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Unit 2_Ops&SCM_DIPK205T_MBA2ndSem_Dr Vivek Aggarwal (updated)
Unit 2_Ops&SCM_DIPK205T_MBA2ndSem_Dr Vivek Aggarwal (updated)
Unit 2_Ops&SCM_DIPK205T_MBA2ndSem_Dr Vivek Aggarwal (updated)
UNIT 2
Unit 2: Sales and Operations Planning 8 - lecture hours
• Overview of Sales and Operations Planning Activities, Aggregate
Operations Plan, Aggregate Planning Techniques, Material Requirements
Planning, Master Production Schedule, Theory of Constraints, Capacity
Planning Concepts in OSCM, Capacity Planning in Services versus
Manufacturing.
Sales and Operations Planning
• LO-1: Understand what sales and operations planning is and how it coordinates
manufacturing, logistics, service, and marketing plans.
• LO-2: Construct and evaluate aggregate plans that employ different strategies for
meeting demand.
• LO–3: Explain what material requirements planning (MRP) is.
• LO–4: Understand how the MRP system is structured.
• LO–5: Analyze an MRP problem.
• LO–6: Evaluate and compare MRP lot-sizing techniques.
Introducing Sales and Operations Planning
Sales and Operations Planning Meeting
Members Present: President, Chiefs of Marketing, Supply
Chain and Finance.
Subsequently, each plant translates the quarterly aggregate plan into a 4-week plan, detailing specific
product assignments for production runs. Weekly resource allocation, including raw materials and labor, is
then determined based on these plans. Effective aggregate planning not only facilitates high plant
utilization but also contributes to cost efficiency, as evidenced by Frito-Lay's substantial market share of
60%.
In summary, Frito-Lay's emphasis on effective aggregate planning serves as a cornerstone for achieving
operational excellence, maintaining competitiveness, and maximizing profitability in the snack and chips
industry.
Discussion Questions
1. How does Frito-Lay's approach to aggregate planning demonstrate the strategic significance of aligning
production capacity with fluctuating demand in the snack and chips industry?
2. Additionally, how might advancements in technology and data analytics further improve Frito-Lay's
ability to forecast demand and optimize production capacity?
What is Sales and Operations Planning?
Sales and operations planning (S&OP) was coined by companies to refer to
aggregate planning.
• The new terminology is meant to capture the importance of cross-functional
work.
• Aggregate means at the level of major groups of products.
• Aggregation on the supply side is done by product families, and on the
demand side it is done by groups of customers.
Aggregate operations plan or S&OP translates annual and quarterly business
plans into broad labor and output plans for the intermediate term.
• 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 at the detailed individual product
level.
Types of Planning
Long-range planning
Planning focusing on a horizon greater than one year.
Usually performed annually.
Intermediate-range planning
Planning focusing on a period from 3 to 18 months.
Time increments are weekly, monthly, or quarterly.
Short-range planning
Planning covering a period from a day to six months.
Daily or weekly time increments.
Major Operations and Supply Planning Activities
The Aggregate Operations Plan
Aggregate plan precedes the master schedule
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.
Aggregate Planning
Oxford Reference defines aggregate planning as "an approach to planning that
enables overall output levels and the appropriate resource input mix to be set
Thus, the aggregate plan for a car factory would consider the total number of
units produced per month but would not be concerned with scheduling
individual models or colors. It would, instead, be concerned with the labor and
Table 13.1
Relevant Costs
1. Basic production costs. The fixed and variable costs incurred in producing
a given product type in a given time period.
Forecast demand
50 –
40 –
30 –
0–
Jan Feb Mar Apr May June = Month
22 18 21 21 22 20 = Number of
Figure 13.3 working days
Level output rate plan:
Roofing Supplier Example 1
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)
w orkfo rce
ta n t
Table 13.3
Plan 1 – cons
Level output rate plan:
Roofing Supplier Example 1
Monthly
Cost Information
Production at Demand Inventory Ending
Month carry
Inventory 50 Units
cost per Day Forecast $ 5Change
per unit per Inventory
month
Subcontracting cost per unit $10 per unit
Jan 1,100 900 $+200 200
5 per hour ($40 per day)
Average pay rate
Feb 900
700 $+200
7 per hour 400
Overtime pay rate (above 8 hours per day)
Mar 1,050 1.6 hours per unit
Labor-hours to produce a unit
800 +250 650
Cost of increasing daily production rate $300 per unit
Apr and training)
(hiring 1,050 -
1,200 150 500
Cost of decreasing daily production rate $600 per unit
May
(layoffs) 1,100 -
1,500 over from
Total units of inventory carried 400 one wo100
t r kforce
month to1 –
thec onstan = 1,850 units
next
Table
June 13.3 1,000 Plan - 0
Workforce required to produce 1,100
50 units100
per day = 10 workers
1,850
Level output rate plan:
Roofing Supplier Example 1
Monthly
Costs
Cost Information
Production at Calculations
Demand Inventory Ending
Month carry
Inventory
Inventory 50 Units
cost per Day Forecast
carrying $ 5Change
perunits
(= 1,850 unit per Inventory
monthx $5
carried
Subcontracting cost per unit$9,250 per
$10unit)
per unit
Jan
Regular-time 1,100
labor 900 $+200
(= 105 workers 200
x $40
per hour ($40 per
per day)
Average pay rate
Feb 900 49,600 day x 124 days)
700 $+200
7 per hour 400
Overtime pay rate (above 8 hours per day)
Other costs (overtime,
Mar layoffs, 1,050
hiring, 1.6 hours per unit
Labor-hours to produce a unit
subcontracting) 800 0 +250 650
Cost of increasing daily production rate $300 per unit
Apr
Total cost
(hiring 1,050
and training) -
1,200
$58,850 150 500
Cost of decreasing daily production rate $600 per unit
May
(layoffs) 1,100 -
1,500 over from
Total units of inventory carried 400 one 100
Table
June 13.3 1,000 month to the next- = 1,850 units 0
Workforce required to produce 1,100
50 units100
per day = (50*1.6)/8=10 workers
1,850
Hybrid/ Subcontracting plan:
Roofing Supplier Example 1
7,000 –
6,000 – Reduction
of inventory
–
Jan Feb Mar Apr May June
Figure 13.4
Hybrid/ Subcontracting plan:
Roofing Supplier Example 2
n t ract i ng
ubco
Pla n2–s
40 –
30 –
0–
Jan Feb Mar Apr May June = Month
22 18 21 21 22 20 = Number of
working days
Hybrid/ Subcontracting plan:
Roofing Supplier Example 2
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)
Hybrid/ Subcontracting plan: Roofing Supplier Example 2
In-house production =38 units per day
x 124 days
= 4,712 units
Workforce required to produce In- house 38 units per day =
(38*1.6)/8=7.6 workers
Subcontract units =6,200 - 4,712 =1,488 units
Costs Calculations
Regular-time labor (= 7.6 workers x $40 per day x 124
$37,696 days)
Subcontracting (= 1,488 units x $10 per unit)
Table 13.3 14,880
Total cost
$52,576
Chase plan:
Roofing Supplier Example 3
60 –
50 –
40 –
30 –
0–
Jan Feb Mar Apr May June = Month
22 18 21 21 22 20 = Number of
working days
Chase plan:
Roofing Supplier Example 3
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)
Table 13.3
Chase plan:
Roofing Supplier Example 3
Table 13.4
Comparison of Three Plans
Regular labor
49,600 37,696 49,600
Overtime labor 0 0 0
Hiring 0 0
9,000
Layoffs 0 0
9,600
Subcontracting 0 0
14,880
Plan 2 is the lowest cost option
Total cost Table 13.5
$58,850 $52,576 $68,200
Aggregate Planning Techniques
• Cut-and-try charting and graphic methods
• Involves costing out various production planning alternatives
and selecting the one that is best.
• Elaborate spreadsheets developed to facilitate the decision
process.
• Linear programming
• Use of mathematical analysis to determine an optimal plan.
• Simulation
• What-if analysis using simulated demand to evaluate
effectiveness of alternative plans.
Material Requirements Planning
48
Dependent Demand
• Dependent demand drives the MRP system.
• Dependent demand is caused by the demand for a higher–level
item.
• Cars need tires.
• Planes need wings.
49
Where MRP Can Be Used
50
Industry Applications and Expected Benefits of MRP
51
Master Production Scheduling
• It shows the quantity and timing of specific end items for a scheduled
production.
53
The Aggregate Plan and the Master Production
Schedule for Mattresses
54
Master Production Schedule
• Master production schedule (MPS): the time–phased plan
specifying how many and when the firm plans to build each end
item.
• Aggregate plan specifies production on a monthly or quarterly
basis.
• MSP identifies exact models on a period–by–period bases.
• Period is usually weekly.
55
Time Fences
• Flexibility within a master production schedule depends on
several factors.
• Production lead time.
• Commitment of parts and components to an end item.
• Relationship between customer and vendor.
• Amount of excess capacity.
• How willing management is to make changes.
56
Master Production Schedule Time Fences
57
Available to Promise
58
Material Requirements Planning System Structure
59
Master Production Schedule
Ex1: A bicycle manufacturer is developing a Master Production Schedule
(MPS) for the next six weeks. The following information is available:
• Initial inventory (Week 0): 200 bicycles
• Lot size: 500 bicycles
• Production per run: 500 bicycles
• Lead time: 1 week (components need to be ordered one week before
production)
60
Master Production Schedule for Bicycles (6 Weeks)
Given Information:
• Initial Inventory (Week 0): 200 bicycles, Lot Size: 500 bicycles
• Production per Run: 500 bicycles, Lead Time: 1 week (components need to be
ordered one week before production)
Calculations:
• Gross Requirements: Starting inventory (Week 0) + Demand Forecast + Customer Orders for the week
• Net Requirements: Gross Requirements - Previous Week's Available to Promise (ATP)
• Scheduled Receipts (Considering Lead Time): Production from the order placed one week prior (considering
lead time)
• Planned Production Orders (for next week): Based on Net Requirements for the upcoming week, considering the
lot size (round up if necessary)
• Available to Promise (ATP): Previous Week's ATP + Scheduled Receipts for the week - Net Requirements for the
week 61
Master Production Schedule for Bicycles (6 Weeks)
Weeks Week 0 Week 1 Week 2 Week 3 Week 4 Week 5
Demand Forecast 400 300 500 600 400
Customer orders 100 200 300 100
Opening Inventory =200 200 200 300 0 0 -100
Requirement (Demand Forecast or 0 400 300 500 600 400
Customer order whichver is higher)
Net inventory before production 200 -200 0 -500 -600 -500
(Opening inventory- Requirement)
MPS (Planned Production) if Net 0 500 0 500 500 500
inventory is less than zero
Projected inventory (MPS+ Opening 200 300 0 0 -100 0
Inventory- Requirement)
ATP Inventory (MPS-Customer Order 200 200
500+200-400 500 200 400
62
Master Production Schedule for Bicycles (6 Weeks) with ATS
Weeks Week 0 Week 1 Week 2 Week 3 Week 4 Week 5
Demand Forecast 400 300 500 600 400
Customer orders 100 200 300 100
Opening Inventory =200 200 200 300 0 0 -100
Requirement (Demand Forecast or 0 400 300 500 600 400
Customer order whichver is higher)
Net inventory before production 200 -200 0 -500 -600 -500
(Opening inventory- Requirement)
MPS (Planned Production) if Net 0 500 0 500 500 500
inventory is less than zero
Projected inventory (MPS+ Opening 200 300 0 0 -100 0
Inventory- Requirement)
ATP Inventory (MPS-Customer Order 200 200 500 200 400
till next MPS) Calculate ATS after MPS Initially
projected 500-100-200 500-0 500-300 500-100
inventory
63
Master Production Schedule
Ex2: A Car manufacturer is developing a Master Production
Schedule (MPS) for the next months. The following information is
available:
• Initial inventory (Week 1): 500 Cars
• Lot size: 1000 units
• Production per run: 10000 cars
• Lead time: 1 week (components need to be ordered one week
before production)
64
65
Definitions
Capacity refers to :
The upper limit or ceiling on the load that
an operating unit can handle
Changes in
demand
Changes in
Opportunity
technology
capacity
planning
Changes in Perceived
environment threats
The basic questions in capacity planning
How much
?is needed
forecasting
What kind
When is it of capacity
?needed ?is needed
When capacity planning ?
90.00%
90.00%
80.00%
72.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Efficiency Utilization
Utilization Example
•Utilizatio
Utilization = ? Capacity used 83 units/wk
n= = = .692
Best operating level 120 units/wk
Best Operating Level
Average
unit cost
of output
Underutilization Over-utilization
Best Operating
Level
Volume
Ex. Measuring capacity
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week,
Shifts/day = 3,
Hours/shift = 8
Design capacity = (7 x 3 x 8) x (1,200)
= 201,600 rolls/week
Utilization = 148,000/201,600 = 73.4%
Efficiency = 148,000/175,000 = 84.6%
Examples of Capacity Measures
## 11 44 00 00 55 . .00 22 , ,00 00 00
## 22 33 00 00 88 . .00 22 , ,44 00 00
## 33 77 00 00 22 . .00 11 , ,44 00 00
55 , ,88 00 00
Goal." It is based on the idea that every system, whether it's a manufacturing process, a project, or an organization,
has a constraint that limits its ability to achieve its goals. TOC aims to identify and manage these constraints in order
to improve overall system performance. Some examples of constraints includes: Machine capacity, Sales saturation,
For a preliminary example of the Theory of Constraints, imagine you are building electric cars. You have all the pieces
except for one key component: the batteries. Due to a material shortage, your company will need to wait an extra
month to receive them. Waiting for the next shipment of batteries is the largest limiting factor within your operation.
Even though your cars are practically finished, not one product can be delivered until you receive the batteries and
install them.
Key Principles of Theory of Constraints:
• Identify the Constraint: The first step is to identify the constraint, also known as the bottleneck, which limits the
system's output or performance.
• Exploit the Constraint: Once the constraint is identified, efforts should be made to maximize its utilization and
efficiency to get the most out of the system.
• Subordinate Everything Else to the Constraint: Other activities within the system should be aligned to support
and enhance the performance of the constraint. This ensures that non-constraint activities do not overwhelm the
constraint.
• Elevate the Constraint: If the constraint cannot be overcome by exploiting and subordinating other activities,
actions should be taken to alleviate or remove the constraint. This might involve investing in additional resources
or changing processes.
• Repeat: Once the initial constraint is addressed, the process is repeated by identifying the next constraint in the
system. Continuous improvement is achieved by iteratively identifying and addressing constraint s.
Identify the Constraint
Steps is to identify the constraint, also known as the bottleneck, which limits the system's output or
performance.
1. Observation and Data Analysis: Start by closely observing the production line and collecting data on
production rates, work-in-progress inventory, and cycle times for each process.
2. Performance Metrics: Analyze key performance metrics such as throughput, cycle time, and work-in-
progress inventory levels. A process with consistently high work-in-progress inventory and low throughput
compared to other processes is likely a bottleneck.
3. Constraint Analysis: Use TOC principles to identify constraints. Constraints can be physical resources like
machines, labour, or processes with limited capacity.
An outdated policy is causing a bottleneck in maintenance activities. Steps to eliminate bottlenecks
Example of the theory of constraints
Step 1: Identify
A policy that states all maintenance requests must be approved by upper management is creating a bottleneck that
is preventing maintenance activities from being completed. This policy has not been updated for 5 years.
Step 2: Exploit
The Maintenance Manager and his team are assigned to develop a new policy to address maintenance requests.
Step 3: Subordinate
Employees are trained to submit all maintenance requests directly to the Maintenance Manager. The manager then
chooses if the request should require additional approval and who that approval should come from.
Step 4: Elevate
The new policy is overwhelming the Maintenance Manager with requests. The company will hire an additional
employee to be tasked with receiving and monitoring the maintenance requests.
Step 5: Repeat
Performance data is re-analyzed and it is confirmed that maintenance activities have improved, and the constraint
is broken. The next constraint must now be identified and the Five Focusing Steps repeat.