C6 - Sales and Operations Planning - Capacity Planning and Aggregate Production Planning RSV

OPERATION MANAGEMENT
C6. Sales and Operations Planning

Instructor: MBA. Nguyen Danh Ha Thai. Email: thaindh@hcmute.edu.vn
Office: A1-307 Zalo: 0906 613 813
1
thaindh@hcmute.edu.vn
The Sales And Operations Planning Process
Sales and operations planning (S&OP): a process for coordinating
supply and demand.
Aggregate refers to sales and operations planning for product lines

or families.
There are two objectives to sales and operations planning:

1. To establish a company-wide game plan for allocating resources,
and
2. To develop an economic strategy for meeting demand.
2
3
The Monthly S&OP Planning Process
4
Strategies for adjusting capacity
5
Strategies For Adjusting Capacity
Aggregate planning evaluates alternative capacity sources to find an economic
strategy for satisfying demand.
1. Producing at a constant rate and using inventory to absorb fluctuations in
demand (level production)
2. Hiring and firing workers to match demand (chase demand)
3. Maintaining resources for high-demand levels
4. Increasing or decreasing working hours (overtime and undertime)
5. Subcontracting work to other firms
6. Using part-time workers
7. Providing the service or product at a later time period (backordering)
6
Strategies For Adjusting Capacity
When one of these alternatives is selected, a company is said to
have a pure strategy for meeting demand. When two or more
are selected, a company has a mixed strategy.
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1 - Level Production / 2 - Chase Demand
Level production:
producing at a constant rate and using inventory as needed to meet
demand.
Chase demand:
changing workforce levels so that production matches demand.
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Pure Strategies For Meeting Demand
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3 - Peak Demand / 4 - Overtime And Undertime
Peak demand:
staffing for high levels of customer service.
Overtime and undertime adjust working hours to meet demand.
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5 - Subcontracting / 6 - Part-Time Workers
Subcontracting lets outside companies complete the work.
Using part-time workers is feasible for unskilled jobs or in areas with

large temporary labor pools (such as students, homemakers, or
retirees)
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Backlogs, Backordering, Lost Sales
Backlog: accumulated customer orders to be completed at a later
date.
Backordering: ordering an item that is temporarily out-of-stock.
Lost sales: forfeited sales for out-of-stock items.
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Strategies for managing demand
13
Backlogs, Backordering, Lost Sales
• Shifting demand into other time periods with incentives, sales promotions, and
advertising campaigns;
• Offering products or services with countercyclical demand patterns; and
• Partnering with suppliers to reduce information distortion along the supply

chain.
14
Quantitative
Operation
Management techniques for
aggregate planning
158
Quantitative Techniques For Aggregate Planning
Aggregate planning:
the process of determining the quantity and timing of production
over an intermediate time frame.
Pure strategy:
varying only one capacity variable in aggregate planning.
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Example
Compares the cost of two pure strategies: level production and chase demand.
The Good and Rich Candy Company makes a variety of candies in three factories
worldwide. Its line of chocolate candies exhibits a highly seasonal demand
pattern, with peaks during the winter months (for the holiday season and
Valentine’s Day) and valleys during the summer months (when chocolate tends to
melt and customers are watching their weight). Given the following costs and
quarterly sales forecasts, determine whether (a) level production, or (b) chase
demand would more economically meet the demand for chocolate candies:
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Example
18
Example
19
Example
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Casumina makes production plan based on the forecasting from Jan to Jun.
FORECASTING
Month Demand Work days Demand per
(Units) day
1 900 22 41
2 700 18 39
3 800 21 38
4 1.200 21 57
5 1.500 22 68
6 1.100 20 55
Total 6.200 124
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No beginning inventory, No worker initially - Chose the right aggregate plan.
Cost structure
Items Cost
Inventory 5.000 đ/unit/month
Sub-contracting 10.000 đ/product
Production cost 5.000 đ/hour (40.000đ/day)
Overtime (time1,5) 7.500 đ/hour
Labour time 1,6 giờ/unit
Hiring cost 600.000đ
Firing cost 700.000đ
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A/ level production
Average demand = 6.200 / 124 = 50 units / day
Unit/day Stock-out
Inventory
Level production
Month
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A/ level production
Month Demand Actual Inventory Accumulated

Production Inventory
1 900 1.100 200 200
2 700 900 200 400
3 800 1.050 250 650
4 1.200 1.050 -150 500
5 1.500 1.100 -400 100
6 1.100 1.000 -100 0
Total 6.200 6.200 1.850
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A/ level production
Total workers = 10 —> Salary or Production cost: 10*5.000*8*124= 49.600.000

Hiring cost = 10*600.000 = 6.000.000
Total Inventory = 1.850 units —> Cost = 1.850 * 5.000 = 9.250.000
Total cost = 64.850.000
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B/ Chase demand - Basic analysis
Month Demand Output / Needed Hiring Firing

worker/ worker
month
1 900 110 9 9 0
2 700 90 8 0 1
3 800 105 8 0 0
4 1.200 105 12 4 0
5 1.500 110 14 2 0
6 1.100 100 11 0 3
Total 6.200 62 15 4
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B/ Chase Demand - Basic Analysis
Salary or Production cost: (9*22+8*18+8*21+12*21+14*22+11*20)*5.000*8=

51.600.000
Hiring cost = 15*600.000 = 9.000.000
Firing cost = 4*700.000 = 2.800.000
Total cost = 63.400.000
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B/ Chase demand - Mixed Strategy
Mon Dem Dem Output / Need Actual Invent Accumul

th and and - worker/ ed produ ory ated
Inve month work ction Inventory
ntory er
1 900 900 110 9 990 90 90
2 700 610 90 7 630 20 20
3 800 780 105 8 840 60 60
4 1.200 1140 105 11 1155 15 15
5 1.500 1485 110 14 1540 55 55
6 1.100 1045 100 11 1100 55 55
Total 6.200 6255 295
28
B/ Chase demand
Month Needed worker Hiring Firing
1 9 9
2 7 0 2
3 8 1
4 11 3
5 14 3
6 11 3
Total 16 5
29
B/ Chase Demand - Mixed Strategy
Salary or Production cost: (9*22+7*18+8*21+11*21+14*22+11*20)*5.000*8=

50.040.000
Hiring cost = 16*600.000 = 9.600.000
Firing cost = 5*700.000 = 3.500.000
Inventory cost = 295 *5.000 = 1.475.000
Total cost = 64.615.000
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C/ Overtime and Undertime
Set stable workforces for lowest demand. After that, using Overtime to adapt the
increasing of demand.
—> Lowest demand on March = 38 units

—> Need workers = 38/5 = 7,5 -> 8 workers
—> Output of 8 worker a day = 8*5 = 50 units
31
Month Demand Production Overtime Inventory

Products
1 900 880 20 0
2 700 720 0 20
3 800 840 0 40
4 1.200 840 360 0
5 1.500 880 620 0
6 1.100 800 300 0
Total 6.200 1300 60
32
Overtime = 1.300*1,6 = 2.080 hours
Salary or Production cost: 8*5.000*8*124= 39.680.000

Overtime cost = 2.080 * 5.000*1,5 = 15.600.000
Hiring cost = 8*600.000= 4.800.000
Inventory cost = 60 *5.000 = 300.000
Total cost = 60.380.000
33
C/ Sub-contracting
Set stable workforces for lowest demand. After that, using Sub-contracts to adapt
the increasing of demand.
—> Lowest demand on March = 38 units

—> Need workers = 38/5 = 7,5 -> 8 workers
—> Output of 8 worker a day = 8*5 = 50 units
34
C/ Sub-contracting
Month Demand Production Sub- Inventory

contracts
1 900 880 20 0
2 700 720 0 20
3 800 840 0 40
4 1.200 840 360 0
5 1.500 880 620 0
6 1.100 800 300 0
Total 6.200 1300 60
35
C/ Sub-contracting
Salary or Production cost: 8*5.000*8*124= 39.680.000

Hiring cost = 8*600.000= 4.800.000
Sub-contract cost = 1.300*10.000 = 13.000.000
Inventory cost = 60 *5.000 = 300.000
Total cost = 57.780.000
36
Summary
Cost Level Chase Over/Under Sub-

time contracting
Production 49.600.000 50.040.000 39.680.000 39.680.000
Overtime - - 15.600.000 -
Hiring 6.000.000 9.600.000 4.800.000 4.800.000
Firing - 3.500.000 - -
Sub-contract - - - 13.000.000
Inventory 9.250.000 1.475.000 300.000 300.000
Total 64.850.000 64.615.000 60.380.000 57.780.000

37
General Linear Programming Model
Linear programming gives an optimal solution, but demand and
costs must be linear.
Formulate a linear programming model for Example that will satisfy

demand for Good and Rich chocolate candies at minimum cost.
Solve the model with Excel Solver.
38
General Linear Programming Model
39
Example
• Objective function: The objective function seeks to minimize the cost of hiring workers, ring workers, holding
inventory, and production. Cost values are provided in the problem statement for Example. The number of workers hired
and red each quarter and the amount of inventory held are variables whose values are determined by solving the linear
programming (LP) problem.
• Demand constraints: The rst set of constraints ensures that demand is met each quarter. Demand can be met from
production in the current period and inventory from the previous period. Units produced in excess of demand remain in
inventory at the end of the period. In general form, the demand equations are constructed as
It-1 + Pt = Dt + It
• where Dt is the demand in period t, as speci ed in the problem. Leaving demand on the
right-hand side, we have
It-1 + Pt - It = Dt
There are four demand constraints, one for each quarter. Since there is no beginning inventory, I0 = 0, and it can be
dropped from the rst demand constraint.
40
fi
fi
fi
fi
fi
Example
• Production constraints: The four production constraints convert the workforce size to
the
number of units that can be produced. Each worker can produce 1000 units a quarter,
so the production each quarter is 1000 times the number of workers employed, or
1000Wt = Pt
• Workforce constraints: The workforce constraints limit the workforce size in each
period to the previous period’s workforce plus the number of workers hired in the
current period minus the number of workers red.
Wt-1 + Ht - Ft = Wt
41
Notice the rst workforce constraint shows a beginning workforce size of 100.
fi
fi
Example
• Additional variables and constraints: Additional variables, such as
overtime and subcontracting, can be added to the LP formulation as needed.
The cost of those variables is then added to the objective function.
Additional constraints such as limiting the amount of overtime or
subcontracting can also be added in the Solver model.
42
43
44
Mixed Strategy
Mixed strategy:
varying two or more capacity factors to determine a feasible
production plan.
45
Mixed Strategy
Demand for Quantum Corporation’s action toy series follows a seasonal pattern—
growing through the fall months and culminating in December, with smaller peaks
in January (for after- season markdowns, exchanges, and accessory purchases)
and July (for Christmas-in-July specials).
46
Mixed Strategy
Each worker can produce on average 100 cases of action toys each month.
Overtime is limited to 300 cases, and subcontracting is unlimited. No action toys
are currently in inventory. The wage rate is $10 per case for regular production,
$15 for overtime production, and $25 for subcontracting. No stockouts are
allowed. Holding cost is $1 per case per month. In- creasing the workforce costs
approximately $1000 per worker; decreasing the workforce costs $500 per
worker.
Management wishes to test the following scenarios for planning production:
a. Level production over the 12 months.
b. Produce to meet demand each month.
c. Solve the problem with linear programming (LP) using Excel Solver.
47
48
The Transportation Method
Use the transportation method when hiring and firing is not an
option.
49
50
Burruss Manufacturing Company uses overtime, inventory, and subcontracting to
absorb fluctuations in demand. An aggregate production plan is devised annually
and updated quarterly. Cost data, expected demand, and available capacities in
units for the next four quarters are given here. Demand must be satisfied in the
period it occurs; that is, no backordering is allowed. Design a production plan that
will satisfy demand at minimum cost.
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52
53
54
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The Hierarchical Nature Of Planning
Planning involves a hierarchy of decisions. By determining a strategy for
meeting and managing demand, aggregate planning provides a framework
within which shorter-term production and capacity decisions can be made.
56
The Hierarchical Nature Of Planning
57
Collaborative Planning
Collaborative planning:
sharing information and synchronizing production
across the supply chain.
58
Available-To-Promise
Available-to-promise (ATP):
the quantity of items that can be promised to the customer; the
difference between planned production and customer orders
already received.
Capable-to-promise:
the quantity of items that can be produced and made available
at a later date.
59
East Coast Bicycle Company has recently begun to accept customer orders
over the Internet. The company uses both an aggregate production plan for
families and a master production schedule for individual products. Now
East Coast wants to add available-to-promise functionality to the planning
process. Using the information given below, determine how many girls 26"
bikes are available-to-promise in April, May, and June.
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61
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Rules-Based ATP
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Aggregate
Operation
Management Planning for
Services
648
Aggregate Planning For Services
The aggregate planning process is different for services in the following ways:
1. Most services cannot be inventoried. It is impossible to store an airline seat, hotel room, or hair
appointment for use later when demand may be higher. When the goods that accompany a service
can be inventoried, they typically have a very short life. Newspapers are good for only a day; flowers,
at most a week; and cooked hamburgers, only 10 minutes.
2. Demand for services is difficult to predict. Demand variations occur frequently and are often
severe. The exponential distribution is commonly used to simulate the erratic demand for services—
high-demand peaks over short periods of time with long periods of low demand in between. Customer
service levels established by management express the percentage of demand that must be met and,
sometimes, how quickly demand must be met. This is an important input to aggregate planning for
services.
3. Capacity is also difficult to predict. The variety of services offered and the individualized nature
of services make capacity difficult to predict. The “capacity” of a bank teller depends on the number
and type of transactions requested by the customer. Units of capacity can also vary. Should a hospital
define capacity in terms of number of beds, number of patients, size of the nursing or medical staff, or
number of patient hours?
65
Aggregate Planning For Services
4. Service capacity must be provided at the appropriate place and time. Many services have
branches or outlets widely dispersed over a geographic region. Determining the range of services and
staff levels at each location is part of aggregate planning.
5. Labor is usually the most constraining resource for services. This is an advantage in
aggregate planning because labor is very flexible. Variations in demand can be handled by hiring
temporary workers, using part-time workers, or using overtime. Summer recreation programs and
theme parks hire teenagers out of school for the summer. Federal Express staffs its peak hours of
midnight to 2 A.M. with area college students. McDonald’s, Walmart, and other retail establishments
woo senior citizens as reliable part-time workers. Workers can also be cross-trained to perform a
variety of jobs and can be called upon as needed. A common example is the sales clerk who also
stocks inventory. Less common are police officers who are cross-trained as firefighters and
paramedics.
66
Revenue Management
Revenue management:
maximizes the yield of time sensitive products and services.
67
68
Single Order Quantities
69
Revenue Management
70
Example
Lauren Lacy, manager of the Lucky Traveler Inn in Las Vegas, is tired of customers who make
reservations and then don’t show up. Rooms rent for $100 a night and cost $25 to maintain per day.
Overflow customers can be sent to the Motel 7 for $70 a night. Lauren’s records of no-shows over the
past six months are given below. Should the Lucky Traveler start over-booking? If so, how many
rooms should be overbooked?
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Example
72
Practices
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THANKS!
Any questions?
You can find me at:
▸ Zalo: 0906 613 813
▸ thaindh@hcmute.edu.vn
74

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OPERATION MANAGEMENT

C6. Sales and Operations Planning

Aggregate refers to sales and operations planning for product lines

There are two objectives to sales and operations planning:

Overtime and undertime adjust working hours to meet demand.

Using part-time workers is feasible for unskilled jobs or in areas with

Backordering: ordering an item that is temporarily out-of-stock.

Lost sales: forfeited sales for out-of-stock items.

• Offering products or services with countercyclical demand patterns; and

• Partnering with suppliers to reduce information distortion along the supply

Month Demand Actual Inventory Accumulated

Total workers = 10 —> Salary or Production cost: 10*5.000*8*124= 49.600.000

Total cost = 64.850.000

Month Demand Output / Needed Hiring Firing

Salary or Production cost: (9*22+8*18+8*21+12*21+14*22+11*20)*5.000*8=

Total cost = 63.400.000

Mon Dem Dem Output / Need Actual Invent Accumul

Month Needed worker Hiring Firing

Salary or Production cost: (9*22+7*18+8*21+11*21+14*22+11*20)*5.000*8=

Total cost = 64.615.000

—> Lowest demand on March = 38 units

Month Demand Production Overtime Inventory

Overtime = 1.300*1,6 = 2.080 hours

Salary or Production cost: 8*5.000*8*124= 39.680.000

Total cost = 60.380.000

—> Lowest demand on March = 38 units

Month Demand Production Sub- Inventory

Salary or Production cost: 8*5.000*8*124= 39.680.000

Total cost = 57.780.000

Cost Level Chase Over/Under Sub-

Total 64.850.000 64.615.000 60.380.000 57.780.000

Formulate a linear programming model for Example that will satisfy

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Salary or Production cost: 85.0008*124= 39.680.000

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