Sales and Operations Planning

14e
Operations and
Supply Chain
Management
CHASE | SHANKAR | JACOBS
19–1
SALES AND
OPERATIONS
PLANNING
Chapter Nineteen
McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
19–2
Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
Learning Objectives
• LO19–1: Understand what sales and operations planning
is and how it coordinates manufacturing, logistics,
service, and marketing plans.
• LO19–2: Construct and evaluate aggregate plans that

employ different strategies for meeting demand.
• LO19–3: Explain yield management and why it is an

important strategy.
19–3
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.
– Aggregate means at the level of major groups of products.
19–4
Planning Activities
Major Sales and Operations
19–5
Sales and Operations Planning Activities –
Overview
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.
19–6
Types of Planning
Long-range planning
• Planning focusing on a horizon greater than 1 year, usually

performed annually
Intermediate-range planning
• Planning focusing on a period from 3 to 18 months, time

increments are weekly, monthly, or quarterly
Short-range planning
• Planning covering a period from 1 day to 6 months with daily

or weekly time increments
19–7
Aggregate Operations Plans
• Specifies the optimal combination of
– Production rate (units completed per unit of time)
– Workforce level (number of workers needed in a period)
– Inventory on hand (inventory carried from previous period)
• Product group or broad category (aggregation)
• Planning done over an intermediate-range planning

period of 3 to 18 months
19–8
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.
19–9
Planning System
Inputs to the Production
19–10
Production Planning
Strategies
• Production planning Match the production rate by
Chase hiring and laying off employees
strategies are the plans strategy Must have a pool of easily trained
applicants to draw on
for meeting demand.

Trade offs involved Vary the number of hours worked
through flexible work schedules
Stable
workforce
or overtime —variable
include workers work hours
employed, work hours,

inventory and shortages. Level Demand changes are absorbed by
fluctuating inventory levels, order
strategy backlogs, and lost sales
• A pure strategy uses just

one of these approaches, Sub-
Hiring and laying off are
a mixed strategy uses translated into subcontracting contracti
ng
two or more.
19–11
Relevant Costs
Costs associated with

Basic production costs changes in the
production rate
Cost Types
Inventory holding Backorder costs

costs
19–12
Aggregate Planning
Techniques
Cut-and-try approach
• Involves costing out various production planning alternatives and selecting

the one that is best
• Elaborate spreadsheets developed to facilitate the decision process
Linear programming
• Use of mathematical analysis to determine an optimal plan
Simulation
• What-if analysis using simulated demand to evaluate effectiveness of
alternative plans
19–13
Cut and Try – JC Company
Because inventory
holding cost is in
$/unit, material
cost is not relevant
19–14
Aggregate Planning – JC
Company
January ending
inventory becomes
February beginning
inventory.
For the Excel template visit

www.mhhe.com/sie-chase14e
Excel: Aggregate P
lanning
19–15
Evaluate Alternative Plans
Produce to exact monthly Produce to meet expected

production requirements by average demand by maintaining
varying workforce size a constant workforce
Produce to meet expected

Produce to meet the minimum
demand for all but the first two
expected demand using a
months using a constant
constant workforce and
workforce and use overtime to
subcontract to meet additional
meet additional output
requirements
requirements
19–16
Plan 1: Exact Production;
Vary Workforce
Production exactly
matches
requirements.
Workers are added

or reduced as
needed.
19–17
Plan 2: Constant Workforce;
Vary Inventory and Stockout
Number of workers is set

to meet average demand
over the time horizon.
This then determines
production rate and
inventory/backorders.
19–18
Plan 3: Constant Low Workforce;
Subcontract Workforce sized to
meet minimum
demand (April).
Demand over minimum is

met with subcontracting.
19–19
Plan 4: Constant Workforce; Overtime
Demand in
the first two
months is
high, so
overtime is
used to
compensate.
Then,
inventory can
be built for
high demand
in June.
19–20
Plan Comparison
19–21
Summary
Graphical
19–22
Level Scheduling
• A level schedule holds production constant
over a period of time.
• It is something of a combination of the

strategies mentioned here.
• For each period, it keeps the workforce

constant and inventory low, and depends on
demand to pull products through.
19–23
Level Scheduling
• Advantages • Requirements
– The entire system can be planned to – Production should be repetitive
minimize inventory and work-in- (assembly-line format).
process. – The system must contain excess
– Product modifications are up-to-date capacity.
because of the low amount of work- – Output of the system must be fixed
in-process. for a period of time.
– There is a smooth flow throughout – There must be a smooth relationship
the production system. among purchasing, marketing, and
– Purchased items from vendors can be production.
delivered when needed, often directly – The cost of carrying inventory must
to the production line. be high.
– Equipment costs must be low.
– The workforce must be multi-skilled.
19–24
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.
• Widespread scientific application began with American
Airlines’ computerized reservation system (SABRE).
19–25
Yield Management Success
Factors
Demand can be Fixed costs are

Inventory is
segmented by high and variable
perishable
customer costs are low
Product can be Demand is highly

sold in advance variable
19–26
Yield Management – Hotels
• 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.
19–27
Yield Management – Levers
Yield management is
most common when
price is variable and
duration is predictable.
19–28
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.
19–29

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14e

• LO19–2: Construct and evaluate aggregate plans that

• LO19–3: Explain yield management and why it is an

• Sales and operations planning is a process that helps

Sales and operations planning was coined by companies to

The new terminology is meant to capture the importance

Aggregation on the supply side is done by product

• Planning focusing on a horizon greater than 1 year, usually

• Planning focusing on a period from 3 to 18 months, time

• Planning covering a period from 1 day to 6 months with daily

• Product group or broad category (aggregation)

• Planning done over an intermediate-range planning

• Complementary products work for firms facing

• With services, cycles are more often measured in hours

for meeting demand.

employed, work hours,

• A pure strategy uses just

Costs associated with

Inventory holding Backorder costs

• Involves costing out various production planning alternatives and selecting

• Use of mathematical analysis to determine an optimal plan

For the Excel template visit

Produce to exact monthly Produce to meet expected

Produce to meet expected

Workers are added

Number of workers is set

Demand over minimum is

• It is something of a combination of the

• For each period, it keeps the workforce

Demand can be Fixed costs are

Product can be Demand is highly

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