Sales and Operations

Planning
(Aggregate Planning)
 Sales and Operations
Planning
• Strategic and tactical
considerations

• Top-down planning

• Bottom-up planning

• Optimization techniques
 Back to Pennington Cabinet

• Strategic Capacity Level:

Five machines, nine assembly teams
• Company produces make-to-stock
cabinets for sale at Lowe’s, etc.
• Effective capacity:
5,000 jobs per year
OR
about 420 jobs per month
 Pennington (continued)
Raw Demand for next 6 months:
January 150 jobs
February 250
March 350
April 450
May 600
June 650
What are our options . . . ?
 Pennington (again) . . .
Raw Demand
600 Need 450

Monthly capacity = 420

300

April
 Sales and Operations
Planning (SOP)
• Purpose: Select capacity options
over the intermediate time horizon
• Capacity options:
– Workforces
– Shifts
– Overtime
– Subcontracting
– Inventories
– etc.
 Time Horizon View . . .

Short-Range Plan SOP Long-Range Plan

(days, weeks out) (months out) (years out)

Capacity levels Changes in Changes in

considered adjustable fixed
“frozen” in the capacity capacity
short-term possible possible
 SOP continued
(2 - 18 months out)
• Outside of time frame  strategic planning
• Inside of time frame  tactical planning

“Big Picture” approach to planning

• Families or groups (aggregation) of:
– Products
– Resources
– Technologies or skills
• Provide “rough” estimates
 Position in the Overall
Business Planning Cycle
Decisions Time Frame
Product and process 18+ months
Long-Range
“Bricks and Mortar”
Plans
Employment and overall 2 to 18 months
SOP inventory levels
What demand to meet?
Specific products and times Less than 2 months
Short-Range Scheduling of people and
Plans equipment
 Inputs to the Process

Strategic Capacity Levels
 Existing buildings
 Processes
Demand Management
 Forecasts of customer
demand
 Need for spares, etc.
 Pricing

SOPs

External Capacities
 Suppliers
 Subcontractors
 Advantages of SOP

• Negotiated process
– “Agreed” demand

• Functional coordination
– Budgets and cash flow analyses

• Reduces operations task to

“meeting the plan”
 SOP Approaches
Top-Down Bottom-Up
• Similar products OR • Different products AND
stable mix unstable mix

• Standards available for • Requires forecasts and

planning production data for
individual products
– time, cost requirements
from history and/or
planning documentation • Can be extremely data-
intensive
• Can “Average” product
 Top-Down Planning
1. Develop the aggregate sales forecast
and planning values.
2. Translate the sales forecast into
resource requirements.
 Personnel, equipment, materials
3. Generate alternative production plans.
 Chase, level, mixed
4. Select the best of the plans.
 Lowest cost, best fit to capability
 Top-Down Example I
(Product Data)
Product % of Total Labor/Unit
A100 10% 40 hours
B200 50% 20 hours
C300 20% 15 hours
D400 5% 10 hours
E500 10% 20 hours
F600 5% 10 hours
 Top-Down Example II
(“Average” Products)

Product % of Total Labor/Unit

A100 10% 40 hours
B200 50% 20 hours
C300 20% 15 hours
D400 5% 10 hours
E500 10% 20 hours
F600 5% 10 hours

10%(40) + 60%(20) + 20%(15) + 10%(10) = 20 hours

 Top-Down Example III
(Conditions or Constraints)

• Agreed upon demand to be met for

upcoming 12 month period
• Can vary workforce and inventory levels
• No backordering
• “Average” unit requires 20 worker hours
• Each worker works 160 hours per month
 Top-Down Example IV
(Demand Forecast for 12 months)
Month Demand Month Demand
March 1592 September 2504
April 1400 October 2504
May 1200 November 3000
June 1000 December 3000
July 1504 January 2504
August 1992 February 1992
 Top-Down Example V
(Other tidbits of data …)

• Hiring cost = $300

• Firing cost = $200

• Inventory holding cost = $6 / unit / month

• Start and end with 227 workers (goal)

• Start and end with about 1000 units in

inventory (goal)
 Detail of First Six Months
from Level Strategy
Demand in Employees to
Employee Meet Actual Actual Ending
Month Demand Hours Production Plan Employees Production Firings Hirings Inventory

March 1592 31840 199 252 2016 0 25 1424

April 1400 28000 175 252 2016 0 0 2040

May 1200 24000 150 252 2016 0 0 2856

June 1000 20000 125 252 2016 0 0 3872

July 1504 30080 188 252 2016 0 0 4384

August 1992 39840 249 252 2016 0 0 4408

Note: We develop a level strategy by setting “Actual Employees”

equal to the average required for the 12 month planning period
 Detail of First Six Months
from Chase Strategy
Demand in Employees to
Employee Meet Actual Actual Ending
Month Demand Hours Production Plan Employees Production Firings Hirings Inventory

March 1592 31840 199 199 1592 28 0 1000

April 1400 28000 175 175 1400 24 0 1000

May 1200 24000 150 150 1200 25 0 1000

June 1000 20000 125 125 1000 25 0 1000

July 1504 30080 188 188 1504 0 63 1000

August 1992 39840 249 249 1992 0 61 1000

Note: We develop a chase strategy by setting “Actual

Employees” equal to the number needed in each period
 Cumulative Production

10000
15000
20000
25000
30000

0
5000
ar
ch
Ap
ril
M
ay
Ju
ne
Ju
ly
Au
Se gus
pt t
Level SOP

em
be
O r
ct
ob
No er
ve
m
De be
ce r
m
Chase SOP

be
Ja r
Another View ...

nu
a
Fe ry
br
ua
ry
 Cost Details from the
Spreadsheets ...
Cost of current plan: $205,844

Level strategy Firing: Hiring: Inventory:

Totals: 25 25 32224
Costs: $5,000 $7,500 $193,344

Cost of current plan: $197,000

Chase strategy Firing: Hiring: Inventory:

Totals: 250 250 12000
Costs: $50,000 $75,000 $72,000
 Top-Down Example
(Other Issues …)

• Are complete costs shown?

– Expand out for budget and cash flow analysis
• “Input” (suppliers) and “output” (logistics
and warehousing) considerations
– Lead time, materials availability, storage
space?
• Variations in actual production
– Scrap, rework, equipment breakdowns
 Top-Down Example
(Expand the options …)
We can now subcontract production
• Maximum subcontract of 1400 units per month
• Cost is $5 more per unit than internal
production cost
• Will this option:
– 1) increase costs?
– 2) decrease costs?
– 3) have no effect on costs?
 Second Approach:
“Bottom-Up” SOP

• Products with very different

requirements

• Requires forecasts and production

data for individual products

• Can be extremely data-intensive

 Iterative Approach
(Similar to Top Down)
Develop Production
Plans for Distinct
Families or Otems
NO

Determine
Total
Load

Check feasibility:
– Bottleneck processes
– Key suppliers
Feasible? YES Implement Plan
– Other resources (cash)
 Detail from Bottom Up
Plan
Bill of Labor CSEs Home Gyms

Assembly 50 2

Painting 2 3
Hours of Assembly Hours of Painting
Month CSEs Home Gyms Assembly Maximum Painting Maximim
January 30 200 1900 2200 660 750
February 25 205 1660 2200 665 750
March 20 210 1420 2200 670 750
April 15 215 1180 2200 675 750
May 20 210 1420 2200 670 750
June 50 180 2860 2200 640 750
Total: 160 1220
 … and Load Profile for
Assembly
Assembly Load Profile

3500

3000

2500

2000 Assembly
Max.
1500

1000

500

0
1 2 3 4 5 6
 Smoothing Production in
April, May, and June . . .
Bill of Labor CSEs Home Gyms
Assembly 50 2
Painting 2 3
Hours of Assembly Hours of Painting
Month CSEs Home Gyms Assembly Max. Painting Max
January 30 200 1900 2200 660 750
February 25 205 1660 2200 665 750
March 20 210 1420 2200 670 750
April 25 215 1680 2200 695 750
May 30 210 1920 2200 690 750
June 30 180 1860 2200 600 750
Total: 160 1220

NOTE: Total production over the six months isn’t changing, just the timing
 … and the New Load
Profile
Assembly Load Profile

2500

2000

1500
Assembly
Max.
1000

500

0
1 2 3 4 5 6
 Options for Services
 Smooth out demand:
Appointments
Discounts and promotions
Seasonal complements
 Tiered workforce:
Full-time and part-time
Customer involvement
 Minimize on-line activities
 Self-Test
 Go into SOP.xls and try to develop a aggregate
production plan with lower costs than either the pure
chase or pure level strategies. Do this by varying
the actual workforce in place, making sure you keep
inventory levels above 0 at all times.

 Suppose firing and hiring costs were to double while

inventory holding cost per unit was cut in half. How
do you think this would affect the relative
attractiveness?
 Advanced Topic:
Optimization Modeling

• What is optimization modeling?

• Essential conditions

• Application to operations problems

 Optimization Modeling

Family of mathematical techniques

used to allocate limited resources
among competing demands in an
optimal way

What is our financial objective?

What are our constraints?
 Optimization Example 1

Product mix:

Find the product mix that will

maximize revenue, given limits on
materials, labor hours, and machine
hours available
 Optimization Example 2

SOP:

Find the workforce and inventory

levels which will minimize hiring,
firing, and inventory costs while still
meeting demand.
 Optimization Example 3
Transportation Problem:
Minimize the cost of shipping items from
different plants to different stores

150 100

Plants Stores
300 200

150 300
 Optimization Example 4
Material Yield:
Minimize the amount of scrap
generated by cutting steel, fabric,
Scrap
wood, etc. Material
 Optimization
Essential Conditions I
1. Explicit objective
 Maximize revenue or profit
 Minimize costs
2. Some constraint(s)
 Resource limits
 Demand requirements
 Optimization
Essential Conditions II
3. Conditions can be expressed
mathematically
Revenue = $1000X
Variable cost = $310X
Assembly hours needed = 15X
4. Divisibility
OK to make half a unit or hire two
thirds of an individual
 SOP Optimization

Two major types of problems

1. Maximize profit or revenues subject
to resource constraints

2. Minimize costs subject to demand

requirements
 Maximization Problem I
1. CSE: $1000 per unit
Home Gym: $150 per unit
2. Labor requirements:

Assembly Painting
CSE 50 2
Home Gym 2 3
 Maximization Problem II
3. Hours available per month

Assembly 2200 hours

Painting 750 hours

4. Sales of home gyms limited to 150

per month
 In mathematical form:
(CSE  C, Home Gym  H)
Maximize: $1000C + $150H

Subject to the following conditions:

50C + 2H < 2200 (Assembly hours constraint)

2C + 3H < 750 (Painting hours constraint)

H < 150 (Demand limit on home gyms)

C, H > 0 (think about it!)

 Bottom Up Plan to Allocate
Capacity to Maximize Profits
Revenue: $ -

Maximum
Labor Requirements that can be Actual
Before Assembly Painting Price sold per Production

Solving CSEs 50 2 $ 1,000 10000 0

Home Gyms 2 3 $ 50 150 0

Hours Actual Slack

Available Hours Hours
Assembly 2200 0 2200
Painting 750 0 750
 Bottom Up Plan to Allocate
Capacity to Maximize Profits
Revenue: $ 45,500

Maximum
Labor Requirements that can be Actual
and Assembly Painting Price sold per Production

After CSEs 50 2 $ 1,000 10000 38

Home Gyms 2 3 $ 50 150 150
Solving
Hours Actual Slack
Available Hours Hours
Assembly 2200 2200 0
Painting 750 526 224
 Key Points
• This is the most revenue we could
generate, given the constraints
• “No slack” assembly time, Home gym
demand
• More painting time or more CSE demand
wouldn’t change anything
• More constraints can only make the
problem more difficult, fewer constraints
can only help
 Minimization Problem
SOP:
“Meet the production plan with the
minimum total hiring, firing, and
inventory cost”
• Take earlier SOP problem and solve using
optimization techniques.
• Can you figure out how the problem would
be defined?
 Highlight from
Optimization Solution
Unit Demand Employees Production Hirings Firings Inventory
227.0 1000.0
1592.0 147.4 1179.2 0.0 79.6 587.2
1400.0 147.4 1179.2 0.0 0.0 366.4
1200.0 147.4 1179.2 0.0 0.0 345.6
1000.0 147.4 1179.2 0.0 0.0 524.8
1504.0 147.4 1179.2 0.0 0.0 200.0
1992.0 301.0 2408.0 153.6 0.0 616.0
2504.0 331.0 2648.0 30.0 0.0 760.0
2504.0 331.0 2648.0 0.0 0.0 904.0
3000.0 331.0 2648.0 0.0 0.0 552.0
3000.0 331.0 2648.0 0.0 0.0 200.0
2504.0 331.0 2648.0 0.0 0.0 344.0
1992.0 331.0 2648.0 0.0 0.0 1000.0
227.0 0.0 104.0

Annual Cost = $130,200

(Note: Solution didn’t let inventory go below 200)
 What to Take Away from this ...

• Essential conditions:
Explicit objective
Constraints
Linearity
Divisibility
• Write out an objective function or
constraint for simple problem
• Interpret simple results