonalities.


Sales and Operations Planning

Sales and operations planning (S&OP): The process of planning future aggregate resource levels so that supply is in balance with demand.

Staffing plan: A sales and operations plan of a service firm, which centers on staffing and other human resource–related factors.

Production plan: A sales and operations plan of a manufacturing firm, which centers on production rates and inventory holdings.


Aggregation

The sales and operations plan is useful because it focuses on a general course of action, consistent with the company’s strategic goals and objectives, without getting bogged down in details.

Product family: A group of customers, services, or products that have similar demand requirements and common process, labor, and materials requirements.

A company can aggregate its workforce in various ways as well, depending on its flexibility.

The company looks at time in the aggregate – months, quarters, or seasons—rather than in days or hours.


The Relationship of Sales and Operations Plans

to Other Plans

A financial assessment of an organization’s near future (1 or 2 years ahead) is called either a business plan (in for-profit firms) or an annual plan (in nonprofit services).

Business plan: A projected statement of income, costs, and profits.

Annual plan or financial plan: A plan for financial assessment used by a nonprofit service organization.


The Relationship of Sales and Operations Plans

to Other Plans


SALES AND OPERATIONS PLANNING (S&OP)

Merges Aggregate Planning with Sales Involvement

Demand ManagementResources PlanningSales and Operations Planning

(Volume)

Front End

Rough-cut capacity planning

Master Production Schedule(MPS)

Engine

Detailed Material Planning (MRP)

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The Decision Context

Information inputs to Sales and Operations plans

Business or Annual plan

Operations Strategy

Capacity Constraints

Demand Forecast


Managerial Inputs from FunctionalAreas to Sales and Operations Plans


Plan Objectives

Six objectives usually are considered during development of a plan:

1. Minimize Costs/Maximize Profits

2. Maximize Customer Service

3. Minimize Inventory Investment

4. Minimize Changes in Production Rates

5. Minimize Changes in Workforce Levels

6. Maximize Utilization of Plant and Equipment


Reactive Alternatives

Reactive alternatives are actions that can be taken to cope with demand requirements.

Anticipation inventory is inventory that can be used to absorb uneven rates of demand or supply.

Workforce adjustment: Hiring and laying off to match demand.

Workforce utilization: Use of overtime and undertime.

Vacation schedules: Use of plant-wide vacation period, vacation “blackout” periods.


Subcontracting: Outsourcing to overcome short-term capacity shortages.

Backlogs, Backorders, and Stockouts:Backlog: An accumulation of customer orders

that have been promised for delivery at some future date.

Backorder: A customer order that cannot be filled immediately but is filled as soon as possible.

Stockout: An order that is lost and causes the customer to go elsewhere.

Reactive Alternatives


Aggressive Alternatives

Aggressive alternatives are actions that attempt to modify demand and, consequently, resource requirements.

Complementary products: Services or products that have similar resource requirements but different demand cycles.

Creative Pricing: Promotional campaigns designed to increase sales with creative pricing.


Planning Strategies

Chase strategy: A strategy that involves hiring and laying off employees to match the demand forecast.

Level-utilization strategy: A strategy that keeps the workforce constant, but varies its utilization to match the demand forecast.

Level-inventory strategy: A strategy that relies on anticipation inventories, backorders, and stockouts to keep both the output rate and the workforce constant.

Mixed strategy (Hybrid): A strategy that considers and implements a fuller range of reactive alternatives than any one “pure” strategy.


Hallmark Strategy

Hallmark spends considerable resources to effectively produce and distribute more than 40,000 different products through 43,000 retail outlets in the United States alone.

Hallmark has never used layoffs to adjust production rates. Employee flexibility is the key to this strategy.

Hallmark follows a philosophy of retraining its employees continually to make them more flexible.

To keep workers busy, Hallmark shifts production from its Kansas City plant to branch plants in Topeka, Leavenworth, and Lawrence, Kansas, to keep those plants fully utilized.

It uses the Kansas City plant as its “swing facility.” When demand is down, Kansas City employees may take jobs in clerical positions, all at factory pay rates. They might also be in classrooms learning new skills.


Constraints and Costs

The planner usually considers several types of costs when preparing sales and operations plans.

1. Regular-Time Costs: These costs include regular-time wages plus contributions to benefits, Social Security, retirement funds, and pay for vacations and holidays.

2. Overtime Costs: Overtime wages typically are 150 percent of regular-time wages.

3. Hiring and Layoff Costs: Include the costs of advertising jobs, interviews,training programs, exit interviews, severance pay, and lost productivity.

4. Inventory Holding Costs

5. Backorder and Stockout Costs


Data for Applications 14.1-14.3

The Barberton Municipal Division of Road Maintenance is charged with road repair in the city of Barberton and surrounding area. Cindy Kramer, road maintenance director, must submit a staffing plan for the next year based on a set schedule for repairs and on the city budget. Kramer estimates that the labor hours required for the next four quarters are 6,000, 12,000, 19,000, and 9,000, respectively. Each of the 11 workers on the workforce can contribute 520 hours per quarter. Overtime is limited to 20 percent of the regular-time capacity in any quarter. Subcontracting is not permitted.

Payroll costs are $6,240 in wages per worker for regular time worked up to 520 hours, with an overtime pay rate of $18 for each overtime hour. Although unused overtime capacity has no cost, unused regular time is paid at $12 per hour. The cost of hiring a worker is $3,000, and the cost of laying off a worker is $2,000.


Chase StrategyApplication 14.1


Level-Utilization StrategyApplication 14.2


Mixed StrategyApplication 14.3

Key Ideas: Hire only 7 in quarter 3, making maximum use of overtime to compensate. Reduce the amount of undertime in quarter 3. Reduce the layoffs required in quarter 4.


Mixed StrategyApplication 14.3

Key Ideas: Hire only 7 in quarter 3, making maximum use of overtime to compensate. Reduce the amount of undertime in quarter 3. Reduce the layoffs required in quarter 4.

SPREADSHEET


Sales and Operations Planning as a Process

Sales and operations planning is a decision-making process, involving both planners and management.

The process itself, typically done on a monthly basis, consists of six basic steps.


Decision Support Tools

Spreadsheets can be used, including ones that you develop on your own. Input valuesDerived valuesUtilized timeCalculated values

The Transportation method of production planning to solve production planning problems assumes that a demand forecast is available for each period, along with a possible workforce adjustment plan.


Spreadsheet6-period Worksheet


Planning Using a Spreadsheet


S&OP Spreadsheetfor a Make-to-Stock Family


The Transportation Methoda special case of linear

programming Obtain the demand forecast for each period to be covered by

the sales and operations plan and identify the initial inventory level currently available that can be used to meet future demand. Select a candidate workforce adjustment plan and specify the capacity limits of each production alternative.

Estimate the cost of holding inventory, and the cost of possible production alternatives.

Input the information gathered in steps 1-3 into a computer routine that solves the transportation problem.

Repeat the process with other plans for regular-time, overtime, and subcontracting capacities until you find the solution that best balances cost and qualitative considerations.

14-Sales & Operations Planning

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