Copyright 2011 by The McGraw-Hill Companies, I nc. All rights reserved.

McGraw-Hill/I rwin
Manufacturing
Planning and Control
MPC 6
th
Edition
Chapter 4
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 managements handle on the business.
4-3
Agenda
What is SOP?
SOP links with MPC
SOP activities and techniques
Critical SOP issues
State-of-the-art SOP
Principles
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
4-5
SOP Fundamentals
The role of SOP is to balance supply and
demand at the volume level
Demand Supply
Volume
Mix
Sales and
Operations
Planning
Balance between supply and demand
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.
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
4-8
SOP Process
Run sales forecast
reports
Demand planning
phase
Supply planning phase
Pre-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
4-9
SOP Process Key
Activities
Updating the sales forecast
Reviewing the impact of operations plan
changescan current capacity and materials
support the changes?
Identifying alternatives where problems exist
Formulating recommendations for top
management
Communicating the information to top
management
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
4-11
Communicating SOP
InformationDisplays
Information can be conveyed in
several ways
Charts (monthly forecast, cumulative
production, alternative plans)
Tabular displays (easily captured and
communicated using spreadsheets)
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
4-13
Production Strategies
Chaseproduction output is changed
to match sales quantities
Levelproduction is constant, resulting
in inventory build-up and depletion
over time
Mixedcombination of chase and level
designed to result in acceptable levels
of flexibility and inventory
4-14
Chase Strategy
Calculate hires and fires each period
If Employees
t
> Employees
t-1
then Hires
t
= Employees
t
Employees
t-1

else Fires
t
=Employees
t-1
- Employees
t
Calculate the number of employees required
Employees
t
= Planned production
t
/Employee productivity
Calculate the operations plan (in units)
Planned production
t
= Forecast sales
t
Inventory
t-1
+Inventory
t
Calculate end-of-month inventory targets
Inventory
t
= Target days x Expected Demand
t+1
/Working days
t+1
A spreadsheet with these calculations
can be found here.
4-15
Chase Strategy
0
200
400
600
800
1000
1200
1400
1600
Jan Feb Mar Apr May Jun
Demand f orecast
Chase
4-16
Level Strategy
Calculate ending inventory levels and days of supply
Inventory
t
= Inventory
t-1
+ Planned production
t
Forecast demand
t

Days of supply
t
= Inventory
t
/(Expected demand
t+1
/Working days
t+1
)
Calculate the number of employees needed
Inventory
T
= Expected Demand
T+1
/Working days
T+1
Total production required = Total forecast demand Beginning inventory + Ending inventory
T

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.
4-17
Level Strategy
0
200
400
600
800
1000
1200
1400
1600
Jan Feb Mar Apr May Jun
Demand f orecast
Level
4-18
Karma strateji (Mixed
Strategy)
0
200
400
600
800
1000
1200
1400
1600
Jan Feb Mar Apr May Jun
Demand f orecast
mixed
4-19
Example: Chase Strategy
4-20
Example: Level Strategy
4-21
Example: Mixed Strategy
4-22
2011 Pearson Education,
Inc. publishing as Prentice
Hall
Roofing Supplier Example 1
Table 13.2
Month Expected Demand
Production
Days
Demand Per Day
(computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
= = 50 units per day
6,200
124
Average
requirement
=
Total expected demand
Number of production days
4-23
2011 Pearson Education,
Inc. publishing as Prentice
Hall
Roofing Supplier Example 1
Figure 13.3
70
60
50
40
30

0
Jan Feb Mar Apr May June = Month

22 18 21 21 22 20 = Number of
working days
P
r
o
d
u
c
t
i
o
n

r
a
t
e

p
e
r

w
o
r
k
i
n
g

d
a
y

Level production using average
monthly forecast demand
Forecast demand
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
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
Month
Production
Days
Production
at 50 Units
per Day
Demand
Forecast
Monthly
Inventory
Change
Ending
Inventory
Jan 22 1,100 900 +200 200
Feb 18 900 700 +200 400
Mar 21 1,050 800 +250 650
Apr 21 1,050 1,200 -150 500
May 22 1,100 1,500 -400 100
June 20 1,000 1,100 -100 0
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
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
Month
Production
Days
Production
at 50 Units
per Day
Demand
Forecast
Monthly
Inventory
Change
Ending
Inventory
Jan 22 1,100 900 +200 200
Feb 18 900 700 +200 400
Mar 21 1,050 800 +250 650
Apr 21 1,050 1,200 -150 500
May 22 1,100 1,500 -400 100
June 20 1,000 1,100 -100 0
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
Costs Calculations
Inventory carrying $9,250 (= 1,850 units carried x $5
per unit)
Regular-time labor 99,200 (= 10 workers x $80 per
day x 124 days)
Other costs (overtime,
hiring, layoffs,
subcontracting) 0
Total cost $108,450
4-27
2011 Pearson Education,
Inc. publishing as Prentice
Hall
Roofing Supplier Example 2
Figure 13.4
C
u
m
u
l
a
t
i
v
e

d
e
m
a
n
d

u
n
i
t
s

7,000
6,000
5,000
4,000
3,000
2,000
1,000

Jan Feb Mar Apr May June
Cumulative forecast
requirements
Cumulative level
production using
average monthly
forecast
requirements
Reduction
of inventory
Excess inventory
6,200 units
4-28
2011 Pearson Education,
Inc. publishing as Prentice
Hall
Roofing Supplier Example 3
Table 13.2
Month Expected Demand
Production
Days
Demand Per Day
(computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
Minimum requirement = 38 units per day
4-29
2011 Pearson Education,
Inc. publishing as Prentice
Hall
Roofing Supplier Example 3
70
60
50
40
30

0
Jan Feb Mar Apr May June = Month

22 18 21 21 22 20 = Number of
working days
P
r
o
d
u
c
t
i
o
n

r
a
t
e

p
e
r

w
o
r
k
i
n
g

d
a
y

Level production
using lowest
monthly forecast
demand
Forecast demand
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
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
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
Costs Calculations
Regular-time labor $75,392 (= 7.6 workers x $80 per
day x 124 days)
Subcontracting 29,760 (= 1,488 units x $20 per
unit)
Total cost $105,152
4-33
2011 Pearson Education,
Inc. publishing as Prentice
Hall
Roofing Supplier Example 4
Table 13.2
Month Expected Demand
Production
Days
Demand Per Day
(computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
Production = Expected Demand
4-34
2011 Pearson Education,
Inc. publishing as Prentice
Hall
Roofing Supplier Example 4
70
60
50
40
30

0
Jan Feb Mar Apr May June = Month

22 18 21 21 22 20 = Number of
working days
P
r
o
d
u
c
t
i
o
n

r
a
t
e

p
e
r

w
o
r
k
i
n
g

d
a
y

Forecast demand and
monthly production
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
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
Jan 900 41 $ 14,400 $ 14,400
Feb 700 39 11,200
$1,200
(= 2 x $600)
12,400
Mar 800 38 12,800
$600
(= 1 x $600)
13,400
Apr 1,200 57 19,200
$5,700
(= 19 x $300)
24,900
May 1,500 68 24,000
$3,300
(= 11 x $300)
24,300
June 1,100 55 17,600
$7,800
(= 13 x $600)
25,400
$99,200 $9,000 $9,600 $117,800
Table 13.4
4-37
2011 Pearson Education,
Inc. publishing as Prentice
Hall
Comparison of Three Plans
Table 13.5
Cost Plan 1 Plan 2 Plan 3
Inventory carrying $ 9,250 $ 0 $ 0
Regular labor 99,200 75,392 99,200
Overtime labor 0 0 0
Hiring 0 0 9,000
Layoffs 0 0 9,600
Subcontracting 0 29,760 0
Total cost $108,450 $105,152 $117,800
Plan 2 is the lowest cost option
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 managers experience and
performance
Other Models
Linear Decision Rule
Simulation
4-39
2011 Pearson Education,
Inc. publishing as Prentice
Hall
Management Coefficients Model
Builds a model based on managers
experience and performance
A regression model is constructed
to define the relationships between
decision variables
Objective is to remove
inconsistencies in decision making
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
4-41
2011 Pearson Education,
Inc. publishing as Prentice
Hall
Summary of Aggregate
Planning Methods
Techniques
Solution
Approaches Important 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
Optimization LP software available;
permits sensitivity
analysis and new
constraints; linear
functions may not be
realistic.
Table 13.8
4-42
2011 Pearson Education,
Inc. publishing as Prentice
Hall
Summary of Aggregate
Planning Methods
Techniques
Solution
Approaches Important Aspects
Management
coefficients
model
Heuristic Simple, easy to implement;
tries to mimic managers
decision process; uses
regression.
Simulation Change
parameters
Complex; may be difficult
to build and for managers
to understand.
Table 13.8
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
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/sponsorkeep top management focused on the
process, clear major obstacles, and acquire resources
SOP process ownerprovide leadership for the SOP process and
implementation
Demand planning teamprovide demand data and represent forecasting,
marketing, and sales functions
Supply planning teamprovide supply system information and represent
manufacturing and purchasing functions
Pre-SOP teammanage cross-functional development of SOP
Executive SOP teamupper management representative of each
functional area
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 questionHow do
you go to market?
Product family groupings that
are consistent with sales and
marketings 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
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
Manufacturings job is to achieve the planexactly
(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
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
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?
4-49
Principles
The operations plan isnt 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.
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.
4-51
QuizChapter 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)