Sales Operations

Sales and Operations Planning(Aggregate Planning)

Chapter 10

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 10 - 2

Chapter ObjectivesBe able to:Distinguish among strategic planning, tactical planning, and detailed planning and control. Describe why sales and operations planning (S&OP) is important to an organization and its supply chain partners.Generate multiple alternative sales and operations plans for a firm. Describe the differences between top-down and bottom-up S&OP and discuss the strengths and weaknesses of level, chase, and mixed production strategies. Discuss the organizational issues that arise when firms decide to incorporate S&OP into their efforts. Examine how S&OP can be used to coordinate activities up and down the supply chain. Apply optimization modeling techniques to the S&OP process.


Sales and Operations Planning

Sales and operations planning (S&OP) – A process to develop tactical plans by integrating marketing plans for new and existing products with the management of the supply chain. Brings together all the plans for the business into

one integrated set of plans. Also called Aggregate planning.

© 2010 APICS Dictionary


S&OP Planning Levels

Strategic planning Tactical planning Detailed planning and control

Figure 10.1


Goals of S&OP To indicate how the organization will use its tactical

capacity resources to meet expected customer demand.

To strike a balance between the various needs and constraints of the supply chain partners.

To serve as a coordinating mechanism for the various supply chain partners.

To express the business’s plans in terms that everyone can understand.


Major Approaches

Top-down planning – An approach to S&OP in which a single, aggregated sales forecast drives the planning process.

Bottom-up planning – An approach to S&OP that is used when the product/service mix is unstable and resource requirements vary greatly across the offerings.


Choosing an Approach

Figure 10.2


Planning Values

Planning values – Values that decision makers use to translate a sales forecast into resource requirements and to determine the feasibility and costs of alternative sales and operations plans.


Top-Down Planning

Developing a top-down plan: Develop the aggregate sales forecast and planning

values. Translate the sales forecast into resource

requirements. Generate alternative production plans.


Top-Down Example – Pennington Cabinets

12 month sales forecast



Table 10.3



Forecast exceeds capacityin peak months

Figure 10.3



Translate the Sales Forecast into Resource Requirements

For example:

April800 * 20 = 16,000 hrs16,000/160 = 100 wkrs

Table 10.4


Alternative Production Plans

Level production plan – A S&OP plan in which production is held constant and inventory is used to absorb the differences between production and the sales forecast.

Chase production plan – A S&OP plan in which production is changed in each time period to match the sales forecast.

Mixed production plan - A S&OP plan that varies both production and inventory levels in an effort to develop the most effective plan.


Level Production Plan

Table 10.5



Actual Workers Hold workforce constant at 105 (average

workforce over 12-month planning horizon)

Regular Production 105 x (160 hours per month/20 hours per set) =

840 sets per month or 10,080 sets per year



Hiring and Layoffs Hire 5 workers in January to bring the workforce

up to 105 from the initial level of 100. Layoff 5 workers at the end to bring the workforce

back to its starting level.• Ensures equal comparison of alternative plans under

the same beginning and ending conditions.



Inventory Levels



Cost of the Plan


Chase Production Plan

Actual workforce production and overtime production vary so that total production essentially matches sales for each month.

Inventory never builds up because total production “chases” sales.

There are more hires and layoffs and overtime production costs.



Table 10.6



Cost of the plan


Mixed Production Plan

By varying the production and inventory levels, the best plan can be developed.

The number of potential mixed plans is essentially limitless.

For example, overtime may be limited to 12 cabinet sets per month in October and November.



Table 10.7



Cost of the Plan


Bottom-Up Planning

Steps are similar to top-down planning. Main difference is that the resource

requirements for each product or service must be evaluated individually and then added up across all products or services to get a picture of overall requirements.


Bottom-Up Example

Although machine hour requirements are similar, labor requirements differ greatly.

Table 10.8


Bottom-Up Example

Table 10.9


Bottom-Up Example

The difference in labor requirements becomes important when the product mix changes.

Even though the aggregate forecast across both product lines is 700 units each month, the product mix changes, as can be seen in the labor hours needed each month.


Bottom-Up Example

Load Profile – A display of future capacity requirements based on released and/or planned orders over a given span of time.

Figure 10.4

© 2010 APICS Dictionary


Cash Flow Analysis

Net cash flow – The net flow of dollars into or out of a business over some time period.

Net cash flow = cash inflows – cash outflows


Cash Flow Analysis

Different sales scenarios can have a significant effect on cash flow as shown above.Figure 10.5


Choosing between Plans What impact will the plan have on key suppliers and

transportation providers? What are the cash flows like? Do the supply chain partners and the firm itself

have the space needed to hold any planned inventories?

Does the plan contain significant changes in the workforce?

How flexible is the plan?


Fine-Tuning the Plan

Figure 10.6


Rolling Planning Horizons

Rolling planning horizon – A planning approach in which an organization updates its sales and operations plan regularly, such as on a monthly or quarterly basis.

Figure 10.7


Implementing S&OP

Developing the foundation Build managerial support and infrastructure to

make it a success. Integrating and streamlining the process

Update the plan and use the results for decision-making.

Gaining a competitive advantage Make S&OP a core competency.


Service Considerations

Making sales match capacity

Making capacity (typically the workforce) match sales


Making Sales Match Capacity

Yield management – An approach that services commonly use with highly perishable “products” in which prices are regularly adjusted to maximize total profit.

Total profit = (average profit per service unit sold) * (# of service units sold)


Making Capacity Match Sales

Tiered workforce – A strategy used to vary workforce levels in which additional full-time or part-time employees are hired during peak demand periods, while a smaller permanent staff is maintained year-round.

Offloading – A strategy for reducing and smoothing out workforce requirements that involves having customers perform part of the work themselves.


S&OP Optimization Modeling

Optimization model – A class of mathematical models used when the user seeks to optimize some objective function subject to some constraints. Understand the pattern of resource decisions –

labor, inventory, machine time, etc. - that will result in the lowest total cost while still meeting the sales forecast.

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