1. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Manufacturing Planning and Control MPC 6 th Edition Chapter 4

2. 4-2 Sales and Operations Planning The Sales and Operations Planning (SOP) process is used to develop an overall business plan to integrate the functional planning efforts within the company. SOP links strategic goals to production and coordinates the planning efforts of various groups such as marketing, finance, operations, and human resources. SOP is top management’s handle on the business.

3. 4-3 Agenda What is SOP?SOP links with MPCSOP activities and techniquesCritical SOP issuesState-of-the-art SOPPrinciples

4. 4-4 SOP Functions SOP provides the key communication links for top management to coordinate the various planning activities in a business Strategic Planning Marketing Planning Resource Planning Financial Planning Demand Management Rough-Cut Capacity Planning Sales & Operations Planning (Volume) Sales Plan Operations Plan Master Production Scheduling (Mix) Front End MPC Boundary

5. 4-5 SOP Fundamentals The role of SOP is to balance supply and demand at the volume level DemandSupply VolumeMix Sales and Operations Planning Balance between supply and demand

6. 4-6 SOP Communication The plan must be expressed in terms that are meaningful to non- manufacturing executives The operations portion of the plan must be stated in terms that MPC functions can use Aggregate units by product line, dollar value, etc.

7. 4-7 Value of SOP The SOP process provides visibility of the interactions between sales, marketing, production, and finance Critical trade-off decisions are documented Manufacturing performance is controlled in a clear fashion This leads to better integration among functional areas and better response to the marketplace

8. 4-8 SOP Process Run sales forecast reports Demand planning phase Supply planning phasePre-SOP meeting Executive SOP Meeting End of month Statistical forecasts Field sales worksheets Management forecast First-pass spreadsheets Recommendations and agenda Capacity constraints Second-pass spreadsheets Decisions and game plan

9. 4-9 SOP Process – Key Activities Updating the sales forecast Reviewing the impact of operations plan changes–can current capacity and materials support the changes? Identifying alternatives where problems exist Formulating recommendations for top management Communicating the information to top management

10. 4-10 SOP Discipline For the SOP process to be routine and effective, replanning must occur when conditions indicate the need Mechanisms for maintaining support for the plans are important Senior executive involvement is a minimum requirement

11. 4-11 Communicating SOP Information–Displays Information can be conveyed in several ways Charts (monthly forecast, cumulative production, alternative plans) Tabular displays (easily captured and communicated using spreadsheets)

12. 4-12 SOP Tabular Display A planning factor is used to convert sales $ to units The display includes both history and the plan Using a chase strategy can lead to large variations in planned production Planning assumptions are clearly displayed Financial results of the plan are calculated and displayed

13. 4-13 Production Strategies Chase–production output is changed to match sales quantities Level–production is constant, resulting in inventory build-up and depletion over time Mixed–combination of chase and level designed to result in acceptable levels of flexibility and inventory

14. 4-14 Chase Strategy Calculate hires and fires each period If Employeest > Employeest-1 then Hires t = Employeest – Employeest-1 else Fires t =Employeest-1 - Employeest Calculate the number of employees required Employeest = Planned productiont/Employee productivity Calculate the operations plan (in units) Planned productiont = Forecast salest – Inventory t-1 +Inventoryt Calculate end-of-month inventory targets Inventoryt = Target days x Expected Demandt+1/Working days t+1 A spreadsheet with these calculations can be found here.here

15. 4-15 Chase Strategy

16. 4-16 Level Strategy Calculate ending inventory levels and days of supply Inventoryt = Inventoryt-1 + Planned production t – Forecast demandt Days of supplyt = Inventory t /(Expected demandt+1/Working dayst+1) Calculate the number of employees needed InventoryT = Expected DemandT+1/Working days T+1 Total production required = Total forecast demand – Beginning inventory + Ending inventoryT Planned production each period = Total production required/Number of periods Employees required each period = Planned production each period/Employee productivity per day A spreadsheet with these calculations can be found here.here

17. 4-17 Level Strategy

18. 4-18 Karma strateji (Mixed Strategy)

19. 4-19 Example: Chase Strategy

20. 4-20 Example: Level Strategy

21. 4-21 Example: Mixed Strategy

22. 4-22 © 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 1 Table 13.2 MonthExpected Demand Production Days Demand Per Day (computed) Jan9002241 Feb7001839 Mar8002138 Apr1,2002157 May1,5002268 June1,100 2055 6,200124 = = 50 units per day 6,200 124 Average requirement = Total expected demand Number of production days

23. 4-23 © 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 1 Figure 13.3 70 – 60 – 50 – 40 – 30 – 0 – JanFebMarAprMayJune=Month  221821212220=Number of working days Production rate per working day Level production using average monthly forecast demand Forecast demand

24. 4-24 © 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 2 Table 13.3 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $20 per unit Average pay rate $10 per hour ($80 per day) Overtime pay rate $17 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit Plan 1 – constant workforce

25. 4-25 © 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 2 Table 13.3 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $20 per unit Average pay rate $10 per hour ($80 per day) Overtime pay rate $17 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit Plan 1 – constant workforce Month Production Days Production at 50 Units per Day Demand Forecast Monthly Inventory Change Ending Inventory Jan221,100900+200200 Feb18900700+200400 Mar211,050800+250650 Apr211,0501,200-150500 May221,1001,500-400100 June201,0001,100-1000 1,850 Total units of inventory carried over from one month to the next= 1,850 units Workforce required to produce 50 units per day= 10 workers

26. 4-26 © 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 2 Table 13.3 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $20 per unit Average pay rate $10 per hour ($80 per day) Overtime pay rate $17 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit Plan 1 – constant workforce Month Production Days Production at 50 Units per Day Demand Forecast Monthly Inventory Change Ending Inventory Jan221,100900+200200 Feb18900700+200400 Mar211,050800+250650 Apr211,0501,200-150500 May221,1001,500-400100 June201,0001,100-1000 1,850 Total units of inventory carried over from one month to the next= 1,850 units Workforce required to produce 50 units per day= 10 workers CostsCalculations Inventory carrying$9,250(= 1,850 units carried x $5 per unit) Regular-time labor99,200(= 10 workers x $80 per day x 124 days) Other costs (overtime, hiring, layoffs, subcontracting)0 Total cost$108,450

27. 4-27 © 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 2 Figure 13.4 Cumulative demand units 7,000 – 6,000 – 5,000 – 4,000 – 3,000 – 2,000 – 1,000 – – JanFebMarAprMayJune Cumulative forecast requirements Cumulative level production using average monthly forecast requirements Reduction of inventory Excess inventory 6,200 units

28. 4-28 © 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 3 Table 13.2 MonthExpected Demand Production Days Demand Per Day (computed) Jan9002241 Feb7001839 Mar8002138 Apr1,2002157 May1,5002268 June1,100 2055 6,200124 Minimum requirement = 38 units per day Plan 2 – subcontracting

29. 4-29 © 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 3 70 – 60 – 50 – 40 – 30 – 0 – JanFebMarAprMayJune=Month  221821212220=Number of working days Production rate per working day Level production using lowest monthly forecast demand Forecast demand

30. 4-30 © 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 3 Table 13.3 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $20 per unit Average pay rate $10 per hour ($80 per day) Overtime pay rate $17 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit

31. 4-31 © 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 3 Table 13.3 Cost Information Inventory carry cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit In-house production=38 units per day x 124 days =4,712 units Subcontract units=6,200 - 4,712 =1,488 units

32. 4-32 © 2011 Pearson Education, Inc. publishing as Prentice Hall Table 13.3 Cost Information Inventory carry cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit Roofing Supplier Example 3 In-house production=38 units per day x 124 days =4,712 units Subcontract units=6,200 - 4,712 =1,488 units CostsCalculations Regular-time labor$75,392(= 7.6 workers x $80 per day x 124 days) Subcontracting29,760(= 1,488 units x $20 per unit) Total cost$105,152

33. 4-33 © 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 4 Table 13.2 MonthExpected Demand Production Days Demand Per Day (computed) Jan9002241 Feb7001839 Mar8002138 Apr1,2002157 May1,5002268 June1,100 2055 6,200124 Production = Expected Demand Plan 3 – hiring and layoffs

34. 4-34 © 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 4 70 – 60 – 50 – 40 – 30 – 0 – JanFebMarAprMayJune=Month  221821212220=Number of working days Production rate per working day Forecast demand and monthly production

35. 4-35 © 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 4 Table 13.3 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $20 per unit Average pay rate $10 per hour ($80 per day) Overtime pay rate $17 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit

36. 4-36 © 2011 Pearson Education, Inc. publishing as Prentice Hall Roofing Supplier Example 4 Table 13.3 Cost Information Inventory carrying cost $ 5 per unit per month Subcontracting cost per unit $10 per unit Average pay rate $ 5 per hour ($40 per day) Overtime pay rate $ 7 per hour (above 8 hours per day) Labor-hours to produce a unit 1.6 hours per unit Cost of increasing daily production rate (hiring and training) $300 per unit Cost of decreasing daily production rate (layoffs) $600 per unit Month Forecast (units) Daily Prod Rate Basic Production Cost (demand x 1.6 hrs/unit x $10/hr) Extra Cost of Increasing Production (hiring cost) Extra Cost of Decreasing Production (layoff cost) Total Cost Jan90041 $ 14,400 —— Feb7003911,200— $1,200 (= 2 x $600) 12,400 Mar8003812,800— $600 (= 1 x $600) 13,400 Apr1,2005719,200 $5,700 (= 19 x $300) —24,900 May1,5006824,000 $3,300 (= 11 x $300) —24,300 June1,1005517,600— $7,800 (= 13 x $600) 25,400 $99,200$9,000$9,600$117,800 Table 13.4

37. 4-37 © 2011 Pearson Education, Inc. publishing as Prentice Hall Comparison of Three Plans Table 13.5 CostPlan 1Plan 2Plan 3 Inventory carrying$ 9,250$ 0 Regular labor99,20075,39299,200 Overtime labor000 Hiring009,000 Layoffs009,600 Subcontracting029,7600 Total cost$108,450$105,152$117,800 Plan 2 is the lowest cost option

38. 4-38 © 2011 Pearson Education, Inc. publishing as Prentice Hall Mathematical Approaches  Useful for generating strategies  Transportation Method of Linear Programming  Produces an optimal plan  Management Coefficients Model  Model built around manager’s experience and performance  Other Models  Linear Decision Rule  Simulation

39. 4-39 © 2011 Pearson Education, Inc. publishing as Prentice Hall Management Coefficients Model  Builds a model based on manager’s experience and performance  A regression model is constructed to define the relationships between decision variables  Objective is to remove inconsistencies in decision making

40. 4-40 © 2011 Pearson Education, Inc. publishing as Prentice Hall Other Models Linear Decision Rule  Minimizes costs using quadratic cost curves  Operates over a particular time period Simulation  Uses a search procedure to try different combinations of variables  Develops feasible but not necessarily optimal solutions

41. 4-41 © 2011 Pearson Education, Inc. publishing as Prentice Hall Summary of Aggregate Planning Methods Techniques Solution ApproachesImportant Aspects Graphical methods Trial and error Simple to understand and easy to use. Many solutions; one chosen may not be optimal. Transportation method of linear programming OptimizationLP software available; permits sensitivity analysis and new constraints; linear functions may not be realistic. Table 13.8

42. 4-42 © 2011 Pearson Education, Inc. publishing as Prentice Hall Summary of Aggregate Planning Methods Techniques Solution ApproachesImportant Aspects Management coefficients model HeuristicSimple, easy to implement; tries to mimic manager’s decision process; uses regression. SimulationChange parameters Complex; may be difficult to build and for managers to understand. Table 13.8

43. 4-43 Management Obligations Commit to the SOP process Establish the SOP framework Put the right team together Set meetings Participate in the process Modify performance measures and reward structures to align with the plan Force resolution of trade-offs between functions Lead the cultural change

44. 4-44 Functional Roles The primary obligation for all functions involved is to “hit the plan” A cross-functional team approach is important Executive champion/sponsor–keep top management focused on the process, clear major obstacles, and acquire resources SOP process owner–provide leadership for the SOP process and implementation Demand planning team–provide demand data and represent forecasting, marketing, and sales functions Supply planning team–provide supply system information and represent manufacturing and purchasing functions Pre-SOP team–manage cross-functional development of SOP Executive SOP team–upper management representative of each functional area

45. 4-45 Defining Product Families Aggregation levels should be convenient for all functional areas Structure by product type, product characteristics, brand, market segment, etc. Fundamental question–How do you go to market? Product family groupings that are consistent with sale’s and marketing’s view of the market are generally best Select appropriate unit of measure for each family (units, pounds, cases, etc.) SOP is best performed at an aggregate level

46. 4-46 Integrated Planning Integration among sales, marketing, and production is key Sales and marketing need to sell what is planned (overselling is just as bad as underselling) Opportunities need to be evaluated via changes to the SOP Manufacturing’s job is to achieve the plan–exactly (overproduction and underproduction are equally bad) The end result is good customer service Breakdowns in the plan must be quickly reported by the functional area responsible

47. 4-47 Strategic Planning A direction-setting activity Can be an extension of budgeting More recently, plan is based on products and markets rather than organizational units SOP must support strategic plans

48. 4-48 Operations Plan Control The SOP process should be widely understood Planned results for each functional area should be clearly communicated The seriousness of the plan must also be reinforced Key issues When and how to change the plan? How stable should the plan be from period to period?

49. 4-49 Principles The operations plan isn’t a forecast. It is a statement of desired production output. The operations plan is included in the SOP process to maintain agreement with other functional plans. Trade-offs required to frame the operations plan must be made prior to final approval Top management involvement is imperative in the SOP process. The SOP process should relate directly to the strategic plan.

50. 4-50 Principles The MPC system should be used to perform routine activities and provide routine data, allowing management time to be devoted to important tasks. The MPC system should facilitate what- if analysis at the SOP level. Reviews of performance against SOP are needed to prompt replanning when necessary.

51. 4-51 Quiz–Chapter 4 The four fundamental issues in Sales and Operations Planning are __________. Sales and Operations Planning balances supply and demand at the ______ level. Many key Sales and Operations Planning linkages are outside the Manufacturing Planning and Control (MPC) system. (True/False) A strategy which matches monthly supply to forecasted demand is ________. A strategy which maintains a consistent monthly output is _________. The primary obligation for any functional area is to “hit the plan.” (True/False)