Chapter 5

Integrated Operations
Planning

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 Integrated Operations Planning
Supply chain planning.
Supply chain planning applications.
Sales and operations planning (S&OP).
Advanced Planning System (APS) Overview.
Collaborative Planning, Forecasting, and
Replenishment.
Forecasting.
Summary.
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 Supply Chain Planning
Supply chain visibility.
Simultaneous resource consideration.
Resource utilization.

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 Supply Chain Visibility
Visibility regarding location and status of
inventory.
Identify inventory status exceptions.
Reduce risk and uncertainty.

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 Simultaneous Resource Consideration
Jointly balance supply chain.
• Demand.
• Capacity.
• Material requirements.
• Constraints.
Jointly balance supply chain assets.
• Raw materials.
• Production.
• Storage.
• Transportation.
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 Resource Utilization
Minimize plant and equipment resources.
Production run lengths.
Set-ups.
Complete trade-off assessment.

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 Supply Chain Planning Objectives
Developing a consistent forecast within the
firm.
Balancing supply and demand within the firm.
Exchanging demand and inventory availability
information with supply chain partners.
Developing consistent inventory availability
plans throughout the supply chain.

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 Internal Integrative Management
The Challenge of Functional Boundaries

The Great
Divide
Supplier Distribution
and and
Operations Customer
Collaboration Collaboration

Why Not One Forecast and One Plan and One Metric Framework?

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 Why Is Balance So Hard To Achieve?
Supply and demand “sides” have different objectives

Operations-Focused Customer-Facing
Efficiency Effectiveness
Cost-to-Provide Cost-to-Serve
Predictable demand patterns is Tailored service and product
assumed/desired offerings – flexibility
Cost reduction/containment Maximize service options
Operational plans/order Sales forecasts/sales targets
forecasts

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 Figure 5.2 Planning Process Conflicts
Balancing Objectives

Operations Sales
• Detailed Forecasts • Aggregate Forecasts
• Few Products High Working Capital • Many Product
(Inventories)
• Long Runs Lower Service Levels Variations
Lower Quality • Rapid Response
• Stable Schedules Lower Margins
• Long Lead Times • High Service
• Maximize Production • Maximize Revenue

Traditional functional approach to planning leads to differing interests,

suboptimal actions, and slower improvement

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 Demand Types
Independent versus dependent demand.
Stationary versus dynamic demand.
Single versus multi-echelon demand.
Single-item versus system demand.

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 Independent versus Dependent Demand
Independent demand.
• Characteristic of items purchased by end-users (that is, consumer).
• Typically not under the control of the firm.
• Under minimal control by the firm.
• Examples include consumer goods such as food, electronics, and
automobiles.

Dependent demand.
• Characteristic of items used to assemble other items (that is, wheels used
to build cars).
• Typically driven by the production schedule of the firm.
• Under significant control by the firm since the firm typically makes the
production schedule.
• Examples include components for automobiles and electronics.

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 Stationary versus Dynamic Demand
Stationary demand.
• Demand that is reasonably stable and doesn’t
fluctuate.
• Demand may be deterministic (constant) or
probabilistic (limited variability).
Dynamic demand.
• Demand that is highly variable driven by
unpredictable events such as weather or political
events.
• Dynamic demand is typically highly probabilistic.
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 Single versus Multi-echelon Demand
Single-echelon Demand.
• Demand that is placed on a single stage distribution system
such as customer to distribution center to plant.
• Single-stage systems are typically easier to forecast since
there is only one level of forecast required.
Multi-echelon Demand.
• Demand that is placed against a multi-stage distribution
systems such as customer to local distribution center to
regional distribution center to plant.
• Multi-stage systems are more difficult to forecast since it is
necessary to forecast both the local and the regional
distribution center.
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 Single-item versus System Demand
Single-item Demand.
• Single item demand is the most common and it focuses on
developing a forecast and inventory control parameters for
individual items.
• Inventory control parameters for each item are based on the
service objectives and the demand characteristics.
System Demand.
• System demand focuses on developing forecast and inventory
control parameters based on the need to keep a system (that
is, vehicle or plane) operating.
• Items that are critical for the operation of the system would be
provided a higher service level than an item that is not critical
for operation.
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 Supply Chain Planning Applications 1

Demand planning – Forecasting of unit sales by geography

and product.
Production planning – Development of a manufacturing plan
considering resource availability:
• Make-to-Order (MTO).
• Assemble-to-Order (ATO).
• Make-to-Stock (MTS).
Logistics planning – Coordinates overall movement demand,
vehicle availability, and transportation expense.
Inventory deployment – Coordinates product demand with
the ability to produce and ship product to the consumer.
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 Supply Chain Planning Applications 2

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 Bill of Materials

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 Sales & Operations Planning (S&OP)
S&OP process.
Making S&OP Work.

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 Sales and Operations Planning Defined
An internal-to-firm demand collaboration process where
individuals from operations-focused and customer-facing
processes collaborate to develop a coordinated plan for
responding to customer requirements within the
resource constraints of the enterprise.
S&OP may also be used collaboratively across
enterprises.

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 S&OP Process 1

Collaboratively establishes a coordinated plan for responding

to customer requirements within the resource constraints of
the enterprise.
Consider marketing and sales plans (Including innovation and
pricing plans).
Consider materials availability.
Prioritize plans and choices.
Evaluate and prioritize risks.
Set risk tolerances.
Manage, monitor, and control demand and supply plan
performance and variances.
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 Figure 5.3 S & OP Process

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 External Evaluation: Part of S&OP
Measurements and functional goals on the operations-
focused and customer-facing “sides,” including.
• Profitable customers.
• Product mix priorities.
External trends and their impact on strategic plans.
• Trends in customer demand.
• Changes in technology.
• Changes in competitive environment.
• Changes in resource availability.

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 S&OP Process 2
Develop functional input (Marketing, sales, finance, and
operations).
Collaborate to develop common demand forecast.
Collaborate to determine resource availability (Supply,
raw materials, and capacity).
Identify alternatives and assess trade-offs.
Review financial implications.
Review with executives to agree on common plan.
Execute plan.
Review results of plan.
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 Making S & OP Work
Executing the process every month.
Process ownership and clarity of roles and responsibilities.
Organizational commitment to achieving high forecast
accuracy.
Focus should be on the next 3 to 12 months.
One integrated plan that integrates the actions of the entire
organization.
Senior management decision making.
Measuring end-to-end supply chain performance.
S&OP forecast versus operating plan or budget.
©2020 McGraw-Hill Education Source: Stephen P. Crane, CVCR Newsletter, 3, no 1 (Winter 2008)
 Benefits from S & OP
Improved forecast accuracy.
Increases customer service and perfect order percent.
Reduces cast-to-cash cycle time.
Enhances gross profit margin.
Improves capacity utilization.

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 Barriers to an Effective S & OP
Disconnect between S & OP and corporate strategy – for
example, transaction versus business focus.
Lack of senior management support/decision.
Unrealistic “single-number.”
Lack of commitment to regular meetings.
Short-term planning horizon/focus.
Unbiased “leader.”
Failure to consider product life cycle issues and external business
trends.
Failure to prioritize.
Lack of proper and consistent measures.

©2020 McGraw-Hill Education Source: Patrick Bower, “12 Most Common Threats to Sale and Operations Planning Process,” Journal of Business Forecasting. Fall 2005, 4-14.
 APS System Overview
Advanced planning and scheduling overview.
• Focus on component or item.
• Consider network of plants, distribution centers, and
customers.
• Requires links for lead times.
Sample APS planning situation.
APS system modules.

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 Figure 5.4 – Advanced Planning and
Scheduling Overview

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 Table 5.2 - Sample APS Planning
Situation
Time Period 1 2 3 4 5
Requirement 200 200 200 600 200
Production Capacity 300 300 300 300 300
Alternative 1 (overtime):
Production 200 200 200 600* 200
Inventory Carryover - - - - -

Alternative 2 (build ahead):

Production 300 300 300 300 200
Inventory Carryover 100 200 300 - -

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 APS System Components
Demand management.
Resource management.
Resource optimization.
Resource allocation.
• Available to promise (ATP).
• Capable to promise (CTP).

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 Figure 5.5 - APS System Modules

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 Collaborative Planning, Forecasting,
and Replenishment
Coordinates the requirements planning process
between supply chain partners for demand creation
and demand fulfillment activities.
Steps:
• Create a joint business plan where a customer and supplier
share, discuss, coordinate, and rationalize their own
individual strategies to create a joint plan.
• Create a joint calendar for planning activities.
• Create a common sales forecast.
• Develop production, replenishment, and shipment plans.
Source: https://www.gs1us.org/DesktopModules/Bring2mind/DMX/Download.aspx?Command=Core_Download&EntryId=492&language=en-
US&PortalId=0&TabId=134

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 Figure 5.6 Basic relationships for CPFR
illustrated in a retail situation

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 CPFR Model: Retailer/Manufacturer
Tasks

VICS – CPFR Model

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 Rationale for Supplier Integration
Identifying how suppliers can enhance
customer value.
Facilitating joint product innovation and
development.
Enhances the relationship between firm and
supplier.

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 Customer Integration
Facilitates customer segmentation with key
customers.
Allows firms to customize products and
delivery capabilities with key customers.

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 Forecasting 1

Forecast is the specific definition

of what is projected to be sold,
when and where.
Forecasting is a critical capability.
• Many logistics and supply chain
activities must be completed in
anticipation of a sale.
Forecasting approaches to
achieve enhanced service or
reduced inventory.
• Improve forecast accuracy.
• Forecast at a higher level of
aggregation.

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 Forecasting 2

Define a forecast and forecasting.

Discuss the rationale for forecasting in the supply
chain.
Examine the key drivers that are utilized to
improve forecasting.
Describe the challenges faced in the forecasting
process.
Discuss several simple and complex forecasting
techniques.
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 Forecasting Requirements
Collaborative planning.
Requirements planning.
Resource management.

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 Forecast Components
Base.
Seasonal.
Trend.
Cyclical.
Promotional.
Irregular.

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 Major Factors Influencing Forecast
Promotions.
Price changes.
Financial requirements.
Product substitution.
New product introductions.
Competitive actions.

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 Figure 5.7 Forecast Process

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 Inventory/Forecast Relationship

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 How Product Characteristics Influence
The Need To Forecast
Low Economies of Scale
Long response time Detailed accurate forecasting is not
experienced in as critical, as the firm has more
replenishing product production flexibility. For example,
final product customization could be
postponed so that it’s only necessary
to forecast the base units (that is, at
a higher level of aggregation) with
final customization much nearer time
of demand.
Short response time When it’s possible to obtain product
experienced in quickly and there are limited scale
replenishing product economies, the focus should shift
from forecasting to the design of a
responsive and flexible process.
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High Economies of Scale
Accurate forecasting is
critical in this case as it’s
necessary to forecast an
extended time into the
future to allow for
production or
transportation economies.
Focus on developing an
accurate short-term forecast
with strong consideration of
marketing and competitive
tactics and less
consideration of history.
 Figure 5.8 Response of a Simulated Production/ Distribution
System to a sudden 10 Percent Increase in Sales at the Retail Level

Source: Adapted from Jay W. Forrester. Industrial Dynamics (Waltham, MA: Pegasus Communications, 1961).
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 Table 5.4 Forecast Techniques 1

Forecast Description Application Limitations

Technique
Moving An unweighted average of Useful when there are only Not useful when there is
the previous periods of base and irregular demand significant seasonality or
Average sales components trend

Exponential An exponentially weighted Useful when necessary to Not as useful when there are
moving average using maintain data and generate other factors influencing
Smoothing smoothing constants to forecasts for a large number demand, such as promotions,
place greater weights on of items which incorporate price changes, or competitive
more recent demands individual trend and actions not regularly
seasonality components scheduled

Time Series Uses time period as the Useful when demand Not particularly responsive to
independent variable to patterns repeat with some change as it takes numerous
predict future demand cyclic, seasonal, or trend periods for the model to
patterns components identify changes in patterns
and for the forecast to
respond to the pattern
changes; also requires
judgment regarding selecting
variables that should be
included

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 Table 5.4 Forecast Techniques 2

Forecast Description Application Limitations

Technique
Regression Uses other independent Useful when there’s a strong Not particularly responsive to
variables, such as price, linear or nonlinear relationship change, as it takes numerous
promotion plans, or between independent variables periods for the model to identify
related product volumes and demand changes in patterns and for the
to predict sales forecasts to respond to the pattern
changes; also requires judgment
regarding selecting which variables
should be included

Multivariate Uses more complex Useful when there’s a complex While there are quantitative
statistical techniques to generally nonlinear relationship factors for selecting the best
identify more complex between historical patterns and model, there is often substantial
demand history demand. The analyses identify judgment involved as well, so these
relationships; techniques and evaluate alternative sets of techniques are often nonsuited for
include spectral analysis, parameters to determine the best detailed item-location-time period
Fourier analysis, transfer fit and use it to predict future forecasts.
functions, and neural demand. These techniques are
networks often more useful for predicting
macro forecasts, such as energy
consumption, economic growth,
or aggregate transportation.

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 Figure 5.9 Comparative Forecast Errors

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 Forecasting Accuracy
(Calculated as Mean Absolute Deviation (MAD) Percent)

Level of Aggregation Minimum Average Maximum

National by Brand 2 5 8

National by Product 4 10 20
Family

National by SKU 10 15 25

Distribution site by SKU 22 42 80

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