Sales and Operations Planning

Chapter 14

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How Sales and Operations Planning fits the Operations Management Philosophy

Operations As a Competitive Weapon Operations Strategy Project Management

Process Strategy Process Analysis Process Performance and Quality Constraint Management Process Layout Lean Systems

Supply Chain Strategy Location Inventory Management Forecasting Sales and Operations Planning Resource Planning Scheduling

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Planning at Whirlpool
Whirlpool begins production of room air conditioners in the fall and holds them as inventory until they are shipped in the spring. Building inventory in the slack season allows the company to even out production rates over much of the year and still satisfy demand in the peak periods. However, when summers are hotter than usual, demand increases dramatically and stockouts can occur. If Whirlpool increases its output and the summer is hot, it stands to increase its sales and market share. But if the summer is cool, the company is stuck with expensive inventories. Whirlpool prefers to make its production plans based on the average year, taking into account industry forecasts for total sales and traditional seasonalities.
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Sales and Operations Planning

Sales and operations planning (S&OP): The process of planning future aggregate resource levels so that supply is in balance with demand. Staffing plan: A sales and operations plan of a service firm, which centers on staffing and other human resourcerelated factors. Production plan: A sales and operations plan of a manufacturing firm, which centers on production rates and inventory holdings.
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Aggregation
The sales and operations plan is useful because it focuses on a general course of action, consistent with the companys strategic goals and objectives, without getting bogged down in details. Product family: A group of customers, services, or products that have similar demand requirements and common process, labor, and materials requirements. A company can aggregate its workforce in various ways as well, depending on its flexibility. The company looks at time in the aggregate months, quarters, or seasonsrather than in days or hours.
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The Relationship of Sales and Operations Plans to Other Plans

A financial assessment of an organizations near future (1 or 2 years ahead) is called either a business plan (in for-profit firms) or an annual plan (in nonprofit services). Business plan: A projected statement of income, costs, and profits. Annual plan or financial plan: A plan for financial assessment used by a nonprofit service organization.
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The Relationship of Sales and Operations Plans to Other Plans

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The Decision Context

Information inputs to Sales and Operations plans
Business or Annual plan Operations Strategy Capacity Constraints Demand Forecast
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Managerial Inputs from Functional Areas to Sales and Operations Plans

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Plan Objectives
Six objectives usually are considered during development of a plan:
1. Minimize Costs/Maximize Profits

2. Maximize Customer Service

3. Minimize Inventory Investment 4. Minimize Changes in Production Rates

5. Minimize Changes in Workforce Levels

6. Maximize Utilization of Plant and Equipment
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Reactive Alternatives
Reactive alternatives are actions that can be taken to cope with demand requirements. Anticipation inventory is inventory that can be used to absorb uneven rates of demand or supply. Workforce adjustment: Hiring and laying off to match demand. Workforce utilization: Use of overtime and undertime. Vacation schedules: Use of plant-wide vacation period, vacation blackout periods.
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Reactive Alternatives
Subcontracting: Outsourcing to overcome short-term capacity shortages. Backlogs, Backorders, and Stockouts:
Backlog: An accumulation of customer orders that have been promised for delivery at some future date. Backorder: A customer order that cannot be filled immediately but is filled as soon as possible. Stockout: An order that is lost and causes the customer to go elsewhere.

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Aggressive Alternatives
Aggressive alternatives are actions that attempt to modify demand and, consequently, resource requirements. Complementary products: Services or products that have similar resource requirements but different demand cycles. Creative Pricing: Promotional campaigns designed to increase sales with creative pricing.
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Planning Strategies
Chase strategy: A strategy that involves hiring and laying off employees to match the demand forecast. Level-utilization strategy: A strategy that keeps the workforce constant, but varies its utilization to match the demand forecast. Level-inventory strategy: A strategy that relies on anticipation inventories, backorders, and stockouts to keep both the output rate and the workforce constant. Mixed strategy: A strategy that considers and implements a fuller range of reactive alternatives than any one pure strategy.
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Hallmark Strategy
Hallmark spends considerable resources to effectively produce and distribute more than 40,000 different products through 43,000 retail outlets in the United States alone. Hallmark has never used layoffs to adjust production rates. Employee flexibility is the key to this strategy. Hallmark follows a philosophy of retraining its employees continually to make them more flexible. To keep workers busy, Hallmark shifts production from its Kansas City plant to branch plants in Topeka, Leavenworth, and Lawrence, Kansas, to keep those plants fully utilized. It uses the Kansas City plant as its swing facility. When demand is down, Kansas City employees may take jobs in clerical positions, all at factory pay rates. They might also be in classrooms learning new skills.
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Constraints and Costs

The planner usually considers several types of costs when preparing sales and operations plans.
1. Regular-Time Costs: These costs include regular-time wages plus contributions to benefits, Social Security, retirement funds, and pay for vacations and holidays. 2. Overtime Costs: Overtime wages typically are 150 percent of regular-time wages. 3. Hiring and Layoff Costs: Include the costs of advertising jobs, interviews,training programs, exit interviews, severance pay, and lost productivity. 4. Inventory Holding Costs 5. Backorder and Stockout Costs
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Data for Applications 14.1-14.3

The Barberton Municipal Division of Road Maintenance is charged with road repair in the city of Barberton and surrounding area. Cindy Kramer, road maintenance director, must submit a staffing plan for the next year based on a set schedule for repairs and on the city budget. Kramer estimates that the labor hours required for the next four quarters are 6,000, 12,000, 19,000, and 9,000, respectively. Each of the 11 workers on the workforce can contribute 520 hours per quarter. Overtime is limited to 20 percent of the regular-time capacity in any quarter. Subcontracting is not permitted. Payroll costs are $6,240 in wages per worker for regular time worked up to 520 hours, with an overtime pay rate of $18 for each overtime hour. Although unused overtime capacity has no cost, unused regular time is paid at $12 per hour. The cost of hiring a worker is $3,000, and the cost of laying off a worker is $2,000.
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Chase Strategy
Application 14.1

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Level-Utilization Strategy
Application 14.2

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Mixed Strategy
Application 14.3

Key Ideas: Hire only 7 in quarter 3, making maximum use of overtime to compensate. Reduce the amount of undertime in quarter 3. Reduce the layoffs required in quarter 4.
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Sales and Operations Planning as a Process

Sales and operations planning is a decision-making process, involving both planners and management. The process itself, typically done on a monthly basis, consists of six basic steps.

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Decision Support Tools

Spreadsheets can be used, including ones that you develop on your own.
Input values Derived values Utilized time Calculated values

The Transportation method of production planning to solve production planning problems assumes that a demand forecast is available for each period, along with a possible workforce adjustment plan.
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Spreadsheet
4-period Worksheet

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Spreadsheet
6-period Worksheet

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Planning Using a Spreadsheet

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S&OP Spreadsheet for a Make-to-Stock Family

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The Transportation Method

a special case of linear programming
Obtain the demand forecast for each period to be covered by the sales and operations plan and identify the initial inventory level currently available that can be used to meet future demand. Select a candidate workforce adjustment plan and specify the capacity limits of each production alternative. Estimate the cost of holding inventory, and the cost of possible production alternatives. Input the information gathered in steps 1-3 into a computer routine that solves the transportation problem. Repeat the process with other plans for regular-time, overtime, and subcontracting capacities until you find the solution that best balances cost and qualitative considerations.
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The Transportation Method

Example 14.2
The Tru-Rainbow Company produces a variety of paint products. Demand is highly seasonal. Current inventory is 250,000 gallons, and ending inventory should be 300,000 gallons. Regular-time cost is $1.00 per unit, overtime cost is $1.50 per unit, subcontracting cost is $1.90 per unit, and inventory holding cost is $0.30 per gallon per quarter. Determine the best production plan.
Quarter

Maximum overtime in any quarter is 20 % of regular-time capacity. The subcontractor can supply a maximum of 200,000 gallons per quarter. Production can be subcontracted in one period and the excess held in inventory for a future period to avoid a stockout. No backorders or stockouts are permitted.
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Input Data for Prospective Tru-Rainbow Company Production Plan

Transportation Tableau for Tru-Rainbow Company

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Solution for Tru-Rainbow Company Production Plan

The first row shows that 230 units of the initial inventory are used to help satisfy the demand in quarter 1. The remaining 20 units in the first row are earmarked for helping supply the demand in quarter 3. The sum of the allocations across row 1 (230 + 0 + 20 + 0) does not exceed the maximum capacity of 250, given in the right column so there is unused capacity
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Solution for Tru-Rainbow Company Production Plan

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Solution for Tru-Rainbow Company Production Plan

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Application 14.4
The Bull Grin Company makes an animal-feed supplement. Sales are seasonal, but Bull Grin's customers refuse to stockpile the supplement during slack sales periods; they insist on shipments according to their schedules to stockpile the supplement during slack sales periods and wont accept backorders. The reactive alternatives that they use, in addition to work-force variation, are regular time, overtime, subcontracting, and anticipation inventory. Backorders are not allowed. Bull Grin employs workers who produce 1,000 pounds of supplement for $830 on regular time and $910 on over-time. Holding 1000 pounds of feed supplement in inventory per quarter costs $100. There is no cost for unused regular-time, overtime or subcontracting capacity.
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Transportation Method
Application 14.4

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Transportation Method
Application 14.4

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Bull Grin Company Production, Shipments, and Inventories

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Bull Grin Company Production, Shipments, and Inventories

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Total Cost of Bull Grin Company Plan

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Solved Problem 1
The Cranston Telephone Company employs workers who lay telephone cables and perform various other construction tasks. Each worker puts in 600 hours of regular time per planning period and up to 100 hours overtime. Above is the estimate of the workforce requirements over the next four planning periods: Regular-time wages are $6,000 per employee per period for any time worked up to 600 hours, and $15 per hour over 600 hours. Hiring a new employee costs $8,000. Layoff costs are $2,000 per employee. Currently, 40 employees work for Cranston in this capacity. No delays in service, or backorders, are allowed. Using the spreadsheet approach, prepare a chase strategy using only hiring and layoffs. What are the total numbers of employees hired and laid off? Develop a workforce plan that uses the level-utilization strategy. Maximize the use of overtime during the peak period so as to minimize the workforce level and amount of undertime. Propose an effective mixed-strategy plan. Compare the total costs of the three plans.
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Chase Strategy
The chase strategy workforce is calculated by dividing the demand for each period by 600 hours. This strategy calls for a total of 20 workers to be hired and 40 to be laid off during the four-period plan.

Total cost of the chase strategy is $1,050,000.

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Level-Utilization Strategy
The level-utilization strategy calls for three employees to be hired in the first quarter and for none to be laid off.

Total cost of the Level-Utilization Strategy is $1,119,000.

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Mixed Strategy
The mixed-strategy plan uses a combination of hires, layoffs, and overtime to reduce total costs. The workforce is reduced by 5 at the beginning of the first period, increased by 8 in the third period, and reduced by 13 in the fourth period. The plan was developed by trial and error. Additional improvements to the mixed strategy are possible.

Total cost of this Mixed Strategy is $1,021,000

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