Sales and

Operations Planning

Chapter 14

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 How Sales and Operations Planning
fits the Operations Management
Philosophy

Operations As a Competitive
Weapon
Operations Strategy
Project Management Process Strategy
Process Analysis
Process Performance and Quality
Constraint Management
Process Layout Supply Chain Strategy
Lean Systems Location
Inventory Management
Forecasting
Sales and Operations Planning
Resource Planning
Scheduling

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 Planning at Whirlpool

 Whirlpool begins production of room air conditioners in the fall

and holds them as inventory until they are shipped in the spring.
 Building inventory in the slack season allows the company to
even out production rates over much of the year and still satisfy
demand in the peak periods.
 However, when summers are hotter than usual, demand
increases dramatically and stockouts can occur.
 If Whirlpool increases its output and the summer is hot, it stands
to increase its sales and market share. But if the summer is
cool, the company is stuck with expensive inventories.
 Whirlpool prefers to make its production plans based on the
average year, taking into account industry forecasts for total
sales and traditional seasonalities.
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 Sales and
Operations Planning

 Sales and operations planning (S&OP):

The process of planning future aggregate
resource levels so that supply is in balance
with demand.
 Staffing plan: A sales and operations plan
of a service firm, which centers on staffing
and other human resource–related factors.
 Production plan: A sales and operations
plan of a manufacturing firm, which centers
on production rates and inventory holdings.
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 Aggregation

 The sales and operations plan is useful because it

focuses on a general course of action, consistent with
the company’s strategic goals and objectives, without
getting bogged down in details.
 Product family: A group of customers, services, or
products that have similar demand requirements and
common process, labor, and materials requirements.
 A company can aggregate its workforce in various
ways as well, depending on its flexibility.
 The company looks at time in the aggregate –
months, quarters, or seasons—rather than in days or
hours.
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 The Relationship of
Sales and Operations Plans
to Other Plans
 A financial assessment of an organization’s
near future (1 or 2 years ahead) is called
either a business plan (in for-profit firms) or
an annual plan (in nonprofit services).
 Business plan: A projected statement of
income, costs, and profits.
 Annual plan or financial plan: A plan for
financial assessment used by a nonprofit
service organization.

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 The Relationship of
Sales and Operations Plans
to Other Plans

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 The Decision Context

Information inputs to Sales and

Operations plans
Business or Annual plan
Operations Strategy
Capacity Constraints
Demand Forecast

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 Managerial Inputs from Functional
Areas to Sales and Operations Plans

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 Plan Objectives

Six objectives usually are considered during

development of a plan:
1. Minimize Costs/Maximize Profits
2. Maximize Customer Service
3. Minimize Inventory Investment
4. Minimize Changes in Production Rates
5. Minimize Changes in Workforce Levels
6. Maximize Utilization of Plant and Equipment

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 Reactive Alternatives

 Reactive alternatives are actions that can

be taken to cope with demand
requirements.
 Anticipation inventory is inventory that
can be used to absorb uneven rates of
demand or supply.
 Workforce adjustment: Hiring and laying
off to match demand.
 Workforce utilization: Use of overtime and
undertime.
 Vacation schedules: Use of plant-wide
vacation period, vacation “blackout” periods.
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 Reactive Alternatives

 Subcontracting: Outsourcing to overcome

short-term capacity shortages.
 Backlogs, Backorders, and Stockouts:
 Backlog: An accumulation of customer orders
that have been promised for delivery at some
future date.
 Backorder: A customer order that cannot be filled
immediately but is filled as soon as possible.
 Stockout: An order that is lost and causes the
customer to go elsewhere.
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 Aggressive Alternatives

 Aggressive alternatives are actions that

attempt to modify demand and,
consequently, resource requirements.
 Complementary products: Services or
products that have similar resource
requirements but different demand cycles.
 Creative Pricing: Promotional campaigns
designed to increase sales with creative
pricing.

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 Planning Strategies

 Chase strategy: A strategy that involves hiring and

laying off employees to match the demand forecast.
 Level-utilization strategy: A strategy that keeps
the workforce constant, but varies its utilization to
match the demand forecast.
 Level-inventory strategy: A strategy that relies on
anticipation inventories, backorders, and stockouts
to keep both the output rate and the workforce
constant.
 Mixed strategy: A strategy that considers and
implements a fuller range of reactive alternatives
than any one “pure” strategy.

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 Hallmark Strategy

 Hallmark spends considerable resources to effectively

produce and distribute more than 40,000 different products
through 43,000 retail outlets in the United States alone.
 Hallmark has never used layoffs to adjust production rates.
Employee flexibility is the key to this strategy.
 Hallmark follows a philosophy of retraining its employees
continually to make them more flexible.
 To keep workers busy, Hallmark shifts production from its
Kansas City plant to branch plants in Topeka, Leavenworth,
and Lawrence, Kansas, to keep those plants fully utilized.
 It uses the Kansas City plant as its “swing facility.” When
demand is down, Kansas City employees may take jobs in
clerical positions, all at factory pay rates. They might also be
in classrooms learning new skills.

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 Constraints and Costs

The planner usually considers several types of costs

when preparing sales and operations plans.
1. Regular-Time Costs: These costs include regular-time
wages plus contributions to benefits, Social Security,
retirement funds, and pay for vacations and holidays.
2. Overtime Costs: Overtime wages typically are 150
percent of regular-time wages.
3. Hiring and Layoff Costs: Include the costs of advertising
jobs, interviews,training programs, exit interviews,
severance pay, and lost productivity.
4. Inventory Holding Costs
5. Backorder and Stockout Costs

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 Data for
Applications 14.1-14.3
The Barberton Municipal Division of Road Maintenance is charged
with road repair in the city of Barberton and surrounding area. Cindy
Kramer, road maintenance director, must submit a staffing plan for
the next year based on a set schedule for repairs and on the city
budget. Kramer estimates that the labor hours required for the next
four quarters are 6,000, 12,000, 19,000, and 9,000, respectively.
Each of the 11 workers on the workforce can contribute 520 hours
per quarter. Overtime is limited to 20 percent of the regular-time
capacity in any quarter. Subcontracting is not permitted.

Payroll costs are $6,240 in wages per worker for regular time
worked up to 520 hours, with an overtime pay rate of $18 for each
overtime hour. Although unused overtime capacity has no cost,
unused regular time is paid at $12 per hour. The cost of hiring a
worker is $3,000, and the cost of laying off a worker is $2,000.
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 Chase Strategy
Application 14.1

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 Level-Utilization Strategy
Application 14.2

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 Mixed Strategy
Application 14.3

Key Ideas:
 Hire only 7 in quarter 3, making maximum use of overtime to compensate.
 Reduce the amount of undertime in quarter 3.
 Reduce the layoffs required in quarter 4.
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 Sales and Operations
Planning as a Process
 Sales and operations planning is a decision-making
process, involving both planners and management.
 The process itself, typically done on a monthly basis,
consists of six basic steps.

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 Decision Support Tools
 Spreadsheets can be used, including ones
that you develop on your own.
 Input values
 Derived values
 Utilized time
 Calculated values
 The Transportation method of production
planning to solve production planning
problems assumes that a demand forecast
is available for each period, along with a
possible workforce adjustment plan.
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 Spreadsheet
4-period Worksheet

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 Spreadsheet
6-period Worksheet

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 Planning Using a Spreadsheet

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 S&OP Spreadsheet
for a Make-to-Stock Family

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 The Transportation Method
a special case of linear programming
 Obtain the demand forecast for each period to be covered by
the sales and operations plan and identify the initial inventory
level currently available that can be used to meet future
demand. Select a candidate workforce adjustment plan and
specify the capacity limits of each production alternative.
 Estimate the cost of holding inventory, and the cost of
possible production alternatives.
 Input the information gathered in steps 1-3 into a computer
routine that solves the transportation problem.
 Repeat the process with other plans for regular-time,
overtime, and subcontracting capacities until you find the
solution that best balances cost and qualitative
considerations.

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 The Transportation Method
Example 14.2
The Tru-Rainbow Company produces a variety of paint products.
Demand is highly seasonal. Current inventory is 250,000 gallons, and
ending inventory should be 300,000 gallons. Regular-time cost is $1.00
per unit, overtime cost is $1.50 per unit, subcontracting cost is $1.90 per
unit, and inventory holding cost is $0.30 per gallon per quarter.
Determine the best production plan.

Quarter

Maximum overtime in any quarter is 20 % of regular-time capacity. The

subcontractor can supply a maximum of 200,000 gallons per quarter. Production
can be subcontracted in one period and the excess held in inventory for a future
period to avoid a stockout. No backorders or stockouts are permitted.
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 Input Data for Prospective Tru-Rainbow Company Production Plan

Transportation Tableau for Tru-Rainbow Company

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 Solution for Tru-Rainbow Company Production Plan

• The first row shows that 230 units of the initial inventory are used
to help satisfy the demand in quarter 1. The remaining 20 units in
the first row are earmarked for helping supply the demand in
quarter 3.
• The sum of the allocations across row 1 (230 + 0 + 20 + 0) does
not exceed the maximum capacity of 250, given in the right
column so there is unused capacity
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 Solution for Tru-Rainbow Company Production Plan

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 Solution for Tru-Rainbow Company Production Plan

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 Application 14.4

The Bull Grin Company makes an animal-feed supplement. Sales

are seasonal, but Bull Grin's customers refuse to stockpile the
supplement during slack sales periods; they insist on shipments
according to their schedules to stockpile the supplement during
slack sales periods and won’t accept backorders.

The reactive alternatives that they use, in addition to work-force

variation, are regular time, overtime, subcontracting, and anticipation
inventory. Backorders are not allowed.

Bull Grin employs workers who produce 1,000 pounds of supplement

for $830 on regular time and $910 on over-time. Holding 1000 pounds
of feed supplement in inventory per quarter costs $100. There is no
cost for unused regular-time, overtime or subcontracting capacity.
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 Transportation Method
Application 14.4

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 Transportation Method
Application 14.4

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 Bull Grin Company
Production, Shipments, and
Inventories

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 Bull Grin Company
Production, Shipments, and
Inventories

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 Total Cost of
Bull Grin Company Plan

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 Solved Problem 1

 The Cranston Telephone Company employs workers who lay telephone

cables and perform various other construction tasks.
 Each worker puts in 600 hours of regular time per planning period and up to
100 hours overtime. Above is the estimate of the workforce requirements over
the next four planning periods:
 Regular-time wages are $6,000 per employee per period for any time worked
up to 600 hours, and $15 per hour over 600 hours.
 Hiring a new employee costs $8,000. Layoff costs are $2,000 per employee.
Currently, 40 employees work for Cranston in this capacity. No delays in
service, or backorders, are allowed.
 Using the spreadsheet approach, prepare a chase strategy using only hiring
and layoffs. What are the total numbers of employees hired and laid off?
 Develop a workforce plan that uses the level-utilization strategy.
 Maximize the use of overtime during the peak period so as to minimize the
workforce level and amount of undertime.
 Propose an effective mixed-strategy plan.
 Compare the total costs of the three plans.
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 Chase Strategy
The chase strategy workforce is calculated by dividing the demand for each
period by 600 hours. This strategy calls for a total of 20 workers to be hired
and 40 to be laid off during the four-period plan.

Total cost of the chase strategy is $1,050,000.

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 Level-Utilization Strategy
The level-utilization strategy calls for three employees to be hired in
the first quarter and for none to be laid off.

Total cost of the Level-Utilization Strategy is $1,119,000.

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 Mixed Strategy
The mixed-strategy plan uses a combination of hires, layoffs, and
overtime to reduce total costs. The workforce is reduced by 5 at the
beginning of the first period, increased by 8 in the third period, and
reduced by 13 in the fourth period. The plan was developed by trial and
error. Additional improvements to the mixed strategy are possible.

Total cost of this Mixed Strategy is $1,021,000

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