Sales and Operations Planning Spring, 2014 Supply Chain Management: Strategy, Planning, and Operation Chapter 9 Byung-Hyun Ha

Contents Introduction Managing supply Managing demand Further discussion

Introduction Predictable variability Change in demand that can be forecasted Results of sales planning (a kind of demand planning or shaping) Maximizing profitability in aggregate planning Managing supply Production capacity, inventory Managing demand e.g., by sales planning

Managing Supply Managing capacity Managing inventory Time flexibility from workforce Use of seasonal workforce Use of subcontracting Use of dual facilities – dedicated and flexible Designing product flexibility into production processes Managing inventory Using common components across multiple products Building inventory of high demand or predictable demand products

Managing Demand Demand increases by promotion Market growth Increased sales, increased market size Stealing share Increased sales, same market size Forward buying Same sales, same market size

Managing Demand Example: Red Tomato Tools (1) Promotion effect in a specific period Unit price: $40 Period demand increase by 10% for $1 discount Forward-moving of 20% of two following months’ demand Change in demand by promotion Original Discounting price in January Discounting price in April Jan Feb Mar Apr May Jun 1,600 3,000 3,200 3,800 2,200 Profit: $217, 725 Jan Feb Mar Apr May Jun 3,000 2,400 2,560 3,800 2,200 Profit: $221, 485 Jan Feb Mar Apr May Jun 1,600 3,000 3,200 5,060 1,760 Profit: $211,283

Managing Demand Example: Red Tomato Tools (2) Large increase demand from promotion Unit price: $40 Period demand increase by 100% for $1 discount Forward-moving of 20% of two following months’ demand Change in demand by promotion and its results Original Discounting price in January Discounting price in April Jan Feb Mar Apr May Jun 1,600 3,000 3,200 3,800 2,200 Profit: $217, 725 Jan Feb Mar Apr May Jun 4,400 2,400 2,560 3,800 2,200 Profit: $242, 801 Jan Feb Mar Apr May Jun 1,600 3,000 3,200 8,480 1,760 Profit: $247, 320

Managing Demand Example: Red Tomato Tools (3) Large increase demand from promotion Unit price: $31 Period demand increase by 100% for $1 discount Forward-moving of 20% of two following months’ demand Change in demand by promotion and its results Original Discounting price in January Discounting price in April Jan Feb Mar Apr May Jun 1,600 3,000 3,200 3,800 2,200 Profit: $73,725 Jan Feb Mar Apr May Jun 4,400 2,400 2,560 3,800 2,200 Profit: $84,410 Jan Feb Mar Apr May Jun 1,600 3,000 3,200 8,480 1,760 Profit: $69,120

Managing Demand Impact on promotion timing Factor Impact High forward buying High ability to steal market share High ability to increase overall market High margin Low margin High manufacturer holding costs High costs of changing capacity High retailer holding cost High promotion elasticity of consumer Favor promotion during low-demand periods Favor promotion during peak-demand periods Decreases forward buying by retailer

Further Discussion S&OP as an optimization problem? Implementing in Practice Coordinate planning across enterprises in the supply chain Take predictable variability into account when making strategic decisions Design S&OP to understand and manage the drivers of demand usage Ensure that the S&OP process modifies plan as the reality or forecasts change