Sales and Operations Planning

(Aggregate Planning)

Chapter 10
 Chapter Objectives
Be able to:
Distinguish among strategic planning, tactical planning, and detailed planning
and control.
Describe why sales and operations planning (S&OP) is important to an
organization and its supply chain partners.
Generate multiple alternative sales and operations plans for a firm.
Describe the differences between top-down and bottom-up S&OP and discuss
the strengths and weaknesses of level, chase, and mixed production strategies.
Discuss the organizational issues that arise when firms decide to incorporate
S&OP into their efforts.
Examine how S&OP can be used to coordinate activities up and down the
supply chain.
Apply optimization modeling techniques to the S&OP process.

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 Sales and Operations Planning
 Sales and operations planning (S&OP) – A
process to develop tactical plans by
integrating marketing plans for new and
existing products with the management of
the supply chain. © 2010 APICS Dictionary

 Brings together all the plans for the business into

one integrated set of plans.
 Also called Aggregate planning.

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 S&OP Planning Levels
 Strategic planning
 Tactical planning
 Detailed planning and control

Figure 10.1

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 Goals of S&OP
 To indicate how the organization will use its tactical
capacity resources to meet expected customer
demand.
 To strike a balance between the various needs and
constraints of the supply chain partners.
 To serve as a coordinating mechanism for the
various supply chain partners.
 To express the business’s plans in terms that
everyone can understand.

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 Major Approaches
 Top-down planning – An approach to S&OP in
which a single, aggregated sales forecast
drives the planning process.

 Bottom-up planning – An approach to S&OP

that is used when the product/service mix is
unstable and resource requirements vary
greatly across the offerings.

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 Choosing an Approach

Figure 10.2

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 Planning Values
 Planning values – Values that decision
makers use to translate a sales forecast into
resource requirements and to determine the
feasibility and costs of alternative sales and
operations plans.

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 Top-Down Planning
 Developing a top-down plan:
 Develop the aggregate sales forecast and planning
values.
 Translate the sales forecast into resource
requirements.
 Generate alternative production plans.

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 Top-Down Example –
Pennington Cabinets
 12 month
sales forecast

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 Top-Down Example –
Pennington Cabinets

Table 10.3

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 Top-Down Example –
Pennington Cabinets
 Forecast
exceeds capacity
in peak months

Figure 10.3

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 Top-Down Example –
Pennington Cabinets
 Translate the Sales Forecast into Resource Requirements

For example:

April
800 * 20 = 16,000 hrs
16,000/160 = 100 wkrs

Table 10.4

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 Alternative Production Plans

 Level production plan – A S&OP plan in which

production is held constant and inventory is used to
absorb the differences between production and the
sales forecast.
 Chase production plan – A S&OP plan in which
production is changed in each time period to match
the sales forecast.
 Mixed production plan - A S&OP plan that varies
both production and inventory levels in an effort to
develop the most effective plan.
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 Level Production Plan

Table 10.5

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 Level Production Plan
 Actual Workers
 Hold workforce constant at 105 (average
workforce over 12-month planning horizon)

 Regular Production
 105 x (160 hours per month/20 hours per set) =
840 sets per month or 10,080 sets per year

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 Level Production Plan
 Hiring and Layoffs
 Hire 5 workers in January to bring the workforce
up to 105 from the initial level of 100.
 Layoff 5 workers at the end to bring the workforce
back to its starting level.
• Ensures equal comparison of alternative plans under
the same beginning and ending conditions.

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 Level Production Plan
 Inventory Levels

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 Level Production Plan
 Cost of the Plan

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 Chase Production Plan
 Actual workforce production and overtime
production vary so that total production
essentially matches sales for each month.
 Inventory never builds up because total
production “chases” sales.
 There are more hires and layoffs and
overtime production costs.

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 Chase Production Plan

Table 10.6

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 Chase Production Plan
 Cost of the plan

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 Mixed Production Plan
 By varying the production and inventory
levels, the best plan can be developed.
 The number of potential mixed plans is
essentially limitless.
 For example, overtime may be limited to 12
cabinet sets per month in October and
November.

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 Mixed Production Plan

Table 10.7

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 Mixed Production Plan
 Cost of the Plan

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 Bottom-Up Planning
 Steps are similar to top-down planning.
 Main difference is that the resource
requirements for each product or service
must be evaluated individually and then
added up across all products or services to
get a picture of overall requirements.

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 Bottom-Up Example

Table 10.8

 Although machine hour requirements are

similar, labor requirements differ greatly.

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 Bottom-Up Example

Table 10.9

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 Bottom-Up Example
 The difference in labor requirements
becomes important when the product mix
changes.
 Even though the aggregate forecast across
both product lines is 700 units each month,
the product mix changes, as can be seen in
the labor hours needed each month.

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 Bottom-Up Example
Load Profile – A display of
future capacity
requirements based on
released and/or planned
orders over a given span
of time. © 2010 APICS Dictionary

Figure 10.4

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 Cash Flow Analysis
 Net cash flow – The net flow of dollars into or
out of a business over some time period.

Net cash flow = cash inflows – cash outflows

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 Cash Flow Analysis

Different sales scenarios can have a significant effect on

Figure 10.5 cash flow as shown above.

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 Choosing between Plans
 What impact will the plan have on key suppliers and
transportation providers?
 What are the cash flows like?
 Do the supply chain partners and the firm itself
have the space needed to hold any planned
inventories?
 Does the plan contain significant changes in the
workforce?
 How flexible is the plan?

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 Fine-Tuning the Plan

Figure 10.6

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 Rolling Planning Horizons
 Rolling planning horizon – A planning
approach in which an organization updates
its sales and operations plan regularly, such
as on a monthly or quarterly basis.

Figure 10.7

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 Implementing S&OP
 Developing the foundation
 Build managerial support and infrastructure to
make it a success.
 Integrating and streamlining the process
 Update the plan and use the results for decision-
making.
 Gaining a competitive advantage
 Make S&OP a core competency.

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 Service Considerations
 Making sales match capacity

 Making capacity (typically the workforce)

match sales

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 Making Sales Match Capacity
 Yield management – An approach that
services commonly use with highly
perishable “products” in which prices are
regularly adjusted to maximize total profit.

Total profit =
(average profit per service unit sold) * (# of service units sold)

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 Making Capacity Match Sales
 Tiered workforce – A strategy used to vary
workforce levels in which additional full-time or
part-time employees are hired during peak demand
periods, while a smaller permanent staff is
maintained year-round.

 Offloading – A strategy for reducing and smoothing

out workforce requirements that involves having
customers perform part of the work themselves.

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 S&OP Optimization Modeling

 Optimization model – A class of

mathematical models used when the user
seeks to optimize some objective function
subject to some constraints.
 Understand the pattern of resource decisions –
labor, inventory, machine time, etc. - that will
result in the lowest total cost while still meeting
the sales forecast.

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Sales and Operations Planning
Case Study
Covolo Diving Gear, Part 2

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