1. LESSON 2 Sales and Operations Planning (S&OP) and Aggregate Planning
29 August 2014

2. Lesson Objectives
Upon completion of this lesson, you should be able to:
Interpret the Sales and Operations Planning (S&OP) process as part of the Production Planning and Control (PPC) system
Explain S&OP Integration
Explain the key benefits of the S&OP Process
Demonstrate Aggregate Planning using Level and Chase strategies
Analyze the pros/cons/differences of the Aggregate Planning strategies

3. Lesson Topics This lesson will cover the following topics:
S&OP within the PPC System
S&OP Integration
Benefits of Aggregate Planning Strategies
Aggregate Planning
Aggregate Planning Strategies

4. What’s In It For Me?
Your understanding of Sales and Operations Planning (S&OP) processes will enable you to evaluate your suppliers’ ability to plan and manage their production based upon aggregated resource and demand information

5. Lesson Introduction
How does a company plan its production to meet customer requirements?

6. S&OP within the PPC System
Lesson Topics:
S&OP within the PPC System
S&OP Integration
Benefits of Aggregate Planning Strategies
Aggregate Planning
Aggregate Planning Strategies

7. S&OP within the PPC System
Resource Planning
Material and Capacity Plans
Detailed Capacity Planning
Sales and Operations Planning
Demand Management
Master Production Scheduling
Detailed Material Planning
Shop-floor Systems
Supplier Systems
Enterprise Resource Planning (ERP) Systems
Front End (Strategic)
Engine (Tactical)
Back End (Operational)
Material Requirements Planning

8. S&OP Integration Lesson Topics: S&OP within the PPC System
Benefits of Aggregate Planning Strategies
Aggregate Planning
Aggregate Planning Strategies

9. S&OP Integration
S&OP integrates functional planning processes into an aggregate plan
In manufacturing, S&OP is the single most important cross-functional process in the organization

10. S&OP Integration (cont.)
Strategic Planning
Marketing Planning
Financial Planning
Sales and Operations Planning (Volume/Aggregated)
Sales Plan Operations Plan
Resource Planning
Demand Management
Rough-cut
Capacity Planning
Master Production Scheduling (Mix/Disaggregated)
Front End
PPC Boundary
Engine

11. S&OP Fundamentals Supply vs. Demand
Balancing supply and demand is much easier when dealing in the aggregate, so the role of the S&OP process is to balance supply and demand Volume at the Product Family level.
Demand > Supply
Demand < Supply
Customer service declines
Inventories increase
Costs increase (overtime, premium shipping, etc.)
Layoffs could occur
Quality could decline (in rush to ship, shortcuts taken)
Plant efficiency and morale decline
Margins decrease due to price cutting and discounting

12. S&OP Fundamentals (cont.)
Volume vs. Mix
Processes that occur later in the PPC process disaggregate the volumes planned by the S&OP process to develop a mix of individual products and orders
Volume
Mix
Big picture issues
Detailed decisions
Aggregated (items are gathered together to determine total quantities)
Disaggregated (separated into component parts)
How much to make, production rates for product families or other highly aggregated product collections
Which individual products to make, in which sequence, to meet which customer orders

13. Exercise 1: S&OP Integration
Small Group Exercise:
Find a partner or work in a trio
Refer to Module 2, Lesson 2, Exercise 1 CME130_M2_L2_E1_Exercise_FINAL.docx
Read the directions in the exercise
Complete the activity; be prepared to share your responses
Time allowed: 30 minutes

14. Exercise 1: S&OP Integration
SCENARIO
Using the cable manufacturer case, explain S&OP concepts, how they fit into PPC, and the benefits received.
OBJECTIVES
Interpret the S&OP)process as part of the PPC.
Identify the S&OP Integration.
Explain the key benefits of the S&OP Process.
INSTRUCTIONS
Sketch how S&OP fits into the PPC front end (strategic).
Identify S&OP inputs and output.
Identify how S&OP will help the cable manufacturer.

15. Benefits of Aggregate Planning Strategies
Lesson Topics:
S&OP within the PPC System
S&OP Integration
Benefits of Aggregate Planning Strategies
Aggregate Planning
Aggregate Planning Strategies

16. Benefits of Aggregate Planning Strategies
Greater visibility of demand and supply across the company
Improved product lifecycle management process
Better promotional planning
Improved inventory management
More predictable revenue management
More accurate budget forecasting
Better manufacturing planning with planning horizon of Longest Lead Time Resource Plant and Equipment
Integration of R&D efforts with operations, sales, and marketing

17. Aggregate Planning Lesson Topics: S&OP within the PPC System
S&OP Integration
Benefits of Aggregate Planning Strategies
Aggregate Planning
Aggregate Planning Strategies

18. Aggregate Planning in Manufacturing
Integrates the various business plans, including financial, to meet strategic goals via production
Item
Description
Production rate
Units completed per unit of time
Workforce level
Number of workers
Inventory on hand
Inventory carried from each period to the next
This planning is done over a medium-range planning period of 6 to 18 months (sometimes longer)

19. Aggregate Planning (cont.)
Satisfies the demand forecast at a minimum cost by balancing capacity and demand
Examples of aggregate resources:
Total number of workers
Hours of machine time
Tons of raw materials

20. Aggregate Planning Strategies
Lesson Topics:
S&OP within the PPC System
S&OP Integration
Benefits of Aggregate Planning Strategies
Aggregate Planning
Aggregate Planning Strategies

21. Aggregate Planning Strategies
Level Strategy
Chase Strategy
Combination Strategy
Keep a level workforce throughout the planning period, thereby maintaining a constant production capacity
Adjust production capacity to match demand possibly by hiring/firing workers
Some combination of the Level and Chase strategies
May produce backorders
Avoids backorders
Reduces backorders
Avoids firing, hiring, and training costs
May incur firing, hiring, and training costs
Reduces firing, hiring, and training costs

22. Level Strategy
Note: Assume that monthly demand in units is: January 40, February 60, March 80, April 100, May 20, June 20
Cost and Production Data
Monthly unit holding costs
$5,000
Marginal cost of backorders (monthly/per unit)
$12,000
Hiring and training cost per worker
Layoff cost per worker
$8,000
Labor hours required per unit 50
Hours per worker per month
200
Monthly labor costs per worker

23. Level Strategy (cont.) Jan Feb Mar Apr May Jun Jan Feb Mar Apr May Jun
Units demanded 40 60 80
100 20
Personnel 15
Beginning inventory (short)
Units produced
Units available
Ending inventory (short)
Hiring/firing cost $0
Inventory carrying cost
$100,000
Backorder cost
Labor cost
$75,000
Jan
Feb
Mar
Apr
May
Jun
Units demanded 40 60 80
100 20
Personnel 15
Beginning inventory (short)
Units produced
Units available
Ending inventory (short)
Hiring/firing cost
Inventory carrying cost
Backorder cost
Labor cost
Jan
Feb
Mar
Apr
May
Jun
Units demanded 40 60 80
100 20
Personnel 15
Beginning inventory (short)
Units produced
Units available
Ending inventory (short)
Hiring/firing cost $0
Inventory carrying cost
$100,000
Backorder cost
Labor cost
$75,000
Jan
Feb
Mar
Apr
May
Jun
Units demanded 40 60 80
100 20
Personnel 15
Beginning inventory (short)
Units produced
Units available
Ending inventory (short)
Hiring/firing cost $0
Inventory carrying cost
$100,000
Backorder cost
Labor cost
$75,000
Jan
Feb
Mar
Apr
May
Jun
Units demanded 40 60 80
100 20
Personnel 15
Beginning inventory (short)
Units produced
Units available
Ending inventory (short)
(40)
Hiring/firing cost $0
Inventory carrying cost
$100,000
Backorder cost
$480,000
Labor cost
$75,000
Jan
Feb
Mar
Apr
May
Jun
Units demanded 40 60 80
100 20
Personnel 15
Beginning inventory (short)
(40)
Units produced
Units available
Ending inventory (short)
Hiring/firing cost $0
Inventory carrying cost
$100,000
$200,000
Backorder cost
$480,000
Labor cost
$75,000
Jan
Feb
Mar
Apr
May
Jun
Units demanded 40 60 80
100 20
Personnel 15
Beginning inventory (short)
(40)
Units produced
Units available
Ending inventory (short)
Hiring/firing cost $0
Inventory carrying cost
$100,000
Backorder cost
$480,000
Labor cost
$75,000
Beginning inventory (short) = Previous month ending In this case 0
Units produced = Personnel * worker hours / Labor hours required per unit Units produced = 15 * 200 / 50 = 60
Units available = Beginning inventory + Units produced Units available = = 60
Backorder cost = Marginal cost of backorders (monthly/per unit) * Ending inventory shortage Backorder cost = $12,000 * 0 = $0
Labor cost = Monthly labor costs per worker * Personnel Labor cost = $5,000 * 15 = $75,000
Ending inventory (short) = Units available - Units demanded Ending inventory = 60 – 40 = 20
Hiring/firing cost = Hiring cost * added personnel + firing cost * fired personnel Hiring/firing cost = $12,000 * 0 + $8,000 * 0 = $0
Inventory carrying cost = Holding cost * Ending inventory Inventory carrying cost = $5,000 * 20 = $100,000
Beginning inventory = Previous month ending
Units produced = Personnel * worker hours / Labor hours required per unit
Units available = Beginning inventory + Units produced
Ending inventory = Units available - Units demanded
Hiring/firing cost = Layoff/hiring cost * personnel
Inventory carrying cost = Holding cost * Ending inventory
Backorder cost = Marginal cost of backorders (monthly/per unit) * Ending inventory shortage
Labor cost = Monthly labor costs per worker * Personnel

24. Chase Strategy
Note: Assume that monthly demand in units is: January 40, February 60, March 80, April 100, May 20, June 20.
Cost and Production Data
Monthly unit holding costs
$5,000
Marginal cost of backorders (monthly per unit)
$12,000
Hiring and training cost per worker
Layoff cost per worker
$8,000
Labor hour required per unit 50
Hours per worker per month
200
Monthly labor cost per worker

25. Chase Strategy (cont.) Jan Feb Mar Apr May Jun Jan Feb Mar Apr May Jun
Units demanded 40 60 80
100 20
Personnel 15 10
Beginning inventory (short)
Units produced
Units available
Ending inventory (short)
Hiring/firing cost $0
$40,000
Inventory carrying cost
$100,000
Backorder cost
Labor cost
$75,000
$50,000
Jan
Feb
Mar
Apr
May
Jun
Units demanded 40 60 80
100 20
Personnel 15
Beginning inventory (short)
Units produced
Units available
Ending inventory (short)
Hiring/firing cost
Inventory carrying cost
Backorder cost
Labor cost
Jan
Feb
Mar
Apr
May
Jun
Units demanded 40 60 80
100 20
Personnel 15 10
Beginning inventory (short)
Units produced
Units available
Ending inventory (short)
Hiring/firing cost $0
$40,000
$120,000
Inventory carrying cost
$100,000
Backorder cost
Labor cost
$75,000
$50,000
Jan
Feb
Mar
Apr
May
Jun
Units demanded 40 60 80
100 20
Personnel 15
Beginning inventory (short)
Units produced
Units available
Ending inventory (short)
Hiring/firing cost $0
Inventory carrying cost
$100,000
Backorder cost
Labor cost
$75,000
Jan
Feb
Mar
Apr
May
Jun
Units demanded 40 60 80
100 20
Personnel 15 10 25
Beginning inventory (short)
Units produced
Units available
Ending inventory (short)
Hiring/firing cost $0
$40,000
$120,000
$60,000
Inventory carrying cost
$100,000
Backorder cost
Labor cost
$75,000
$50,000
$125,000
Jan
Feb
Mar
Apr
May
Jun
Units demanded 40 60 80
100 20
Personnel 15 10 25 5
Beginning inventory (short)
Units produced
Units available
Ending inventory (short)
Hiring/firing cost $0
$40,000
$120,000
$60,000
$160,000
Inventory carrying cost
$100,000
Backorder cost
Labor cost
$75,000
$50,000
$125,000
$25,000
Jan
Feb
Mar
Apr
May
Jun
Units demanded 40 60 80
100 20
Personnel 15 10 25 5
Beginning inventory (short)
Units produced
Units available
Ending inventory (short)
Hiring/firing cost $0
$40,000
$120,000
$60,000
$160,000
Inventory carrying cost
$100,000
Backorder cost
Labor cost
$75,000
$50,000
$125,000
$25,000
Ending inventory (short) = Units available - Units demanded Ending inventory = 60 – 40 = 20
Hiring/firing cost = Hiring cost * added personnel + firing cost * fired personnel Hiring/firing cost = $12,000 * 0 + $8,000 * 0 = $0
Inventory carrying cost = Holding cost * Ending inventory Inventory carrying cost = $5,000 * 20 = $100,000
Backorder cost = Marginal cost of backorders (monthly/per unit) * Ending inventory shortage Backorder cost = $12,000 * 0 = $0
Labor cost = Monthly labor costs per worker * Personnel Labor cost = $5,000 * 15 = $75,000
Beginning inventory (short) = Previous month ending In this case 0
Units produced = Personnel * worker hours / Labor hours required per unit Units produced = 15 * 200 / 50 = 60
Units available = Beginning inventory + Units produced Units available =
Beginning inventory = Previous month ending
Units produced = Personnel * worker hours / Labor hours required per unit
Units available = Beginning inventory + Units produced
Ending inventory = Units available - Units demanded
Hiring/firing cost = Layoff/hiring cost * personnel
Inventory carrying cost = Holding cost * Ending inventory
Backorder cost = Marginal cost of backorders (monthly/per unit) * Ending inventory shortage
Labor cost = Monthly labor costs per worker * Personnel

26. Level Strategy Comparative Discussion
Jan
Feb
Mar
Apr
May
Jun
Units demanded 40 60 80
100 20
Personnel 15
Beginning inventory (short)
0.0
20.0
(40.0)
Units produced
60.0
Units available
80.0
Ending inventory (short)
40.0
Hiring/firing cost $0
Inventory carrying cost
$100,000
$200,000
Backorder cost
$480,000
Labor cost
$75,000
Total cost
$175,000
$555,000
$275,000
$1,330,000

27. Chase Strategy Comparative Discussion
Jan
Feb
Mar
Apr
May
Jun
Units demanded 40 60 80
100 20
Personnel 15 10 25 5
Beginning inventory (short)
0.0
20.0
Units produced
60.0
40.0
80.0
100.0
Units available
Ending inventory (short)
Hiring/firing cost $0
$40,000
$120,000
$60,000
$160,000
Inventory carrying cost
$100,000
Backorder cost
Labor cost
$75,000
$50,000
$125,000
$25,000
Total cost
$175,000
$90,000
$220,000
$185,000
$880,000

28. Question and Answer
S&OP is a process that integrates marketing planning, resource planning, financial planning and demand management into a common plan
True
False

29. Question and Answer Benefits of aggregate planning strategies include:
Improved inventory management
More predictable revenue management
More accurate budget forecasting
All of the above

30. Question and Answer
Which strategy keeps a steady workforce but may produce backorders?
Level strategy
Chase strategy

31. Summary Having completed this lesson, you should now be able to:
Interpret the Sales and Operations Planning (S&OP) process as part of the Production Planning and Control (PPC) system
Explain S&OP Integration
Explain the key benefits of the S&OP Process
Demonstrate Aggregate Planning using Level and Chase strategies
Analyze the pros/cons/differences of the Aggregate Planning strategies

32. Summary (cont.)
Your understanding of S&OP processes will help you to evaluate how your suppliers’ performance of these activities will impact their ability to successfully complete a contract.