Chap004-Sales & Operations Planning R1

Manufacturing
Planning and Control

MPC 6th Edition
Chapter 4
McGraw-Hill/Irwin
Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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.
4-2
Agenda
4-3
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
Sales & Operations

Planning (Volume)
Sales Plan
Plan
Operations
Financial
Planning
Demand
Management
MPC Boundary
Rough-Cut
Capacity
Planning
Master
Production
Scheduling (Mix)
Front End
4-4
SOP Fundamentals
Balance between supply and demand
The role of SOP is to balance supply and demand

at the volume level
4-5
SOP Communication
The plan must be expressed in terms
that are meaningful to nonmanufacturing 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.
4-6
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
4-7
SOP Process
End of
month
Statistical forecasts
Field sales worksheets
Management forecast
First-pass spreadsheets
Capacity constraints
Second-pass spreadsheets
Recommendations and
agenda
Decisions
and game
plan 4-8
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
4-9
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
4-10
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)
4-11
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
Financial results of
the plan are
calculated and
displayed
Planning
assumptions are
clearly displayed
4-12
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
4-13
Chase Strategy
A spreadsheet with these calculations

can be found here.
4-14
Chase Strategy
Demand forecast
Chase
1600
1400
1200
1000
800
600
400
200
0
Jan
Feb
Mar
Apr
May
Jun
4-15
Level Strategy
A spreadsheet with these calculations

can be found here.
4-16
Level Strategy
Demand forecast
Level
1600
1400
1200
1000
800
600
400
200
0
Jan
Feb
Mar
Apr
May
Jun
4-17
Karma strateji (Mixed

Strategy)
Demand forecast
mixed
1600
1400
1200
1000
800
600
400
200
0
Jan
Feb
Mar
Apr
May
Jun
4-18
Example: Chase Strategy
4-19
Example: Level Strategy
4-20
Example: Mixed Strategy
4-21
Roofing Supplier Example 1

Production
Days
Demand Per Day

(computed)
Month
Expected Demand
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
Total expected demand

Average
=
Number of production days
requirement
6,200
=
= 50 units per day
124
Table 13.2
2011 Pearson Education,

Inc. publishing as Prentice Hall
4-22
Production rate per working day

Forecast demand
70
60
Level production using average

monthly forecast demand
50
40
30
0
Jan
Feb
Mar
Apr
May
June
22
Figure 13.3
18
21
21
22
20
= Month
= Number of
working days
4-23

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
Table 13.3
Pla
f o rce
k
r
o
w
tant
s
n
o
c
n1
4-24

Production
at 50 Units
Month
Days cost per Day
Inventory
carrying
Cost Information
Production
Jan
22 cost per unit 1,100
Subcontracting
Feb
18
900
Average
pay rate
Mar
21
1,050
Overtime pay rate
Apr
21
1,050
Labor-hours
to
May
22produce a unit1,100
Monthly
Demand Inventory
Ending
Forecast
Inventory
$ 5 perChange
unit per month
900
200
$20 per +200
unit
700
$10 per +200
hour ($80 per400
day)
800
650
$17 per +250
hour
8 hours per 500
day)
1,200 (above-150
1.6 hours
per unit
1,500
-400
$300 per-100
unit
Cost
Juneof increasing
20 daily production
1,000 rate1,100
(layoffs)
$600 per unit
100
0
1,850
Total units of inventory carried over from one nt w orkforce

nsta = 1,850 units
onext
Table 13.3
c
month
to
the
1
Plan
Workforce required to produce 50 units per day = 10 workers
4-25

Production
Monthly
Calculations
at 50 Units
Demand Inventory
Ending
Month
Days cost per Day
Inventory
$ 5 perChange
unit per
month
Inventory
carrying
Inventory
carrying
$9,250 Forecast
(= 1,850
units
carried
x $5
Cost Information
Costs
Production
per
unit)
900
$20
per +200
unit
Jan
22 cost per unit 1,100
Subcontracting
Feb
18labor
900
Regular-time
99,200
Average
pay rate
Mar
21
1,050
Overtime pay rate
Other
(overtime,
Apr costs 21
1,050
hiring, layoffs,
Labor-hours
to
May
22produce a unit1,100
subcontracting)
200
400
(=700
10
$80per
per
$10workers
per +200
hour x($80
day)
day
x 124hour
days)
800
650
$17 per +250
8 hours per 500

day)
1,200 (above-150
1.6 hours
per unit
1,500
-400
100
$300 per-100
unit
Cost
Juneof increasing
20 daily production
1,000 rate1,100
(hiring
and training)
Total
cost
$108,450
(layoffs)
$600 per unit
0
1,850
Total units of inventory carried over from one nt w orkforce

nsta = 1,850 units
onext
Table 13.3
c
month
to
the
1
Plan
Workforce required to produce 50 units per day = 10 workers
4-26

7,000
Cumulative demand units
6,000
Reduction
of inventory
5,000
4,000
3,000
6,200 units
Cumulative level
production using
average monthly
forecast
requirements
2,000
1,000
Cumulative forecast
requirements
Excess inventory
Jan
Figure 13.4
Feb
Mar
Apr
May
June
4-27

Production
Days
Demand Per Day

(computed)
Month
Expected Demand
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
sub
2
n
a
Pl
tin g
c
a
r
t
n
co
Table 13.2
Minimum requirement = 38 units per day

4-28

Forecast demand
70
60
Level production
using lowest
monthly forecast
demand
50
40
30
0
Jan
Feb
Mar
Apr
May
June
22
18
21
21
22
20
= Month
= Number of
working days
4-29

Cost Information
$20 per unit
Average pay rate
Overtime pay rate
$17 per hour

1.6 hours per unit

$300 per unit

(layoffs)
$600 per unit
Table 13.3
4-30

Cost Information
Inventory carry cost
In-housecost
production
Subcontracting
per unit
Average pay rate
Overtime pay rate
= 38$10units
per day
per unit
x $124
5 perdays
hour ($40 per day)
$ 7 perunits
hour
= 4,712
Labor-hours
to produce a unit
Subcontract
units
1.6 hours
per unit
= 6,200
- 4,712
$300 per unit
=
1,488
units
(layoffs)
$600 per unit
Table 13.3
4-31

Cost Information
Inventory carry cost
In-housecost
production
Subcontracting
per unit
Average pay rate
Overtime pay rate
= 38$10units
per day
per unit
x $124
5 perdays
hour ($40 per day)
$ 7 perunits
hour
= 4,712
Labor-hours
to produce a unit
Costs Subcontract
units
1.6 hours
per unit
= Calculations
6,200
- 4,712
$300
per unit x $80 per
Cost
of increasing
daily production
rate
Regular-time
labor
$75,392
(=
7.6 workers
=
1,488
units
day x 124 days)
unitx $20 per

Cost
of decreasing daily production
Subcontracting
29,760rate (= $600
1,488per
units
(layoffs)
unit)
Table 13.3
Total cost
$105,152
4-32

Production
Days
Demand Per Day

(computed)
Month
Expected Demand
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
iring
h
3
Plan
ffs
o
y
a
l
d
an
Table 13.2
Production = Expected Demand

4-33

Forecast demand and
monthly production
70
60
50
40
30
0
Jan
Feb
Mar
Apr
May
June
22
18
21
21
22
20
= Month
= Number of
working days
4-34

Cost Information
$20 per unit
Average pay rate
Overtime pay rate
$17 per hour

1.6 hours per unit

$300 per unit

(layoffs)
$600 per unit
Table 13.3
4-35

Basic
Production
Cost
Inventory carrying
cost (demand
Daily
x
Forecast
Prod
1.6 hrs/unit x
Subcontracting
cost
Month
(units)
Rate per unit
$10/hr)
Cost Information
Extra Cost$of
5 perExtra
unitCost
perofmonth
Increasing
Decreasing
Production
Production
$10 per(layoff
unitcost) Total Cost
(hiring cost)
41
$ 14,400
$ 5 per hour
day)
($40 per
$ 14,400
Feb
700
Overtime
pay rate39
11,200
$ 7 per hour
$1,200
12,400
(= 28xhours
$600) per day)
(above
Mar
800 to produce
38
Labor-hours
a 12,800
unit
$600
1.6 hours
per
unit
(= 1 x
$600)
Average
pay
Jan
900 rate
13,400
Cost
of increasing
daily production
rate
$5,700 $300 per unit
Apr
1,200
57
19,200
(= 19 x $300)
24,900
$3,300 $600 per unit

May of decreasing
1,500
68daily production
24,000
Cost
rate
(= 11 x $300)
(layoffs)
24,300
June
1,100
Table 13.3
55
17,600
$7,800
(= 13 x $600)
25,400
$99,200
$9,000
$9,600
$117,800
Table 13.4

4-36
Comparison of Three Plans

Cost
Plan 1
Plan 2
Inventory carrying
$ 9,250
Regular labor
99,200
75,392
99,200
Overtime labor
Hiring
9,000
Layoffs
9,600
Subcontracting
29,760
$108,450
$105,152
$117,800
Total cost
Plan 2 is the lowest cost option
Plan 3
$
Table 13.5

4-37
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
4-38
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
4-39
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

4-40
Summary of Aggregate
Planning Methods
Techniques
Graphical
methods
Solution
Approaches
Trial and
error
Transportation
Optimization
method of linear
programming
Important Aspects
Simple to understand and
easy to use. Many
solutions; one chosen
may not be optimal.
LP software available;
permits sensitivity
analysis and new
constraints; linear
functions may not be
realistic.
Table 13.8
4-41
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
4-42
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
4-43
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
4-44
Defining Product Families
4-45
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
4-46
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
4-47
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?
4-48
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.
4-49
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.
4-50
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)
4-51

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Manufacturing

Planning and Control

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

Sales and Operations

SOP provides the key communication links for

Sales & Operations

The role of SOP is to balance supply and demand

units by product line, dollar

SOP Process Key

Information can be conveyed in

(monthly forecast, cumulative

SOP Tabular Display

A spreadsheet with these calculations

A spreadsheet with these calculations

Karma strateji (Mixed

Example: Chase Strategy

Example: Level Strategy

Example: Mixed Strategy

Roofing Supplier Example 1

Demand Per Day

Total expected demand

2011 Pearson Education,

Production rate per working day

Roofing Supplier Example 1

Level production using average

Roofing Supplier Example 2

$ 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

Labor-hours to produce a unit

1.6 hours per unit

Cost of increasing daily production rate

$300 per unit

Cost of decreasing daily production rate

$600 per unit

Roofing Supplier Example 2

$600 per unit

Total units of inventory carried over from one nt w orkforce

Roofing Supplier Example 2

8 hours per 500

$600 per unit

Total units of inventory carried over from one nt w orkforce

Roofing Supplier Example 2

Cumulative demand units

Roofing Supplier Example 3

Demand Per Day

Minimum requirement = 38 units per day

Production rate per working day

Roofing Supplier Example 3

Roofing Supplier Example 3

$ 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

Labor-hours to produce a unit

1.6 hours per unit

Cost of increasing daily production rate

Chap004-Sales & Operations Planning R1

Chap004-Sales & Operations Planning R1