 Use to indicate planned changes in market penetration or market approaches

 To coordinate action plans and resource needs

1. Operations,
2. Marketing / sales
3. Finance
4. Information technology
5. And human resources.

 Common names that have been used :

1. Aggregate planning
2. Production planning
3. Staffing planning (in services area)

 Represent opportunities and / or contratints in the ability of the organisation to

deliver startegic action plans.
 At the end of this chapter, students should be able to:

1. Explain the purpose of sales and

operation planning that influence the future
production activity.
2. Discuss the main idea in designing of
sales and operation planning
3. Identify several approaches can be used
in sales and operation planning
4. Calculate the balacing resources in sale
and operations planning
5. Explain the qualitative issues that
occured in sale and operation planning
 Seldom used for the actual scheduling of
 The major objectives of the S&OP are:
production activity. • Support and measure the business
plan
 Used to plan and coordinate resources, • Support the customer
including type, quantity and timing. • Ensure plans are realistic
• Manage change effectively
 Major source for the planning of: • Manage finished good inventory and /
1. Inventory levels
or backlog better to support customer
2. Cash flow
service
3. Human resource needs • Control costs
i. Number of people • Measure performance
ii. Skill levels • Build teamwork
iii. Timing of need
iv. Trianing programs
4. Capital needs
5. Production output
6. Facilities planning
7. Sale and marketing activities
i. Sales promotions
ii. Advertising
iii. Pricing
iv. New product introductions
v. Expansion of markets
 Often products and / or services are aggregated along “family” lines in the S&OP called
aggregate planning”

 Demand is the primary source for forecasting.

 Some of the strategic plans that influence actual demand.

1. Advertising campaigns
2. Promotions
3. Pricing changes
4. Strategic moves into new markets
5. Moves against competition
6. Development of new products
7. New usesfor existing products

 This coordination is a major function of the S&OP.

1. Aggregation of time and production units important to get accurate in the aggregate.

2. Correct amount of aggregation is highly dependent on:

3. type of product or service,
4. nature of customers
5. processes being used
6. Delivery of product or service.
 Primary focus of developing S&OP is to
establish decisions of:
1. Sales volumes
2. Customer service goals
3. Rates of production
4. Inventory levels, and order backlogs.

 Required participation of:

1. Sales
2. Marketing
3. Operations
4. Finance
5. Product Development
MAKE TO STOCK (MTS) VIEW OF AN S&OP
Issue arise:
1.Sales last 3 months = 11,000 more units sold
2.Production less 4,000 than in plan.
3.Over 3 months inventory dropped by 15,000 units
4.Based on month to month calculations:
August:
•sales = 314,000
•production = 303,000 units (difference 11,000)
•planned inventory down from 150,000 units to
139,000 units.
5.the shortfall in their target level of 15 days (15,000
units) in inventory
6.In November:
- plan to produce 5,000 more than expected
sales
In December:
- plan to produce 10,000 more than sales
* Means by end of December they should then be
back on target.

Plans need to be reviewed and revised at the end of each month, since neither
sales nor production are likely to exactly equal projections.
THE MAKE TO ORDER VIEW OF AN S&OP
 no finished goods inventory
 production starts when received order.
 exist awaiting production is called backlog
Several approaches or techniques to
develop plans in S&OP.

Mathematical algorithms
 to search optimal combination of products to
maximize the profitability

Computer simulation
to simulate the production environment where
rapid and effective solutions to scenarios can
be input into the program

Computer spreadsheet
is a subset of the second approache
simulate the demand on a production
resource environment
easy to investigate various approaches
 Aggregate planning is part of a larger production planning system. Therefore,
understanding the interfaces between the plan and several internal and external
factors is useful.

What are the internal and external factors?

Legitimate Planning Strategies

When generating an aggregate plan, the operations manager must answer several
questions:

1)Should inventories be used to absorb changes in demand during the planning

period?
2)Should changes be accommodated by varying the size of the workforce?
3)Should part-timers be used, or should overtime absorb fluctuations?
4)Should subcontractors be used on fluctuating orders so a stable workforce can be
maintained?
5)Should prices or other factors be changed to influence demand?€
 Options Under Legitimate Planning Strategies
1. Capacity Option
 Changing inventory level
 Varying workforce size by hiring
and layoffs
they do not try to change demand but
 Varying production rates through attempt to absorb the fluctuations in it
overtime or idle time
 Subcontracting
 Using part-time workers

2. Demand Option

 Influencing demand
firms try to smooth out changes in the
 Back ordering during high-demand
demand pattern over the planning
period
period.
 Counter-seasonal product and service
mixing
 What are
Operation
these plans?
Manager
 S&OP been develop to find the ‘best’ alternative to align resources to meet expected
demand.

 ‘Best’ means an attempt to:

1. Maximize organization profits
2. Meet expected customer demand
3. Minimize inventory investment
4. Minimize the adverse impact on people. (Layoffs)

 There are three general categories of approaches

1. Chase Strategy
2. Level Strategy
3. Combination /Mix Strategy
Level Strategy.

 Tends to be used in many “lean production” environments.

1.Professional services,: doctors and dentists.
2.Hotel and airlines.
3.restaurants and automobile workshop
4.Chemical industries

Demand Pattern With Level Strategy The Use Of Inventory With A Level Strategy
It maintain a constant output rate, production rate or workforce level over the planning
horizon.
Chase Startegy

Demand is not altered, but resources are

Example:
1."Mid-tier" suppliers of manufactured products.
2.Service industries:
3.Grocery stores and banks
4.Professional tax accounting services
5. "Process" industries such as electric utilities.

Demand Pattern With Chase Production

It sets production equal to forecasted demand where the demand is

not altered but resources are.
Combination Strategy
 Based on approach "mix and match,"
 Altering demand and resources to maximize performance
1. Profit
2. Inventory investment
3. Impact on people.

Example Of A Combination Strategy

It mix and match, altering demand and resources in such a way to maximize
performance to their established criteria, including profit, inventory investment and the
impact on people.
Comparison of the Basic S&OP Strategies
 Several options to accomplish the planning of resources are:
The supply side The demand side
(Operations) (Marketing and Sales)
an attempt to change the production an attempt to alter demand patterns to
supply. meet production outputs.

INTERNAL STRATEGIES EXTERNAL STRATEGIES

Hire and fire Pricing
“Chase" approaches

"Level" approaches
Temporary workers Promotions
Overtime/slack time Advertising
Subcontracting Reservations
Inventory "Package" offerings
Backlog
Do not meet demand
Change production rates

Exception to that may be the use of inventory

The Ahmad Sport Boat Company has demand forecast of aluminum fishing boats under 15 feet for
the next 6 months. The forecast is:
Month Demand
January 250
February 300
March 420
April 560
May 610
June 580

Currently 10 workers assigned to production line, each capable of producing approximately 15

boats per month (December is typically the slowest month for sales). For this simple example we
will assume each month has the same number of production days. They can hire more workers at a
hiring and training cost of RM400 per worker. If they layoff any workers, the unemployment cost is
RM1,000 per worker. The boats have a standard production cost (labour, material, and overhead)
of RM300 per boat. They can use overtime to produce boats, but a boat produced in overtime adds
RM60 in labour cost, and each worker can only produce an extra three boats per month using
overtime. If they keep any boats in inventory it will cost them RM6 per boat per month for any boat
in inventory at the end of the month. Failure to meet market demand typically will imply the
customer will buy from another supplier, and therefore cost the company RM120 in profit. They
recognize this lost profit (selling price less standard cost) as a stock-out cost. They currently have
no boats in inventory.
STEP 1.

Given:

No. of workers available = 10 workers Month Demand

Workers capability to produce = 15 boats per month
January 250
Hiring and training cost = RM400 per worker.
Layoff cost = RM1,000 per worker. February 300
Std prod. cost (labor, material, & overhead) = RM300 per boat. March 420
Overtime cost = additional RM60 in labor cost
April 560
Overtime limit = 3 boats per month per worker
Inventory cost = RM6 per boat per month May 610
Cost of failure to meet market demand = RM120 in profit. June 580
Currently inventory =0

December is typically the slowest month for sales.

Assume each month has the same number of production days
STEP 1. CHASE STRATEGY

 Use a minimum number of workers to meet all demand.

 No inventory allowed
 Overtime can be used if necessary rather than adding another worker
 Overtime production will be limited to 15 boats per month, for at that level it is better to hire another
worker.
 Workers necessary = demand / 15
= 250 / 15
= 16.67 ~ 16 workers
 Additional 10 to be produced in overtime.
A B C D E F G H
Reg.
Reg.
Month Demand Workers OT Prod. Hire & fire H/F cost Prod.` OT cost
Prod.
cost
Jan. 250 16 240 10 +6 2400 72000

Feb. 300

Mar. 420

Apr. 560

May 610

June 580

Total X Y Z

※Total cost require in chase strategy = X + Y + Z

STEP 1. CHASE STRATEGY

 Use a minimum number of workers to meet all demand.

 No inventory allowed
 Overtime can be used if necessary rather than adding another worker
 Overtime production will be limited to 15 boats per month, for at that level it is better to hire another
worker.
 Workers necessary = demand / 15
= 250 / 15
= 16.67 ~ 16 workers
 Additional 10 to be produced in overtime.
A B C D E F G H
Reg.
Month Demand Workers OT Prod. Hire & fire H/F cost Reg. cost OT cost
Prod.
Jan. 250 16 240 10 +6 2400 72000 600

Feb. 300 20 300 0 +4 1600 90000 0

Mar. 420 28 420 0 +8 3200 126000 0

Apr. 560 37 555 5 +9 3600 166500 300

May 610 40 600 10 +3 1200 180000 600

June 580 38 570 10 -2 2000 171000 600

Total 14000 805500 2100

※Total cost require in chase strategy = (14000+805500+2100) = RM821600

STEP 2. LEVEL STRATEGY
 Establish a level workforce for the entire 6 months
 Average demand = 2720 units) / 6
 = 453 boats.
 Establishing level production at 450 (30 workers) * ensure approximately meet average demand*
 Allow the inventory or shortage conditions at constant, level production rate.
 Remember to add hiring cost of the additional 20 workers (rm8,000):

Reg.
Inventory Shortage
Month Demand Produc. Inventory shortage produc.
cost cost
cost
Jan. 250 450
450
Feb. 300
450
Mar. 420
450
Apr. 560
450
May 610
450
June 580
Total

※Total cost require in level strategy

STEP 2. LEVEL STRATEGY
 Establish a level workforce for the entire 6 months
 Average demand = 2720 units) / 6
 = 453 boats.
 Establishing level production at 450 (30 workers) * ensure approximately meet average demand*
 Allow the inventory or shortage conditions at constant, level production rate.
 Remember to add hiring cost of the additional 20 workers (rm8,000):

Reg.
Inventory Shortage
Month Demand Produc. Inventory shortage produc.
cost cost
cost
Jan. 250 450 200 0 135000 1200 0
450
Feb. 300
450
Mar. 420
450
Apr. 560
450
May 610
450
June 580
Total

※Total cost require in level strategy

STEP 2. LEVEL STRATEGY
 Establish a level workforce for the entire 6 months
 Average demand = 2720 units) / 6
 = 453 boats.
 Establishing level production at 450 (30 workers) * ensure approximately meet average demand*
 Allow the inventory or shortage conditions at constant, level production rate.
 Remember to add hiring cost of the additional 20 workers (rm8,000):

Reg.
Inventory Shortage
Month Demand Produc. Inventory shortage produc.
cost cost
cost
Jan. 250 450 200 0 135000 1200 0
450 135000
Feb. 300 350 0 2100 0
450 135000
Mar. 420 380 0 2280 0
450 135000
Apr. 560 270 0 1620 0
450 135000
May 610 110 0 660 0
450 135000
June 580 0 20 0 2400
Total 810000 7860 2400

※Total cost require in level strategy = (810000+7860+2400)+one time hiring cost

= (820260) + 8000 = RM828260
 RESULT

STRATEGY TOTAL COST

Chase RM821600
Level RM828260

From calculation, we can conclude that the combination strategy

gives the smallest cost of the three examples
 The “human” factor : imply manipulation of humans in operation.
1. Layoff – impact the morale of the people
2. Hiring – learning-curve effects
3. The use of temporary workers – learning-curve, cost efficiencies for fulltime workers.

 The customer factor

 (price changes, promotions, etc.)
 range of impressions on customers or potential customers, may not be wisely used
without discretion.

 The forecast factor

 Always considered to be incorrect → contingency planning (use buffer inventory, buffer
capacity or both).
 The buffer based on the size of forecast error.

 External environmental factor

 Impact the ability to create an ideal S&OP:
1. Labor contract
• to obtain right number of people with right skills (cost), availability of labor skills due to
location
2. Government regulation
• concerning environmental, health, safety issues (impact both cost & resources)
3. Competitive force in the market
• projection of demand from past data (forecast)
The company will save the overtime hours for the accountants in an "inventory" of hours. The
accountants are then expected to use those hours to take time off during the period of light
demand (usually in the summer). Since their fiscal year ends August 31, any hours left in
"inventory" are paid in monetary compensation to the accountants at the rate of RM50 per
hour. The partners have developed a forecast of demand (in hours) for the next 8 months
based on past experience of client tax needs. The partners need an estimate of the financial
impact to determine if their decision to keep the staff at 15 is a good one. They also need to
determine if it may be feasible to take on additional work, should a new client request their
services.

Month Demand (Hours) Weeks in Month

January 5000 4.5
February 5500 4
March 6000 4.5
April 4000 4
May 2000 5
June 1500 4
July 1000 4.5
August 1000 4.5
Solution:
The following table shows the financial impact of their aggregated demand.
Using this projection, the partners can now see they need approximately
RM170,000 beyond their normal salary expectations - RM130,000 for temporary
workers plus RM40,000 (800 hours at RM50 per hour) to compensate for unused
overtime at the end of August.

Total time Temp.

Demand Reg. time Cumul. OT Temp.
Month needed (reg hours
(hrs) avail. hours (RM)
+ OT) needed
Jan. 5000 2700 4050 950 1350 23750
Feb. 5500 2400 3600 1900 2550 47500
Mar. 6000 2700 4050 1950 3900 48750
Apr. 4000 2400 3600 400 5100 10000
May 2000 3000 2000 4100
June 1500 2400 1500 3200
July 1500 2700 1500 2000
Aug. 1500 2700 1500 800
130000
Level of detail (the level of aggregation).
Time aggregation (weeks, months, quarters, or
some other unit of time)
Primary purpose of this level of planning is to plan
resources
Aggregation of products or services must also be
addressed.

Time horizon (length of the planning horizon).

How far should the plan go?
When to make the change in the resource base
being planned.
Present conditions include:
i. Flexibility of the existing workforce ?
ii. Flexibility of the existing equipment?
iii. Ease of obtaining capital and the amount of
time
 The appraoch to developing intermediate-term startegies for the best use of
resources to meet the expected customer demand.

 There are three basic apraoches: level, chase and combination which each
with a number of substrategies that can be applied and each with certain
environments with which they fit more appropriately

 3. The key issue is to recognise that planning at this level focuses on the
“BEST” plan for the use of resources, and does not plan specific production
output.