1. Chapter 10 Sales and Operations Planning (Aggregate Planning)

2. Chapter Objectives Be able to:  Distinguish among strategic planning, tactical planning, and detailed planning and control, and describe why sales and operations planning (S&OP) is important to an organization and its supply chain partners.  Describe the differences between top-down and bottom-up S&OP and discuss the strengths and weaknesses of level, chase, and mixed production strategies.  Discuss the organizational issues that arise when firms decide to incorporate S&OP into their efforts.  Describe the managerial considerations surrounding the use of S&OP in a service environment.  Examine how S&OP can be used to coordinate activities up and down the supply chain.  Apply optimization modeling techniques to the S&OP process. Copyright © 2016 Pearson Education, Inc. 10-2

3. Introduction  Sales and Operations Planning (S&OP) – A process to develop tactical plans by integrating marketing plans for new and existing products with the management of the supply chain.  Brings together all the plans for the business into one integrated set of plans.  Also called Aggregate Planning. © 2014 APICS Dictionary Copyright © 2016 Pearson Education, Inc. 10-3

4. S&OP in the Planning Cycle  Strategic planning  Tactical planning  Detailed planning and control Figure 10.1 Copyright © 2016 Pearson Education, Inc. 10-4

5. S&OP in the Planning Cycle  S&OP indicates how the organization will use its tactical capacity resources to meet expected customer demand.  S&OP strikes a balance between the various needs and constraints of the supply chain partners.  S&OP serves as a coordinating mechanism for the various supply chain partners.  S&OP expresses the business’s plans in terms that everyone can understand. Copyright © 2016 Pearson Education, Inc. 10-5

6. Major Approaches to S&OP  Top-down planning – An approach to S&OP in which a single, aggregated sales forecast drives the planning process.  Bottom-up planning – An approach to S&OP that is used when the product/service mix is unstable and resource requirements vary greatly across the offerings.  Planning values – Values that decision makers use to translate a sales forecast into resource requirements and to determine the feasibility and costs of alternative sales and operations plans. Copyright © 2016 Pearson Education, Inc. 10-6

7. Major Approaches to S&OP Figure 10.2 Determining the Appropriate Approach to S&OP Copyright © 2016 Pearson Education, Inc. 10-7

8. Major Approaches to S&OP  Top-Down Planning Process  Develop the aggregate sales forecast and planning values.  Translate the sales forecast into resource requirements.  Generate alternative production plans. Copyright © 2016 Pearson Education, Inc. 10-8

9. Major Approaches to S&OP  Level production plan – A S&OP plan in which production is held constant and inventory is used to absorb differences between production and the sales forecast.  Chase production plan – A S&OP plan in which production is changed in each time period to match the sales forecast.  Mixed production plan - A S&OP plan that varies both production and inventory levels in an effort to develop the most effective plan. Copyright © 2016 Pearson Education, Inc. 10-9

10. Major Approaches to S&OP  Bottom-Up Planning Process  Steps are similar to top-down planning.  Main difference is that the resource requirements must be evaluated individually for each product or service and then added up across all products or services to get a picture of overall requirements. Copyright © 2016 Pearson Education, Inc. 10-10

11. Major Approaches to S&OP  Cash Flow Analysis  The Finance Department is responsible for making sure that the business has the cash it needs to carry out the sales and operations plan and that any excess cash is put to good use.  Net cash flow – The net flow of dollars into or out of a business over some time period. Net cash flow = cash inflows – cash outflows Copyright © 2016 Pearson Education, Inc. 10-11

12. Organizing For and Implementing S&OP  Questions to ask when choosing between alternative plans:  What impact will the plan have on key suppliers and transportation providers?  What are cash flows like?  Do the supply chain partners and the firm itself have the space needed to hold any planned inventories?  Does the plan contain significant changes in the workforce?  How flexible is the plan? Copyright © 2016 Pearson Education, Inc. 10-12

13. Organizing For and Implementing S&OP Figure 10.6 Fine-Tuning the Sales and Operations Plan Copyright © 2016 Pearson Education, Inc. 10-13

14. Organizing For and Implementing S&OP  Rolling planning horizon – A planning approach in which an organization updates its sales and operations plan regularly, such as on a monthly or quarterly basis. Figure 10.7 Copyright © 2016 Pearson Education, Inc. 10-14

15. Organizing For and Implementing S&OP  Implementing S&OP in an organization is a three-phase process:  Developing the foundation  Integrating and streamlining the process  Gaining a competitive advantage Copyright © 2016 Pearson Education, Inc. 10-15

16. Service Considerations  Making Sales Match Capacity  Yield management – An approach that services commonly use with highly perishable “products” in which prices are regularly adjusted to maximize total profit. When demand levels are lower than expected, yield management systems boost demand by lowering the price, but only if the expected result is an increase in total profit. When demand levels are higher than expected, prices are raised, but only if the expected result is higher total profit.  Total profit = (average profit per service unit sold) * (number of service units sold) Copyright © 2016 Pearson Education, Inc. 10-16

17. Service Considerations  Making Capacity Match Sales  Tiered workforce – A strategy used to vary workforce levels, in which additional full-time or part-time employees are hired during peak demand periods, while a smaller permanent staff is maintained year-round.  Offloading – A strategy for reducing and smoothing out workforce requirements that involves having customers perform part of the work themselves. Copyright © 2016 Pearson Education, Inc. 10-17

18. Linking S&OP Throughout the Supply Chain The S&OP process should consider not only the impact on various parties within the firm, but also the impact on outside parties – the firm’s supply chain partners. Figure 10.8 Copyright © 2016 Pearson Education, Inc. 10-18

19. Applying Optimization Modeling to S&OP  Optimization model – A class of mathematical models used when the user seeks to optimize some objective function subject to some constraints.  Objective function – A quantitative function that an optimization model seeks to optimize (i.e. maximize or minimize)  Constraint – A quantifiable condition that places limitations on the set of possible solutions.  S&OP is ideally suited to such analyses because managers might be interested in understanding what pattern of resource decisions – labor, inventory, machine time, etc. - will result in the lowest total cost while still meeting the sales forecast. Copyright © 2016 Pearson Education, Inc. 10-19