25-Nov-22

Operations and Supply Chain Management

S11: SALES AND OPERATIONS PLANNING

Prof. Vivek Roy

Indian Institute of Management Kashipur

The OM-SCM Connect

• Why two different terminologies?
• Operation Management (OM)
• Supply Chain Management (SCM)

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OM vs. SCM Activities

• Strategic Product Design • Sales and Operations
and Development Planning (Aggregate
• Process Design Planning)
• Capacity Planning • MRP
• Workcenter Scheduling
• Facility Location
• Forecasting
• Facility Layout
• Inventory Management
• Quality Control
• Supply Chain Decisions
• Sourcing Management
• Logistics Management

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So what do you plan in a value chain? (At an

Aggregate)

Economic,
Corporate competitive, Aggregate
strategies and political demand
and policies conditions forecasts

Establishes production
Business Plan
and capacity strategies

Establishes
Production plan
production capacity

Master schedule Establishes schedules

for specific products

The Planning Levels & Agenda

Long-range plans
(over one year)
Research & Development
New product plans
Capital investment
Facility location/expansion

Top
executives Intermediate-range plans
(3 to 18 months)
Sales planning
Production planning and budgeting
Operations Setting employment, inventory,
managers subcontracting levels
Analyzing cooperating plans

Short-range plans
(up to 3 months)
Job assignments
Operations Ordering
managers, Job scheduling
supervisors, Dispatching
foremen Overtime
Part-time help

Firm-level Stakeholders Planning Agenda and Horizon 10

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Another View

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Another view
Short-range plans
Job assignments
Ordering
Job scheduling Intermediate-range plans
Dispatching Sales planning
Production planning and
budgeting
Long-range plans
Setting employment, inventory ,R&D
subcontracting levels
New product plans
Analyzing operating plans
Capital expenses
Facility location, expansion

Today 3 Months 1 year 5 years

The Planning Horizon

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Where does SOP leads to?

1. Forecasting
2. Sales & Operations meeting

3. Master Production Scheduling (MPS)

4. Rough cut capacity planning
5. Materials Requirements Planning (MRP)
6. Workcenter Scheduling
7. Purchasing

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SOP / Aggregate Planning

• Purpose is to plan for the next 2-18 months (tactical)

• Given a forecast, what is the best way to plan production

requirements

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Aggregate Planning Defined

”Aggregate Planning means
putting together production units
as a whole group,
compared to detailed planning
where item by item would be shown”
• Why would you like group your products?
– >>To approximate the matching of Demand / Supply
• How?
– >>By setting production rates based on product groups or other
categories (?)
– >>To optimize (a) Production Rate, (b) Workforce Level, and (c)
Inventory-in-Hand
• What can be the functional implication of not doing so?
– >>Loss of intra-firm integration for under / over production
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Overall, Aggregate Planning

•Determines resource capacity to meet demand
over an intermediate time horizon
– Aggregate refers to sales and operations planning
for product lines or families
– Sales and Operations planning (S&OP) matches
supply and demand

•Objectives
– Establish a company wide plan for allocating
resources
– Develop an economic strategy for meeting demand
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Aggregate Planning Objectives

Determine the quantity and timing of

production for the immediate future
 Objective is to optimize cost over the
planning period by adjusting
 Production rates
 Labor levels
 Inventory levels
 Overtime work
 Subcontracting
 Other controllable variables
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Aggregate Planning Objectives

• Minimize Costs/Maximize Profits

• Maximize Customer Service

• Minimize Inventory Investment

• Minimize Changes in Production Rates

• Minimize Changes in Workforce Levels

• Maximize Utilization of Plant and Equipment

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Aggregate Planning Objectives

 Combines appropriate resources

into general terms
 Part of a larger production planning
system
 Disaggregation breaks the plan
down into greater detail
 Disaggregation results in a master
production schedule
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Master Production Scheduling (Disintegration)

Aggregate plan shows

overall quantities to
produce – without
specifying type.

Week

MPS shows quantities

of each type, with
information about the
production time frame.

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Aggregate Forecasts
Firm orders
product of demand
from known
plan from random
customers
customers

Master
Engineering
production Inventory
design
schedule transactions
changes
(MPS)

Bill of
Material Inventory
Material
planning record
(BOM)
(MRP) file
file

POs Various
WOs Reports 21

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Enterprise Resource Planning (ERP) and Material Requirements

Planning (MRP)

ERP – a computer system

MRP – a means for
that integrates
determining the number
application programs in
of parts, components, and
accounting, sales,
materials needed to
manufacturing, and the
produce a product
other functions in a firm

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Aggregate Planning

Marketplace Product Research

and decisions
and
demand technology

Process
planning and
capacity
Demand decisions
forecasts,
orders
Workforce Raw
materials
Aggregate available
plan for
production Inventory
on
hand
External
capacity
Master (subcontractors)
production
schedule and
MRP
systems

Detailed
work
schedules
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Dynamic view of Aggregate Planning

• Strategies to Match Demand and Supply

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Typical steps in developing AP

 Determine demand for each period

 Determine capacity and production rates for each
period
 Identify policies that are pertinent
 Determine unit costs
 Develop alternate plans and costs
 Select the plan that best satisfies the objectives,
typically lowest cost

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Inputs and Outputs to Aggregate

Production Planning
Capacity Strategic Company
Constraints Objectives Policies

Demand Financial
Forecasts Aggregate Constraints
Production
Planning

Size of
Workforce Units or dollars
Production Inventory subcontracted,
per month (in Levels backordered, or
units or $) lost

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Aggregate Plan – Managerial Inputs

Operations Distribution and marketing

Current machine capacities Customer needs
Plans for future capacities Demand forecasts
Workforce capacities Competition behavior
Current staffing level

Materials Accounting and finance

Supplier capabilities Aggregate Cost data
Storage capacity plan Financial condition
Materials availability of firm

Engineering Human resources

New products Labor-market conditions
Product design changes Training capacity
Machine standards
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Aggregate Planning Outputs

• Total cost of the plan

• Plan Includes Projected levels of:

• Inventory
• Output
• Employment
• Subcontracting
• Backordering

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Aggregate Planning Costs

• Regular-Time Costs
• Overtime Costs
• Hiring and
Layoff Costs
• Inventory
Holding Costs
• Backorder and
Stockout Costs

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Aggregate Planning Strategies (For minimizing

TCP)

1. Use inventories to absorb changes in

demand
2. Accommodate changes by varying
workforce size
3. Use part-timers, overtime, or idle time to
absorb changes
4. Use subcontractors and maintain a stable
workforce
5. Change prices or other factors to
influence demand
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Obtaining different configuration of TCP

• Consider your options for modifying Capacity

•but, don’t forget to. . .
• Consider options for
• modifying Demand

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Options for Modifying Aggregate Capacity

and Demand

• Capacity Options :
• changing inventory levels
• varying work force size by hiring or layoffs
• varying production capacity through
overtime & idle time
• subcontracting
• use of part time workers

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Options for Modifying Aggregate Capacity

and Demand

• Demand Options :
• influencing demand
• back-ordering during high demand
periods
• counter-seasonal product mixing

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How could
counter-
seasonal
product mixing
help this
business?

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Demand Options Expanded

 Influencing demand
 Use advertising or promotion to
increase demand in low periods
 Attempt to shift demand to slow
periods
 May not be sufficient to balance
demand and capacity

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Demand Options
 Back ordering during high-
demand periods
 Requires customers to wait for an
order without loss of goodwill or
the order
 Most effective when there are few
if any substitutes for the product
or service
 Often results in lost sales

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Demand Options
 Counterseasonal product and
service mixing
 Develop a product mix of
counterseasonal items
 May lead to products or services
outside the company’s areas of
expertise

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Demand Options
• Pricing – higher prices for peak periods, lower prices for slow periods
• Promotion – try to increase demand in slow periods
• Back orders – defer deliveries to future periods
• New demand – increase spare capacity in slow periods

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Capacity Options
 Changing inventory levels
 Increase inventory in low demand
periods to meet high demand in
the future
 Increases costs associated with
storage, insurance, handling,
obsolescence, and capital
investment
 Shortages can mean lost sales due
to long lead times and poor
customer service
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Capacity Options
 Varying workforce size by hiring
or layoffs
 Match production rate to demand
 Training and separation costs for
hiring and laying off workers
 New workers may have lower
productivity
 Laying off workers may lower
morale and productivity

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Capacity Options
 Varying production rate through
overtime or idle time
 Allows constant workforce
 May be difficult to meet large
increases in demand
 Overtime can be costly and may
drive down productivity
 Absorbing idle time may be
difficult

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Capacity Options
 Subcontracting
 Temporary measure during
periods of peak demand
 May be costly
 Assuring quality and timely
delivery may be difficult
 Exposes your customers to a
possible competitor

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Capacity Options
 Using part-time workers
 Useful for filling unskilled or low
skilled positions, especially in
services

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Aggregate Planning Options

Option Advantages Disadvantages Some Comments
Changing Changes in Inventory holding Applies mainly to
inventory human cost may production, not
levels resources are increase. service,
gradual or none; Shortages may operations
no abrupt result in lost
production sales.
changes
Varying Avoids the costs Hiring, layoff, and Used where size
workforce of other training costs of labor pool is
size by alternatives may be large
hiring or significant
layoffs

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Aggregate Planning Options

Option Advantages Disadvantages Some Comments
Varying Matches seasonal Overtime Allows flexibility
production fluctuations premiums; tired within the
rates without hiring/ workers; may not aggregate plan
through training costs meet demand
overtime or
idle time
Sub- Permits flexibility Loss of quality Applies mainly in
contracting and smoothing control; reduced production
of the firm’s profits; loss of settings
output future business

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Aggregate Planning Options

Option Advantages Disadvantages Some Comments
Using part- Is less costly and High turnover/ Good for unskilled
time workers more flexible training costs; jobs in areas with
than full-time quality suffers; large temporary
workers scheduling labor pools
difficult
Influencing Tries to use Uncertainty in Creates marketing
demand excess capacity. demand. Hard to ideas.
Discounts draw match demand to Overbooking
new customers. supply exactly. used in some
businesses.

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Aggregate Planning Options

Option Advantages Disadvantages Some Comments
Back May avoid Customer must be Allows flexibility
ordering overtime. Keeps willing to wait, within the
during high- capacity but goodwill is aggregate plan
demand constant. lost.
periods

Counter- Fully utilizes May require skills Risky finding

seasonal resources; or equipment products or
product and allows stable outside the firm’s services with
service workforce areas of opposite demand
mixing expertise patterns

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Aggregate Planning Practical Techniques

• Overall, From the capacity side, APP involves
coordinating
• Workforce size
• Work hours
• Inventory
• Backlogs

• Encapsulating options into explicit techniques to

address periodic demand fluctuation

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(A) Graphical and Charting

Methods
 Popular techniques
 Easy to understand and use
 Trial-and-error approaches that do
not guarantee an optimal solution
 Require only limited computations

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(A) Graphical and Charting

Methods
1. Determine the demand for each period
2. Determine the capacity for regular time, overtime,
and subcontracting each period
3. Find labor costs, hiring and layoff costs, and
inventory holding costs
4. Consider company policy on workers and stock
levels
5. Develop alternative plans and examine their total
costs

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Planning Example 1
Demand Per Day
Month Expected Demand Production Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

Average Total expected demand

requirement = Number of production days

6,200
= = 50 units per day
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Planning Example 1
Forecast demand
Production rate per working day

70 –
Level production using average
monthly forecast demand
60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
Figure 13.3 working days
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Planning Example 1
7,000 –

6,000 – Reduction

Cumulative demand units

of inventory
5,000 –
Cumulative level
production using
4,000 – average monthly
forecast
requirements
3,000 –

2,000 – Cumulative forecast

requirements
1,000 –
Excess inventory

–
Jan Feb Mar Apr May June

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Key Strategies for Coordinating Fluctuating Demand

• Chase (hiring-laying off)

• Level (stable workforce-constant output)

• Some combination of the two

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Chase, Level, & Mixed

Approaches to APP
• Chase demand - change productive capacity, usually
by adjusting workforce levels so that production
matches demand

• Level production - produce at a constant output rate

-- use inventory to buffer demand

• Mixed approach - combine aspects of Level and

Chase production plans.

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Chase Demand
Demand

Units

Production

Time

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Level Production

Demand

Production
Units

Time

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Pure Strategy

Level Production Chase Demand

Demand Demand
Production
Production
Units

Units

Time Time

What are pros / cons of these strategies?

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Mixed Strategy
Demand

Units

Production

Time

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(B) The Spreadsheet Approach to

Aggregate Planning
• Forecast the demand for each period
• Determine the capacity for regular time, overtime,
and subcontracting, for each period
• Determine the labor costs, hiring and firing costs, and
inventory holding costs
• Consider company policies which may apply to the
workers or to stock levels
• Develop alternative plans, and examine their total
costs

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APP Example
Quarter Sales Forecast (lb)
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000
Hiring cost = $100 per worker
Firing cost = $500 per worker
Inventory carrying cost = $0.50 pound per quarter
Production per employee = 1,000 pounds per quarter
Beginning work force = 100 workers

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Chase Demand Strategy

Sales Production Workers Workers Workers
Quarter Forecast Plan Needed Hired Fired
Spring 80,000 80,000 80 - 20
Summer 50,000 50,000 50 - 30
Fall 120,000 120,000 120 70 -
Winter 150,000 150,000 150 30 -
100 50

Cost = (100 workers hired x $100) + (50 workers fired x $500)

= $10,000 + 25,000 = $35,000

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Level Production Strategy

Sales Production
Quarter Forecast Plan Inventory
Spring 80,000 100,000 20,000
Summer 50,000 100,000 70,000
Fall 120,000 100,000 50,000
Winter 150,000 100,000 0
400,000 140,000

Cost = 140,000 pounds x 0.50 per pound = $70,000

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Mixed Strategy
Quarter
Previous Spring Summer Fall Winter
Beginning Inventory 0 10,000 40,000 30,000
Demand Forecast 80,000 50,000 120,000 150,000
Production Plan 90,000 80,000 110,000 120,000
Ending Inventory 0 10,000 40,000 30,000 0
Work-force Size 100 90 80 110 120

Total Demand Forecast= 400,000

Total Production Plan= 400,000

Inventory Cost (.50/lb) $5,000 $20,000 $15,000 $0

Work-force Cost $5,000 $5,000 $3,000 $1,000
Total Cost $54,000

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(C) Mathematical Aggregate Planning Techniques

• Mathematical
• Linear programming - optimizing method for allocating resources, usually
computerized, linear assumptions not always valid
• Transportation model – works when no hire or fire variables
• Simulation - trial and error, computerized models can be examined under
variety of conditions

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APP By Linear Programming

Min Costs of Hiring & Firing & Inventory:
= $100 (H1 + H2 + H3 + H4) + $500 (F1 + F2 + F3 + F4)+ $0.50 (I1 + I2 + I3 + I4)
Subject to:
P1 - I1 = 80,000 (1) Demand
where
I1 + P2 - I2 = 50,000 (2) constraints Ht = # hired for period t
I2 + P3 - I3 = 120,000 (3) Ft = # fired for period t
I3 + P4 - I4 = 150,000 (4) It = inventory at end
of period t
P1 - 1,000 W1 = 0 (5) Production
P2 - 1,000 W2 = 0 (6) constraints All variables are
P3 - 1,000 W3 = 0 (7) constrained to be
P4 - 1,000 W4 = 0 (8) non-negative integers.
W1 - H1 + F1 = 100 (9) Work force
W2 - W1 - H2 + F2 = 0 (10) constraints
W3 - W2 - H3 + F3 = 0 (11)
W4 - W3 - H4 + F4 = 0 (12)

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Aggregate Planning in Services

• Services occur when they are rendered
• Demand for service can be difficult to predict
• Capacity availability can be difficult to predict
• Labour flexibility can be an advantage in services

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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
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Yield Management—Success Factors

1. Demand can be segmented by customer
2. Fixed costs are high and variable costs are low
3. Inventory is perishable
4. Product can be sold in advance
5. Demand is highly variable

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Yield Management—Success Factors

1. Pricing structures must appear logical to the
customer and justify the different prices
• Called rate fences
• Pricing also should relate to addressing specific capacity
problems
2. Must handle variability in arrival or starting times,
duration, and time between customers
3. Must be able to handle the service process
4. Must train employees to work in an environment
where overbooking and price changes are standard
occurrences that directly impact the customer
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Yield Management—Success Factors

• The aggregate plan is a high-level operational plan that can be
executed by the operations and supply chain functions
• Typically, aggregation is done by product families and by groups of
customers

• Outputs of the plan are planned production rates, aggregate

labor requirements, and expected finished good levels

• Companies commonly use simple techniques for analyzing

aggregate planning problems
• Strategies vary greatly depending on the situation faced by the
company

• Yield management occurs when a firm adjusts the price of its

product or service in order to influence demand
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Thank You

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