Sales and Capacity Planning Chapter 14 Sales and Capacity Planning Russell and Taylor Operations and Supply Chain Management, 8th Edition

Lecture Outline The Sales and Operations Planning Process Strategies for Adjusting Capacity Strategies for Managing Demand Quantitative Techniques for Aggregate Planning Hierarchical Nature of Planning Aggregate Planning for Services © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Learning Objectives Appreciate the interface of marketing, finance, and operations in S&OP planning Describe the monthly S&OP process and the importance of reconciling differences Utilize various tools and techniques to adjust capacity and manage demand Evaluate a demand scenario and select an appropriate S&OP strategy Describe hierarchical planning and the process of determining available-to-promise Determine overbooking, single orders, and fare class strategies for revenue management in services © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Sales and Operations Planning Determines resource capacity to meet demand over an intermediate time horizon Aggregate refers to sales and operations planning for product lines or families Sales and Operations planning (S&OP) matches supply and demand Objectives Establish a company wide plan for allocating resources Develop an economic strategy for meeting demand © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Sales and Operations Planning Process © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Monthly S&OP Planning Process © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Meeting Demand Strategies Adjusting capacity Resources to meet demand are acquired and maintained over the time horizon of the plan Minor variations in demand are handled with overtime or under-time Managing demand Proactive demand management © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Strategies for Adjusting Capacity Level production Producing at a constant rate and using inventory to absorb fluctuations in demand Chase demand Hiring and firing workers to match demand Peak demand Maintaining resources for high-demand levels © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Strategies for Adjusting Capacity Overtime and under-time Increase or decrease working hours Subcontracting Let outside companies complete the work Part-time workers Hire part-time workers to complete the work Backordering Provide the service or product at a later time period © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Level Production © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Chase Demand © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Strategies for Managing Demand Shifting demand into other time periods Incentives Sales promotions Advertising campaigns Offering products or services with counter-cyclical demand patterns Partnering with suppliers to reduce information distortion along the supply chain © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Quantitative Techniques For AP Pure Strategies Mixed Strategies Linear Programming Transportation Method Other Quantitative Techniques © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Pure Strategies QUARTER SALES FORECAST (LB) Spring 80,000 Summer 50,000 Fall 120,000 Winter 150,000 Hiring cost = $100 per worker Firing cost = $500 per worker Inventory carrying cost = $0.50 pound per quarter Regular production cost per pound = $2.00 Production per employee = 1,000 pounds per quarter Beginning work force = 100 workers © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Level Production Strategy Spring 80,000 Summer 50,000 Fall 120,000 Winter 150,000 Cost of Level Production Strategy SALES PRODUCTION QUARTER FORECAST PLAN INVENTORY © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Level Production Strategy = 100,000 pounds (50,000 + 120,000 + 150,000 + 80,000) 4 Spring 80,000 100,000 20,000 Summer 50,000 100,000 70,000 Fall 120,000 100,000 50,000 Winter 150,000 100,000 0 400,000 140,000 Cost of Level Production Strategy (400,000 X $2.00) + (140,00 X $.50) = $870,000 SALES PRODUCTION QUARTER FORECAST PLAN INVENTORY © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Chase Demand Strategy Cost of Chase Demand Strategy Spring 80,000 Summer 50,000 Fall 120,000 Winter 150,000 SALES PRODUCTION WORKERS WORKERS WORKERS QUARTER FORECAST PLAN NEEDED HIRED FIRED Cost of Chase Demand Strategy © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Chase Demand Strategy Cost of Chase Demand Strategy Spring 80,000 80,000 80 0 20 Summer 50,000 50,000 50 0 30 Fall 120,000 120,000 120 70 0 Winter 150,000 150,000 150 30 0 100 50 SALES PRODUCTION WORKERS WORKERS WORKERS QUARTER FORECAST PLAN NEEDED HIRED FIRED Cost of Chase Demand Strategy (400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000 © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Level Production with Excel Inventory at end of summer Input by user =400,000/4 Cost of level production = inventory costs + production costs © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Chase Demand with Excel Workforce requirements calculated by system No. of workers hired in fall Production input by user; production =demand Cost of chase demand = hiring + firing + production © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Mixed Strategy Combination of Level Production and Chase Demand strategies Example policies no more than x% of workforce can be laid off in one quarter inventory levels cannot exceed x dollars Some industries may shut down manufacturing during the low demand season and schedule employee vacations during that time © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

General Linear Programming (LP) Model LP gives an optimal solution, but demand and costs must be linear Let Wt = workforce size for period t Pt =units produced in period t It =units in inventory at the end of period t Ft =number of workers fired for period t Ht = number of workers hired for period t © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

LP MODEL Minimize Z = $100 (H1 + H2 + H3 + H4) + $500 (F1 + F2 + F3 + F4) + $0.50 (I1 + I2 + I3 + I4) + $2 (P1 + P2 + P3 + P4) Subject to P1 - I1 = 80,000 (1) Demand I1 + P2 - I2 = 50,000 (2) constraints I2 + P3 - I3 = 120,000 (3) I3 + P4 - I4 = 150,000 (4) Production 1000 W1 = P1 (5) constraints 1000 W2 = P2 (6) 1000 W3 = P3 (7) 1000 W4 = P4 (8) 100 + H1 - F1 = W1 (9) Work force W1 + H2 - F2 = W2 (10) constraints W2 + H3 - F3 = W3 (11) W3 + H4 - F4 = W4 (12) © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Setting up the Spreadsheet Target cell; cost of solution goes here Solver will put the solution here When model is complete, Solve Click here next Demand Constraint Workforce Constraint Production Constraint Cells where solution appears © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Setting up the Spreadsheet Click these boxes © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

The LP Solution Cost of optimal solution Optimal production plan Cost of optimal solution Solution is a mix of inventory, hiring and firing Extra report options © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Level Production for Quantum Input by user Excel calculates these Cost of level production © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Chase Demand for Quantum Input by user Excel calculates these Cost of chase demand No. workers hired in Feb. © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

LP Solution for Quantum Solver found this solution Constraint equations in these cells Optimal solution © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Transportation Method EXPECTED REGULAR OVERTIME SUBCONTRACT QUARTER DEMAND CAPACITY CAPACITY CAPACITY 1 900 1000 100 500 2 1500 1200 150 500 3 1600 1300 200 500 4 3000 1300 200 500 Regular production cost $20/unit Overtime production cost $25/unit Subcontracting cost $28/unit Inventory holding cost $3/unit-period Beginning inventory 300 units © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Transportation Tableau © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Transportation Tableau © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Burruss’ Production Plan 1 900 1000 100 0 500 2 1500 1200 150 250 600 3 1600 1300 200 500 1000 4 3000 1300 200 500 0 Total 7000 4800 650 1250 2100 REGULAR SUB- ENDING PERIOD DEMAND PRODUCTION OVERTIME CONTRACT INVENTORY © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Excel and Transportation Method Period 2’s ending inventory Regular production for period 1 Cost of solution Excel and Transportation Method © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Other Quantitative Techniques Linear decision rule (LDR) Search decision rule (SDR) Management coefficients model © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Hierarchical Nature of Planning © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Disaggregation Breaking an aggregate plan into more detailed plans Create Master Production Schedule for Material Requirements Planning © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Collaborative Planning Sharing information and synchronizing production across supply chain Part of CPFR (collaborative planning, forecasting, and replenishment) involves selecting products to be jointly managed, creating a single forecast of customer demand, and synchronizing production across supply chain © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Available-to-Promise (ATP) Quantity of items that can be promised to customer Difference between planned production and customer orders already received AT in period 1 = (On-hand quantity + MPS in period 1) – (CO until the next period of planned production) ATP in period n = (MPS in period n) – Capable-to-promise quantity of items that can be produced and made available at a later date © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

ATP © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

ATP © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

ATP ATP in April = ATP in May = ATP in June = © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

ATP ATP in April = (10+100) – 70 = 40 = 30 Take excess units from April ATP in April = (10+100) – 70 = 40 ATP in May = 100 – 110 = -10 ATP in June = 100 – 50 = 50 = 30 = 0 © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Rule Based ATP © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Aggregate Planning for Services Most services cannot be inventoried Demand for services is difficult to predict Capacity is also difficult to predict Service capacity must be provided at the appropriate place and time Labor is usually the most constraining resource for services © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Yield Management © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Yield Management NO-SHOWS PROBABILITY P(N < X) 0 .15 .00 1 .25 .15 0 .15 .00 1 .25 .15 2 .30 .40 3 .30 .70 Revenue = $100/night Maintenance = $25/night Overflow = $70/night Optimal probability of no-shows P(n < x)  = Cu Cu + Co Co = $70 Cu = $100 - $25 = $75 © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

Optimal probability of no-shows Yield Management NO-SHOWS PROBABILITY P(N < X) 0 .15 .00 1 .25 .15 2 .30 .40 3 .30 .70 Optimal probability of no-shows P(n < x)  = = .517 Cu Cu + Co 75 75 + 70 .517 Hotel should be overbooked by two rooms © 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e

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