Sales

Sales and
and Operations
Operations Planning
Planning
S&OP
S&OP
 What is S&OP
• Sales and operations planning (S&OP), sometimes
known as aggregate planning, is a process where
executive level management regularly meets and
reviews projections for demand, supply and the
resulting financial impact.
• S&OP is a decision making process that makes
certain that tactical plans in every business area
are in line with the overall view of the company's
business plan
• The overall result of the S&OP process is that a
single operating plan is created that identifies
the allocation of company resources, including
time, money and employees.
 Components of S&OP

• 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.
 S&OP Agregation
• 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.
 S&OP 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
 S&OP 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.
 S&OP Aggresive 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.
 S&OP Planning Strategies

• Chase strategy: A strategy that involves hiring

and laying off employees to match the demand
forecast.
• Level strategy: A strategy that keeps the
workforce constant, but varies its utilization and
inventory to match the demand forecast.
• Mixed strategy: A strategy that considers and
implements a fuller range of reactive alternatives
than any one “pure” strategy.
 S&OP 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
 S&OP Examples - Hallmark
• Hallmark spends considerable resources to effectively
produce and distribute more than 40,000 different
products through 43,000 retail outlets in the US 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
 S&OP Examples - 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.
 S&OP – Typical calendar template
S&OP Step Who? When?
Due no later than last
business day of prior
Update FIS Marketing month
Run Preliminary Forecast Supply Chain Business Day 1
DRC & Preliminary Forecast
Review Supply Chain Meeting #1 Business Day 3-4
Run Final Forecast Supply Chain Business Day 5

Generate Preliminary MPS Supply Chain Business Day 6-7

Complete Capacity Analysis Supply Chain Business Day 8
Supply Chain,
Finance, OPS VP,
Alignment for MPS/Capacity Plant Managers Meeting #2 Business Day 9
Meeting #3 (likely will
COO, CFO, VP be GoTo Meeting
Finalize MPS with Executive Sales, VP MFG, VP due to schedule
Approval Supply Chain constraints) Business Day 10
 Benefits of S&OP

• Greater visibility of the demand and

supply across the enterprise
• Improved inventory management
• Increased promotional planning
• Increased accuracy in budget forecasting
• Improved product lifecycle management
process.
Capacity
Capacity Planning
Planning and
and
Scheduling
Scheduling
 What is Capacity
 The amount of resource inputs available
relative to output requirements at a
particular time

Capacity used
Utilizatio n 
Best operating level
• Capacity used
– rate of output actually achieved
• Best operating level
– capacity for which the process was designed
 Best Operating Level

Average
unit cost
of output
Underutilization Overutilization
Best Operating
Level

Volume
 Utilization--Example
• Best operating level = 120 units/week

• Actual output = 83 units/week

• Utilization = ?

•
 Solution

Capacity used 83 units/wk

Utilizatio n  =  .692
Best operating level 120 units/wk
 Economies & Diseconomies of Scale

100-unit
Average plant
unit cost 200-unit
of output plant 400-unit
300-unit
plant
plant

Volume
 The Experience Curve

Cost or
price
per unit

Total accumulated production of units

 Capacity Flexibility
• Flexible plants

• Flexible processes

• Flexible workers
Example--Capacity Requirements

A manufacturer produces two lines of ketchup,

FancyFine and a generic line. Each is sold in small
and family-size plastic bottles.

The following table shows forecast demand for the

next four years.
Year: 1 2 3 4
FancyFine
Small (000s) 50 60 80 100
Family (000s) 35 50 70 90
Generic
Small (000s) 100 110 120 140
Family (000s) 80 90 100 110
 The Product from a Capacity
Viewpoint
• Are we really producing two different
types of ketchup from the standpoint of
capacity requirements?
 Equipment and Labor
Requirements
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200

Three 100,000-units-per-year machines are available for

small-bottle production. Two operators required per
machine.

Two 120,000-units-per-year machines are available for

family-sized-bottle production. Three operators required
per machine.
 Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6

Family-size Mach. Cap. 240,000 Labor 6

Small
Percent capacity used 50.00%
Machine requirement 1.50
Labor requirement 3.00
Family-size
Percent capacity used 47.92%
Machine requirement 0.96
Labor requirement 2.88
Exercise: Fill in the blanks for periods 2-
4.
 Solution
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6

Family-size Mach. Cap. 240,000 Labor 6

Small
Percent capacity used 50.00% 56.67% 66.67% 80.00%
Machine requirement 1.50 1.70 2.00 2.40
Labor requirement 3.00 3.40 4.00 4.80
Family-size
Percent capacity used 47.92% 58.33% 70.83% 83.33%
Machine requirement 0.96 1.17 1.42 1.67
Labor requirement 2.88 3.50 4.25 5.00
 Planning Service Capacity
• Time

• Location

• Volatility of Demand
 Capacity Utilization &
Service Quality
• Best operating point is near 70% of
capacity

• From 70% to 100% of service capacity,

what do you think happens to service
quality? Why?

• Context specific tradeoff

Service Growth Matrix

Chain restaurants
Hotels Department stores
Car and truck rentals Banks
Airlines HMOs
Specialty stores

Dry cleaners Hospitals

Restaurants Resorts
Mom and pop stores Universities
 Capacity Expansion Strategies:
Growth Stage
• “Bermuda Triangle” of operational
complexity
– Management difficulty exceeds management
ability

• New capacity management challenges

– Need for fresh ideas
– Need to upgrade older facilities
 Capacity Expansion Strategies:
Maturity Stage

• Focus on operational efficiencies

• Remodeling and replacement

• Service modification

– Duplication across entire service system

Scheduling
Scheduling
Operations
Operations
 Batch Scheduling
• Very complex scheduling environment
• Can be thought of as “Network of
Queues”
• Customers spend most of their time
waiting
• Closely related to MRP
 Batch Processing
Move-queue-work-wait-move
move

move move move

queue WS 1 wait queue WS 2 wait

move
move

Work is done according to work order

 Difficulties Of Batch/Job Shop
Scheduling
• Variety of jobs processed
• Different routing and processing
requirements of each job
• Number of different orders in the
facility at any one time
• Competition for common resources
 Responsibilities of Production
Control Department
• Loading
– Check availability of material, machines
& labor
• Sequencing
– Release work orders to shop & issue
dispatch lists for individual machines
• Monitoring
– Maintain progress reports on each job
until it is complete
 Gantt Charting
• Developed by Henry Gantt in 1917
• Related concepts:
– Makespan – total time to complete a set of
jobs
– Machine utilization – percent of make span
time a machine (or person) is used.
• Used primarily to monitor progress of
jobs
Job Data for Scheduling
Example
Work center/ Due
Job Machine Hours Date
1 A/2, B/3, C/4 3

2 C/6, A/4 2

3 B/3, C/2, A/1 4

4 C/4, B/3, A/3 4

5 A/5, B/3 2
 Scheduling Example
In what sequence should the jobs be done?

Job 5 Job 2 Job 4

Process A Process C
Job 1 A
C

Process B

Job 3 B
 Where is the bottleneck?

Total Machine times for the five jobs:

– Machine A: 15 hours
– Machine B: 12 hours
– Machine C: 16 hours
C appears to be the bottleneck.
But! A is used for every job; C is not.
Either one could determine makespan.
Gantt Chart for Example
Difference between “Push” and “Pull”
 MRP is the classic “Push” system.
 The MRP system computes production schedules
for all levels based on forecasts of sales of end
items
 Once produced, subassemblies are pushed to
next level whether needed or not
 JIT is the classic “Pull” system.
 The basic mechanism is that production at one
level only happens when initiated by a request
at the higher level
 Units are pulled through the system by request

Compare Wendy’s to McDonalds – Which one is Push vs Pull

 Finite Capacity Scheduling
• Finite capacity scheduling loads jobs
onto work stations being careful not
to exceed the capacity of any given
station.
• Done at the detailed planning and
scheduling (DPS) level
• Part of the loading responsibility.
 Theory of Constraints (TOC)
• Proposed by Goldratt in The Goal (1983)
• Goal is to make money.
• Key elements of “goals” according to
TOC:
– Throughput—what is made and sold
– Inventory—raw materials
– Operating expenses—cost of conversion
• Production does not count until it is sold!
 Theory of Constraints (TOC)
• A constraint is anything that is slowing
down production—a bottleneck.
– A machine or workstation
– The market
– Procurement system
• The bottleneck determines the capacity
of the system.
• Implication: the operations manager
should focus on the bottleneck to
increase capacity and throughput (and
make more money).
 Theory of Constraints (TOC)
 Every organization has – at any given point in time
– at least one constraint which limits the system’s
performance relative to its goal.
 Internal resource constraint – such as capacity
 Market constraint – Market demand less than production
 Policy constraint – such as no overtime policy
 The first principle – Convergence. The more
complex a system is to describe, the simpler it is
to manage
 The second principle – Consistency. If two
interpretations of a natural phenomenon are in
conflict, one or possibly both must be wrong
 The third principle – Respect. Even when people do
things that are stupid they have a reason for that
behavior
 TOC Performance Measurements
Financial
 Net Profits
 An absolute measurement in Dollars
 ROI
 A relative measurement based on investment
 Cash Flow
 A survival measurement
Operational
 Throughput
 The rate at which money is generated by the system though
sales
 Inventory
 All the money that the system has invested in purchasing
things it intends to sell
 Operating expenses
 All the money that the system spends to turn inventory into
throughput
 Five Focusing steps of TOC
 Step Zero – Articulate the goal of the organization
 Step One – Identify the constraint
 The thing that prevents the organization from obtaining its goal
 Step Two – Decide how to exploit the constraint
 Make sure the constraint is doing things that the constraint
uniquely does, and not doing things that it should not
 Step Three – Subordinate all other processes to above
decisions – Align all processes to decision made above
 Step Four – Elevate the constraint
 If required, permanently increase capacity of constraint
 Step Five – If, as a result of these steps, the
constraint has moved, return to step 1
 Don’t let inertia become the constraint
 Three important elements of TOC
 The Drum is the physical constraint of the
plant: The work center or machine that
limits the entire system to produce more
 The Drum determines the rate of production.
Referred to as MPS (Master Production Schedule)
 The rest of the plant follows the beat of
the drum
 Make sure the drum has work and that
anything the drum has processed does not
get wasted

Drum – Buffer - Rope

 Three important elements of TOC
 The Buffer protects the drum, so that it
always has work flowing to it.
 Buffers have time as their unit of measure,
rather than quantity of material
 Buffers are usually placed at carefully
selected locations in order to prevent
unforeseen events from disruption the output
of finished goods
 In general, the key location of time buffers
will be before bottlenecks

Drum – Buffer - Rope

 Three important elements of TOC
 The Rope is the work release mechanism for
the plant – Formal schedule of planned
production or informal daily discussions
 To prevent the buildup of excess inventory, there
must be a linkage between a bottleneck and the
first operation in the series of processes that
feed it. This linkage is referred to as the Rope
 Pulling work into the system earlier than a
buffer time guarantees high work-in-process
and slows down the entire system

Drum – Buffer - Rope

 Drum, Buffer, Rope
Bottleneck (Drum)

A B C D E F Market

Inventory
Communication buffer
(rope) (time buffer)

18
 The TOC thinking process….
 Gain agreement on the problem
 Gain agreement on the direction for a
solution
 Gain agreement that the solution solves the
problem
 Agree to overcome any potential negative
ramifications
 Agree to overcome any obstacles to
implementation

It is a buy-in process
 Comparison of MRP, JIT and TOC
MRP JIT TOC
Loading of Checked by Controlled by Controlled by
Operations capacity reqmnt kanban system bottleneck Oper
Batch Sizes One week or As Small as Variable exploit
more possible constraint
Importance of Critical Unnecessary Critical for
data accuracy bottleneck
Speed of Sch. Slow Very fast Fast
development
Flexibility Lowest Highest Moderate
Cost Highest Lowest Moderate
Goals Meet demand Meet demand Meet demand
Have doable plan Eliminate waste Maximize profit
Planning focus Master Sch Final Assy Sch Bottleneck
Production basis Plan Need Need and plan
 Priority Dispatching Rules
• What are priority dispatching rules?
– If you have more than one job waiting at a
work station, how do you select which one to
process next? The criterion you use for
selecting the next job is your dispatching
rule.
• In front office services, the most
common rule is “first come, first served.”
• Part of the sequencing responsibility
 Priority Dispatching Rules
• Commonly used in manufacturing:
– MINPRT (Minimum Processing Time or SPT,
shortest processing time) This rule
minimizes total waiting time.

– Critical Ratio (Minimizes average lateness)

• Commonly used in services:

– FCFS (First Come, First Served)
 Infinite Capacity Loading
• “Infinite capacity loading” loads jobs
onto work centers without regard for the
total capacity of the work center.
• If the capacity for any given work center
has been exceeded, the schedule must be
changed.
• This is generally done at the MRP level
before detailed scheduling and planning
Infinite capacity loading example: time lines

Time line for job 1

Due date
A Move/Wait B Move/Wait C
(2 hrs) (4 hrs) (3 hrs) (4 hrs) (4 hrs)
Day 1 Day 2 Day 3

Time line for job 2 Due date

Move/Wait
C (6 hrs) A (4 hrs)
(4 hrs)
Day 1 Day 2 Day 3
 Infinite Capacity Loading example

Work center A Work center B Work center C

6 6 6
5 5 5
Hours scheduled

4 4 4
3 Job 2 3 3
2 2
Job 2
2
1 1 Job 1 1 Job 1
Job 1 Job 1
1 2 3 1 2 3 1 2 3
Day Day Day
 Planning and Control Systems
• What delivery date do I promise?
• How much capacity do I need?
• When should I start on each particular
activity or task?
• How do I make sure that the job is
completed on time?
• Advanced Planning & Scheduling (APS)
 Challenges in Demand Planning
When fulfillment is less than perfect, orders
are subject to all kinds of tricks. Here are a
few common examples:
1. An unfilled order may be moved to a future
time bucket.
2. If shortages are anticipated, customers may
artificially inflate their orders to capture a
larger allocation of the available supply.
3. If shortages are anticipated, customers may
withhold orders, or go to alternative products
or suppliers.
Challenges in Demand Planning
• Assume you have been assigned the task of
identifying a level strategy aggregate production
plan for the upcoming year. You have been informed
that beginning inventory is 0 units, your plan should
provide an ending inventory for the year equal to 0
units, and you have been provided the following
forecasts of aggregate demand. What should be the
planned rate of quarterly production?
• 5,750 Units Qtr Forecast
1 6,000
2 5,500
3 5,000
4 6,500
Challenges in Demand Planning
• Assume you have been assigned the task of
identifying a level strategy aggregate
production plan for the upcoming year. You
have been informed that beginning inventory
is 2,000 units, your plan should provide an
ending inventory for the year equal to 500
units, and you have been provided the
following forecasts of aggregate demand.
What should be the planned rate of
quarterly production? Qtr Forecast
• 5,375 Units 1 6,000
2 5,500
3 5,000
4 6,500
Challenges in Demand Planning
• Assume you have been assigned the task of
identifying a chase strategy aggregate production
plan for the upcoming year. You have been informed
that beginning inventory is 500 units, your plan
should provide an ending inventory for the year equal
to 200 units, and you have been provided the
following forecasts of aggregate demand. Knowing
that the typical objective of chase plans is to avoid
carrying inventory, what should be the planned rate
of production for the first quarter?
• 5,500 Units Qtr Forecast
1 6,000
2 5,500
3 5,000
4 6,500
 Scheduling

The increase in variability of the

demand pattern as we move from the
retailer to the factory is called the
bull-whip effect.
• a. True
• b. False

Answer is: a. True

 Lead time is:
• a. also called replenishment time
• b. typically more important to resellers
than to consumers
• c. defined as the time that passes from
ordering an item until it is received and
ready for use or sale
• d. also called order cycle time
• e. accurately described by all of the
above Answer is: e. Reducing lead time can
avoid stock-outs while reducing
inventory costs
 Air Canada, a Montreal-based airline, uses its
excess storage capacity on passenger flights to
Europe to haul cargo. It typically collects several
small shipments consigned to a common European
destination. Shipment schedules are mandated by
the passenger side of its business. Air Canada is an
example of a(n):
• a. third-party service provider
• b. Extranet
• c. vendor-managed logistics expert
• d. import agent
• e. freight forwarder
Answer is: e. Freight forwarders are firms that
accumulate small shipments into larger lots and then
hire a carrier to move them, usually at reduced rates .
 A warehouse that emphasizes speed and
efficient product flow to hold goods for
short periods of time and move them out as
soon as possible:
• a. is a storage warehouse
• b. is a freight forwarder
• c. is a distribution center
• d. is an inventory expediting center.
• e. has a just-in-time inventory system
Answer is: c. Distribution centers are designed to facilitate the
timely movement of goods and represent a very important part of
the supply chain.
 In Canada, Coca-Cola Beverages has rolled out new marketing,
technologies, and packaging to outmaneuver private-label Canadian
cola bottlers, which have captured considerable market share. Coke
will bring in a new just-in-time distribution system based on unit
trains and cross-docking sales centers. Which of the following
statements describes how Coke will most likely use its just-in-time
(JIT) system?
• a. The just-in-time system will require Coke to purchase and/or
lease more warehouse space.
• b. The use of just-in-time means Coke does not have reliable
demand for its product.
• c. The just-in-time system will allow Coke to expand its product line
without requiring additional investments.
• d. The just-in-time system will allow Coke to operate with very low
inventory levels.
• e. The just-in-time system will increase inventory carrying costs
while reducing order processing cost.

Answer is: d. JIT is a means of reducing

inventory--and storage costs. .
 A _____ is an inventory-management
system whereby the supplier determines
the product amount and assortment a
customer, such as a retailer needs and
automatically delivers the appropriate
items.
• a. supplier-managed inventory
• b. supply chain inventory
• c. logistics-managed inventory
• d. just-in-time system
• e. vendor-managed inventory

Answer is: e. vendor-managed inventory