4.

Sales and Operations Planning

Homework problems: 1,2,3,4,5,10,11,18.

4.1. Sales and Operations Planning

Sales and operations planning is a process that provides
management with the ability to strategically direct its busi
ness to achieve competitive advantage. The process brin
gs together all the plans for business (sales, marketing, fi
nancial, manufacturing, sourcing, product development) i
nto one integrated set of plans by product group/family.
Sales and operations plan (S&OP) is an agreed-upon pla
n that comes from the planning process. It is developed a
t the product family level and forms the basis for shorter t
erm manufacturing plans.
Sales and operations planning could precede/direct MPC
decision making or it could be affected by other MPC sys
tems. Fig. 4.1

4.1. Sales and Operations Planning in the Firm

From the manufacturing perspective, operations (production)
plan is the planned production; it is not a forecast of deman
d. It specifies the overall level of manufacturing output plann
ed to be produced, usually stated in terms of aggregate units
of output per month for each product family. Various units of
measure can be used to express the plan: units, tonnage, sta
ndard hours, # of workers, etc.
Within an agreed-upon operations plan, manufacturing is res
ponsible for hitting the plan.
Sales and operations plan (S&OP) is called top managemen
ts handle on the business as it provides the critical links to a
ctivities outside MPC system boundaries, and provides impor
tant visibility of the critical interactions between sales, marketi
ng, production, and finance. Fig. 4.1
3

4.1. Sales and Operations Planning in the Firm

The four fundamentals in sales and operations pla
nning are demand, supply, volume, and mix.
Assuring the balance between demand and supply throu
gh effective coordination of the plans (sales vs. operatio
ns) of the different functional area with the active top ma
nagement involvement.
Volume concerns overall sales rates, production rates, a
ggregate inventories, and order backlogs.
Once the volume decision is made, mix concerns detaile
d decisions about which individual products to make, in
what sequence, and for which customer orders.

4.1. Sales and Operations Planning in the Firm

One of the major payoffs of S&OP is better integration b
etween functional areas. Suppose that actual inventory l
evels do not agree with planned inventory levels and pro
duction does hit the plan (schedule), what could be the p
roblem?
Marketing/sales
Demand management
Recall marketing/manufacturing classical conflicts

Without the S&OP, the job will or may get done but at the
expense of extra inventory, excess capacity, longer lead t
ime, poor customer service, missed new sales opportunit
ies, etc.
5

Classical Marketing/Manufacturing Conflict

Marketing Orientation
(customer focus)
1. Capacity planning
and long range
sales forecasting
2. Production
scheduling
3. Delivery and
distribution
4. Quality assurance
5.

Breadth of product line

6.

Cost control

Manufacturing Orientation
(efficiency/cost focus)
Excess capacity is costly
Stability
Inventory to smooth production
High quality is difficult unless features are simple
Narrow

Blame unreasonable marketing demands

New products provide

production turmoil

7. New product
introduction

4.1. The Sales & Operations Planning Process

1.

2.

3.
4.

5.

Not all sales and operations planning process are the same. Fig.4.2
Run the sales forecasting reports: updating forecast/actual sales, plan
/actual production, and plan/actual inventories, etc. after the month en
d.
Demand planning: considering the actual sales, production, and invent
ories from the past month to develop a new management forecast (sal
es, production, inventory) for the next 12 months, override the statistic
al forecasts when appropriate, by involving senior marketing and sales
management in the process.
Supply/capacity planning: check capacity/resource availability for the
newly developed SOP and modify operations plan, if necessary.
The pre-SOP meeting: involving various functional departments to res
olve problems, identify areas that need top management intervention /
decision.
The executive SOP meeting: finalize SOP, authorize spending, reach
consensus, assess the impact of SOP on business plan, and performa
nce.
7

4.1. The Sales & Operations Planning Process

Considering the chase, level, and mixed operations plan
(Figures 4.3 through 4.7 and 4.10)

Basic tradeoffs:
Costs of changing
workforce level (hiring &
firing), hours worked (over
& under time), subcontract

Inventory carrying costs

Backorder costs

Level strategy can be either constant workforce or

constant work hours (variable workforce)
Example. Problem #2 on page 113.
8

Figure 4.5 Chase Plan explanations

In October:
1. Sales=$30 per unit. Thus, $10 millions=333k units ($10 m/$30).
2. Operations: employee productivity= 8 units/day; 22 days in October. T
hus, 333k units requires 1892 employees (333k/(8x22).
3. Inventory: daily sales for the next period= 400k/20 days=20k units/day.
DoS=days of supply=ending Inventory/daily sales=60k/20k=3 DoS.
Homework: Check November numbers out!
Note: In the History part, actual Sales and actual Inventory are used, but i
n the Plan (future) part, expected values are used.
4. In December (history): daily sales for next period=253k/20days=12,65
0;
Days of Supply (DoS)= 215k/12,650=16.99=17 days.
9

Figure 4.5 Chase Plan explanations

Past 3 months (history):
1. Sales = actual sales are short of forecast; cumulative differ
ence of -100k is about 40% (100k/253k) of January sales.
2. Operations: actual exceeded plan, cumulative difference is
about 45% (115k/253k) of January operations plan.
3. Inventory: increased from 3 to 17 days of supply
4. The need to adjust the operations plan to bring sales and o
perations into balance!!!

10

Figure 4.5 Chase Plan explanations

1.

2.
3.
4.

Costs:
Chase Plan implies that planned operations=planned sales
from January to December. Thus, operations plan in Janua
ry=253k implies 1581 employees (253k/(8x20)).
Hires: 144.3 employees = 1,581 1,437 (in Dec.);
hiring cost=144.3 x $200 = $28,850.
Inventory: $6440k x 2%=$128,800;
Layoffs in June: 909.1 x $500=$454,545.

11

Figure 4.6 Chase with 5 DoS explanations

1. To figure out January operations plan, we calculate daily sa
les for the next period (Feb.)=280,000/21 days=13,333 unit
s/day.
2. 5 DoS = 5 x 13,333 = 66,666=67k units, which is our endin
g inventory for January.
3. January operations = 253k(sales) 216k(beg. Inv.) + 67k
(ending Inv.) = 105,000 units.
4. 105,000/(8x20) = 656.25 employees. Thus, layoffs=780.8
(1437-656.25).
5. Layoff cost = 780.8 x $500=$390,375.
6. Inventory cost = $2,000k x 2%=$40,000.
Homework: Check February numbers out !!!
12

Figure 4.7 Level Plan explanations

1. Level operations strategy is to maintain a constant workfor
ce. The key task is to figure out how many employees woul
d be required. January numbers:
2. Total production = 4333k (12 months sales) 215k (beg. In
v.) + 67k (5 DoS ending Inv. in Dec.) = 4185k units.
3. Annual employee output = 8x243 days=1994 units/yr.
4. # of employee needed = 4185k/1994 = 2152.8 employees.
5. Hiring=2152.8-1437 (Dec.)=715.8; cost=715.8x$200=$143160.
6. Operations plan = 2153x8x20 = 344k units.
7. Inventory = 215 (Dec. ending) + 344(Jan. production )- 253
(Jan. sales) = 306k.
8. DoS = 306k/(280/21)= 23 days; (280/21=daily sales in Feb.)
Homework: Check February numbers out !!!
13

Figure 4.10 Mixed Plan explanations

1. Adding employees in April, July and August and layi
ng off in December to better respond to future dem
and.
2. Chase and Level are two opposite (and extreme) str
ategies. Mixed operating plan usually outperform ch
ase and level strategies in total costs.
3. Mixed operating plan can be optimized using Intege
r Programming.

14

Problem #2 on p. 113
History
Sales
Forecast

Actual

Oct

Nov

Dec

(M$)

12.50

10.00

(units)

5000

(units)

Diff: Month

Pla
n

Jan

Feb

Mar

16.25

5.00

5.00

7.50

4000

6500

2000

2000

3000

4384

3626

6065

-616

-374

-435

-990

-1425

5000

4000

6500

72

70

114

23

19

19

20

21

23

5649

4091

7279

649

91

779

740

1519

Cumulative
Operations
Plan

(units)
(# employ)

# Work Days/Mo.
Actual

(units)

Diff: Month
Cumulative

Target DoS Inv:

Inventory
Plan

Actual

(units)

1270

1270

1270

(000$)

2223

2223

2223

(units)

2265

2730

3944

10

15

13

Days of Supply

15

4.2. Management Obligations in the SOP Process

Top Management Role
The SOP process is inter-functional and needs to be coordinat
ed at the top management level. SOP is also referred to as th
e game planning.
Top management must be committed to the SOP process and
establish or modify the performance measurement and rewar
d structure to align them with the sales and operations plan. R
ecall the traditional performance measure and reward as well
as marketing/manufacturing conflicts.
Resolve the trade-offs between functions before the game pla
n is finalized.
One of the game planning process intention is to not only pro
duce coordinated and integrated plans, budgets, objectives, a
nd goals that are used by managers to make decisions but als
o provide the basis for evaluating performance.
16

4.2. Management Obligations in the SOP Process

Functional Roles
Under the normal situations, the primary obligation for AL
L functions is to hit the plan. That is, sell whats in the s
ales plan, produce whats in the operations plan; no mor
e and no less.
In the uncertain environment (opportunities and threats),
the obligation is to interface and communicate so that a
mismatch between functions wont be created. e.g., oppo
rtunities for selling more arises, what are the implications
for production and finance?
Traditional organizational (functional) units vs. strategic b
usiness units (SBUs)

17

SBU
SBU is an approach to strategic planning that develops a
plan based on products or markets (less on
organizational units). A companys products are typically
grouped into SBUs with each SBU evaluated in terms of
strengths and weaknesses vis--vis similar business
units made and marketed by competitors. These SBU
units are evaluated in terms of their competitive
strengths, their relative advantages, life cycle, and cash
flow, etc.
e.g., GEs lighting, appliance, medical, finance, etc.
Dells PC, server, printer, etc.
Toyotas Lexus, Scion
18

Scion tC (Sports Coupe)

Scion xD (Subcompact)

Scion xB (Urban Utility)

19 from $12,500.
Standard: AC, power windows/lock, airbags, ABS, remote entry, etc. starting

4.2. Management Obligations in the SOP Process

Controlling the Operations Plan
Checking the performance against both sales and
operation plans, analyze and communicate the sources
of variation.
Periodic Reporting
MPS operations plan, weekly
Inventory and backlog, weekly
Capacity utilization,
weekly
Delivery
performance, daily
Identify source of deviations

20

Problem #15 on p. 119

ABC Sales and Operations Planning Spreadsheet

Sales
Forecast

History
Apr
(M$)
$22.50
(units)
1.50
(units)
0.78
-0.72

Plan
May
$25.50
1.70
1.95
0.25
-0.47

Jun
$28.50
1.90
1.63
-0.27
-0.74

Jul
$31.50
2.10

Aug
$34.50
2.30

Sep
$37.50
2.50

1.50
75
20
1.51
0.01

1.70
77
22
1.70
0.00
0.01

1.90
86
22
1.88
-0.02
-0.01

1.39
139
10

2.92
139
21

3.20
139
23

(units) 250000
(000$) $2,625

250000
$2,625

250000 -459999
159001
856001
$2,625
$0 $1,669,508 $8,988,008

Actual
(units) 250001
Days of Supply
9.6

250000
3.9

250001
4.6

Actual
Diff: Month
Cumulative
Operations
Plan
(units)
(# employ)
# Work Days/Mo.
Actual
(units)
Diff: Month
Cumulative
Inventory
Plan

-6.6

2.1

Sum
6900000

7506000
54
250001 Beg inv
833333 Tgt inv for DOS in Sept
583333 Additional inv required
7483333 3 month total build
138580 Build per day
139 Implied constant labor

10.3
21