Chapter 16

Sales and Operations Planning

McGraw-Hill/Irwin Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved

Learning Objectives

1. Understand what sales and operations

planning is and how it coordinates
manufacturing, logistics, service, and
marketing plans.
2. Construct aggregate plans that employ
different strategies for meeting demand.
3. Describe what yield management is
and why it is an important strategy for
leveling demand.

16-2
 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
– By aggregate we mean at the level of major groups
of products

LO 1
16-3
 Overview of Major Operations and
Supply Planning Activities

LO 1
16-4
 Overview of Sales and Operations
Planning Activities

• 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

LO 1
16-5
 Types of Planning

• Long-range planning: planning focusing on a

horizon greater than one year
– Generally is done annually
• Intermediate-range planning: planning
focusing on a period from 3 to 18 months
– Time increments that are weekly, monthly, or
quarterly
• Short-range planning: planning covering a
period from one day to six months
– Daily or weekly time increments

LO 1
16-6
 The Aggregate Operations Plan

• Specify the optimal combination of

– Production rate (units completed per unit of time)
– Workforce level (number of workers)
– Inventory on hand (inventory carried from previous
period)
• Product group or broad category
(aggregation)
• This planning is done over an
intermediate-range planning period of 3 to18
months

LO 1
16-7
 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

LO 1
16-8
 Required Inputs to the Production
Planning System

LO 1
16-9
 Production Planning Strategies

1. Chase strategy
• Match the production rate by hiring and laying off
employees
• Must have a pool of easily trained applicants to
draw on
2. Stable workforce—variable work hours
• Vary the number of hours worked through flexible
work schedules or overtime
3. Level strategy
• Demand changes are absorbed by fluctuating
inventory levels, order backlogs, and lost sales

LO 1
16-10
 Production Planning Strategies
Continued

• Pure strategy: when just one of these

approaches is used to absorb demand
fluctuations
• Mixed strategy: when two or more of the
approaches are used
• In addition to these strategies, managers also
may choose to subcontract some portion of
production
– Similar to the chase strategy, but hiring and laying
off are translated into subcontracting

LO 1
16-11
 Relevant Costs

1. Basic production costs

• The fixed and variable costs incurred in
producing a given product type in a given
time period
2. Costs associated with changes in the
production rate
• Hiring, training, and laying off personnel
3. Inventory holding costs
4. Backorder costs

LO 1
16-12
 Aggregate Planning Techniques

• Cut-and-try approach
– Involves costing out various production
planning alternatives and selecting the one
that is best
– Elaborate spreadsheets are developed to
facilitate the decision process
• Linear programming
• Simulation

LO 1
16-13
 A Cut-and-Try Example: The JC
Company

LO 2
16-14
 More Data (The JC Company)

• In solving this problem, we can exclude

the material costs
• Inventory at the beginning of the first
period is 400 units
• Assume the safety stock should be
one-quarter of the demand forecast

LO 2
16-15
 Aggregate Production Planning
Requirements (The JC Company)

LO 2
16-16
 Four Plans to Investigate (The JC
Company)

1. Produce to exact monthly production

requirements by varying workforce size
2. Produce to meet expected average demand
by maintaining a constant workforce
3. Produce to meet the minimum expected
demand using a constant workforce and
subcontract to meet additional requirements
4. Produce to meet expected demand for all but
the first two months using a constant
workforce and use overtime to meet additional
output requirements
LO 2
16-17
 Production Plan 1: Exact Production;
Vary Workforce (The JC Company)

LO 2
16-18
 Production Plan 2: Constant Workforce;
Vary Inventory and Stockout (The JC
Company)

LO 2
16-19
 Production Plan 3: Constant Low
Workforce; Subcontract (The JC
Company)

LO 2
16-20
 Production Plan 4: Constant Workforce;
Overtime (The JC Company)

LO 2
16-21
 Comparison of Four Plans (The JC
Company)

LO 2
16-22
 Four Plans for Satisfying a Production
Requirement (The JC Company)

LO 2
16-23
 Level Scheduling

• A level schedule holds production

constant over a period of time
• It is something of a combination of the
strategies we have mentioned here
• For each period, it keeps the workforce
constant and inventory low, and depends on
demand to pull products through

LO 1
16-24
 Advantages of Level Scheduling

1. The entire system can be planned to minimize

inventory and work-in-process
2. Product modifications are up-to-date because
of the low amount of work-in-process
3. There is a smooth flow throughout the
production system.
4. Purchased items from vendors can be
delivered when needed, often directly to the
production line

LO 1
16-25
 Requirements to Use Level
Scheduling

1. Production should be repetitive (assembly-line

format)
2. The system must contain excess capacity
3. Output of the system must be fixed for a
period of time
4. There must be a smooth relationship among
purchasing, marketing, and production
5. The cost of carrying inventory must be high
6. Equipment costs must be low
7. The workforce must be multi-skilled

LO 1
16-26
 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
• Its widespread scientific application began
with American Airlines’ computerized
reservation system (SABRE)
LO 3
16-27
 Yield Management Most Effective
When…

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

LO 3
16-28
 Yield Management at a Hotel

• 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

LO 3
16-29
 Operating 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

LO 3
16-30
 Price/Service Duration Matrix:
Positioning of Selected Service
Industries

LO 3
16-31