9/3/2015

Session3:
S&OPandAggregatePlanning

Sales&Operations
Planning(S&OP)

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IntroductiontoS&OP
O A process to synchronize supply, demand,

inventory and stakeholders in order to ensure

that financial business plans and sales plans
are in line with operational plans in
manufacturing, procurement, distribution and
new product introduction within the extended
supply chain

Source: Seven Winning Tips That Every Salesperson Should Know by Dhaul and Yucesan

StakeholdersinS&OP
O CEO/ Business Head
O SOP Manager
O Regional Sales Managers/Sales Heads
O Manufacturing Manager/Head
O Product Manager
O Finance Manager
O HR Manager

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IntroductiontoS&OP
O Practitioners
O
O
O
O

have coined the term Sales and

Operations Planning to replace Aggregate Planning
Highlights the importance of coordinating with other
functional departments so that cross-functional
activities could be captured
It is a decision making process which ensures that
tactical plans are in sync with an organizations
business plans
Sales and Operations planning is a process of
coordinating the supply with demand
Consists of a series of meetings between the heads of
Operations, Marketing and so on
5

IntroductiontoS&OP
O The Marketing heads present a Marketing Plan

consisting of demand projections or unrealistic

sales commitments
O Operations Plan consists of the various cost issues
of meeting demand and available capacity
O The output of the meeting is a consensus forecast
O Aggregate Operations Plan translates annual and
quarterly business plans and the consensus
forecasts into labor and input requirements

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TimeDimensionofPlanning
Nature/
Type

Time
Duration

Characteristics

Long Range

>1 year

Decision on buildings, equipment or

facilities
Top Management Participation

Intermediate 1 month-1 year Hiring, layoff, minor equipment,

Range
subcontracting
Mid level management
Short Range

< 1 month

Overtime, intra organization

movement, allocation of resources,
alternate production routings

TimeDimensionofPlanning
Nature/
Type

Time
Duration

Characteristics

Long Range

>1 year

Decision on buildings, equipment or

facilities
Top Management Participation

Intermediate 1 month-1 year Hiring, layoff, minor equipment,

Range
subcontracting
Aggregate
Planning
Mid level management
Short Range

< 1 month

Overtime, intra organization

movement, allocation of resources,
alternate production routings

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IntroductiontoAggregate
Planning
O Why Aggregate Planning?
Plans are developed for product lines/ product

families and not individual products

It is a plan generated not to control day to day
activities but for a period of 1 month- 1year

MatchingDemandandSupply
O Altering Demand (Proactive)
Pricing
Promotions
O Altering Supply (Reactive)
Subcontracting
Altering Bottleneck Operation

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InputstoAggregatePlanning
O Demand (=Forecast + Orders)
O Cost

Inventory Carrying Cost

Backordering Cost
Overtime
Hiring/Firing
Subcontracting
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InputstoAggregatePlanning
O Resources

Available Raw Materials

Available Workforce
O Policies

Subcontracting
Overtime
Inventory Levels/Safety Stock
Back Orders
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OutputsofAggregatePlanning
O Total Cost
O Required Levels of
Inventory
Subcontracting
Backorder
Output
Hire/Fire figures

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ObjectivesofAggregatePlanning
O Minimization of overall costs
O Maximization of fill rates/customer service
O Minimization the usage of alternatives
O Maximize capacity utilization
O Minimize inventory investment

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AggregatePlanningStrategies
O Pure Strategy
Chase Strategy: Matching production rate to the

order rate, hiring and laying off employees, low

training costs
Level Strategy: Maintain a constant production rate,
stable workforce, order backlogs, fluctuating
inventory levels to absorb the shortages and
surpluses, and lost sales with inventory
obsolescence, higher employee training costs,
Stable Workforce but varying working hours
(flexible work schedules)
Subcontracting
O Hybrid Strategy

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TechniquesforAggregatePlanning
O Cut and Try
O Linear Programming
O Transportation
O Heuristics

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CustomerHierarchies
O In practice it has been seen quite challenging

to allocate scarce product quantities to

different customer segments
O These segments, differ with respect to size and
profitability
O Sometimes customer hierarchy is created on
the basis of long term relations
O This results in order prioritization and can
reduce shortage gaming
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Demand and Working days

Jan

Feb

Mar

Apr

May

Jun

Tot

Demand Forecast

1800

1500

1100

900

1100

1600

8000

No. of Working days

22

19

21

21

22

20

125

Costs
Materials

$100.00/unit

Inventory Holding Cost

$1.50/unit/month

Marginal Cost of Stock-out

$5.00/unit/month

Marginal Cost of Subcontracting

$20.00/unit ($120-$100)

Hiring and Training Cost

$200/worker

Layoff Cost

$250/worker

Labor Hours Required

5/unit

Regular Time Cost (8 hours a day)

$4.00/hour

Overtime Cost (After 8 hours)

$6.00/hour
Inventory

Beginning Inventory

400 units

Safety Stock

25% of month demand

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Source: Operations and Supply Chain Management by Chase et al., 14ed, McGraw Hill

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ExampleContinued
Jan

Feb

Mar

Apr

May

Jun

B.I.

400

Demand

1800

SS

450

Production
Requirement

1850

E.I.

450

19

ExampleContinued
Jan

Feb

Mar

Apr

May

Jun

B.I.

400

Demand

1800

SS

450

Production
Requirement

1850

E.I.

450

?
?
Production
Requirement=
Demand+ SS- B.I.
?
?

20

10

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ExampleContinued
Jan

Feb

Mar

Apr

May

Jun

B.I.

400

450

375

275

225

275

Demand

1800

1500

1100

900

1100

1600

SS

450

375

275

225

275

400

Production
Requirement

1850

1425

1000

850

1150

1725

E.I.

450

375

275

225

275

400

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Problem
O The demand being faced by a firm for the next

six months is given in the following table

Month

Jan

Feb

Mar

Apr

May

Jun

Demand

250

300

350

200

400

300

O Relevant cost information is given in the following table

Inventory Holding Cost

$2/unit/month

Marginal Cost of Stock-out

$3.00/unit/month

Marginal Cost of Subcontracting

$10.00/unit

Hiring and Training Cost

$200/worker

Layoff Cost

$250/worker

Labor Hours Required

3/unit

Regular Time Cost (8 hours a day)

$4.00/hour

Overtime Cost (After 8 hours)

$8.00/hour

22

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ProblemContinued
O There is no initial inventory and no safety

stocks compulsions
O Every month has 20 working days
O Use all the 4 strategies discussed in class, and
compute the overall costs for employing each
of the strategies

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