19–1

Operations andSupply Chain Management

CHASE | SHANKAR | JACOBS

14e

19–2

SALES AND OPERATIONS PLANNING

Chapter Nineteen Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

19–3

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Learning Objectives• LO19–1: Understand what sales and

operations planning is and how it coordinates manufacturing, logistics, service, and marketing plans.

• LO19–2: Construct and evaluate aggregate plans that employ different strategies for meeting demand.

• LO19–3: Explain yield management and why it is an important strategy.

19–4

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What Is Sales and Operations Planning?

• Sales and operations planning is a process that helps firms provide better customer service, lower inventory, shorten customer lead times, stabilize production rates, and give top management a handle on the business.

• The process consists of a series of meetings, finishing with a high-level meeting where key intermediate-term decisions are made.

• This must occur at an aggregate level and also at the detailed individual product level.– Aggregate means at the level of major groups of

products.

19–5

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.Major Sales and Operations Planning Activities

19–6

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.Sales and Operations Planning Activities – Overview

Sales and operations planning was coined by companies to refer to aggregate planning.

The new terminology is meant to capture the importance of cross-functional work.

Aggregation on the supply side is done by product families, and on the demand side it is done by groups of customers.

19–7

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Types of Planning

• Planning focusing on a horizon greater than 1 year, usually performed annually

Long-range planning

• Planning focusing on a period from 3 to 18 months, time increments are weekly, monthly, or quarterly

Intermediate-range planning

• Planning covering a period from 1 day to 6 months with daily or weekly time increments

Short-range planning

19–8

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.Aggregate Operations Plans

• Specifies the optimal combination of– Production rate (units completed per unit of time)

– Workforce level (number of workers needed in a period)

– Inventory on hand (inventory carried from previous period)

• Product group or broad category (aggregation)

• Planning done over an intermediate-range planning period of 3 to 18 months

19–9

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.Production Planning Environment

• In general, the external environment is outside the production planner’s direct control.– In some firms, demand can be managed.

• Complementary products work for firms facing cyclical demand fluctuations.

• With services, cycles are more often measured in hours than months.

19–10

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.Inputs to the Production Planning System

19–11

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.Production Planning Strategies

• Production planning strategies are the plans for meeting demand. Trade offs involved include workers employed, work hours, inventory and shortages.

• A pure strategy uses just one of these approaches, a mixed strategy uses two or more.

Chase strategy

Match the production rate by hiring and laying off employeesMust have a pool of easily trained applicants to draw on

Stable workforce—

variable work hours

Vary the number of hours worked through flexible

work schedules or overtime

Level strategy Demand changes are

absorbed by fluctuating inventory levels, order backlogs, and lost sales

Sub-contracting

Hiring and laying off are translated into subcontracting

19–12

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Relevant Costs

Basic production costs

Costs associated with changes in

the production rate

Inventory holding costs Backorder costs

Cost Types

19–13

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.Aggregate Planning Techniques

• Involves costing out various production planning alternatives and selecting the one that is best

• Elaborate spreadsheets developed to facilitate the decision process

Cut-and-try approach

• Use of mathematical analysis to determine an optimal plan

Linear programming

• What-if analysis using simulated demand to evaluate effectiveness of alternative plans

Simulation

19–14

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.Cut and Try – JC Company

Because inventory holding cost is in $/unit, material cost is not relevant

19–15

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.Aggregate Planning – JC Company

January ending inventory becomes February beginning inventory.

Excel: Aggregate Planning

For the Excel template visit www.mhhe.com/sie-chase14e

19–16

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.Evaluate Alternative Plans

Produce to exact monthly production requirements by varying workforce size

Produce to meet expected average

demand by maintaining a constant workforce

Produce to meet the minimum expected

demand using a constant workforce and

subcontract to meet additional requirements

Produce to meet expected demand for all but the first two months

using a constant workforce and use overtime to meet additional output

requirements

19–17

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.Plan 1: Exact Production; Vary Workforce

Production exactly matches requirements.

Workers are added or reduced as needed.

19–18

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.Plan 2: Constant Workforce; Vary Inventory and Stockout

Number of workers is set to meet average demand over the time horizon. This then determines production rate and inventory/backorders.

19–19

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.Plan 3: Constant Low Workforce; Subcontract

Workforce sized to meet minimum demand (April).

Demand over minimum is met with subcontracting.

19–20

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Plan 4: Constant Workforce; Overtime

Demand in the first two months is high, so overtime is used to compensate. Then, inventory can be built for high demand in June.

19–21

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Plan Comparison

19–22

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Graphical Summary

19–23

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Level Scheduling

• A level schedule holds production constant over a period of time.

• It is something of a combination of the strategies mentioned here.

• For each period, it keeps the workforce constant and inventory low, and depends on demand to pull products through.

19–24

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Level Scheduling

– The entire system can be planned to minimize inventory and work-in-process.

– Product modifications are up-to-date because of the low amount of work-in-process.

– There is a smooth flow throughout the production system.

– Purchased items from vendors can be delivered when needed, often directly to the production line.

– Production should be repetitive (assembly-line format).

– The system must contain excess capacity.

– Output of the system must be fixed for a period of time.

– There must be a smooth relationship among purchasing, marketing, and production.

– The cost of carrying inventory must be high.

– Equipment costs must be low.– The workforce must be multi-

skilled.

• Advantages • Requirements

19–25

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Yield Management

• Yield management: the process of allocating the right type of capacity to the right type of customer at the right price and time to maximize revenue or yield– Can be a powerful approach to making demand more

predictable

• Has existed as long as there has been limited capacity for serving customers.

• Widespread scientific application began with American Airlines’ computerized reservation system (SABRE).

19–26

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.Yield Management Success Factors

Demand can be segmented by customer

Fixed costs are high and

variable costs are low

Inventory is perishable

Product can be sold in

advance

Demand is highly variable

19–27

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.Yield Management – Hotels

• Hotels offer one set of rates during the week and another set during the weekend.

• The variable costs associated with a room are low in comparison to the cost of adding rooms to the property.

• Available rooms cannot be transferred from night to night.

• Blocks of rooms can be sold to conventions or tours.

• Potential guests may cut short their stay or not show up at all.

19–28

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.Yield Management – Levers Yield management

is most common when price is variable and duration is predictable.

19–29

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.Yield Management Systems

• Pricing structures must appear logical to the customer and justify the different prices.

• Must handle variability in arrival or starting times, duration, and time between customers.

• Must be able to handle the service process.

• Must train employees to work in an environment where overbooking and price changes are standard occurrences that directly impact the customer.

• The essence of yield management is the ability to manage demand.