Transcript 413ch4
4. Sales and Operations Planning
Homework problems: 1,2,3,4,5,10,11,18.
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4.1. Sales and Operations Planning
Sales and operations planning is a process that provides management with the ability to strategically direct its business to achieve competitive advantage. The process brings together all the plans for business (sales, marketing, financial, manufacturing, sourcing, product development) into one integrated set of plans by product group/family.
Sales and operations plan (S&OP) is an agreed-upon plan that comes from the planning process. It is developed at the product family level and forms the basis for shorter term manufacturing plans. Sales and operations planning could precede/direct MPC decision making or it could be affected by other MPC systems. Fig. 4.1
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4.1. Sales and Operations Planning in the Firm
From the manufacturing perspective, operations (production) plan is the planned production; it is
not
a forecast of demand. It specifies the overall level of manufacturing output planned to be produced, usually stated in terms of aggregate units of output per month for each product family. Various units of measure can be used to express the plan: units, tonnage, standard hours, # of workers, etc.
Within an agreed-upon operations plan, manufacturing is responsible for “hitting the plan.” Sales and operations plan (S&OP) is called “top management’s handle on the business” as it provides the critical links to activities outside MPC system boundaries, and provides important visibility of the critical interactions between sales, marketing, production, and finance.
Fig. 4.1
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4.1. Sales and Operations Planning in the Firm
The four fundamentals in sales and operations planning are demand, supply, volume, and mix.
Assuring the balance between demand and supply through effective coordination of the plans (sales vs. operations) of the different functional area with the active top management involvement.
Volume concerns overall sales rates, production rates, aggregate inventories, and order backlogs.
Once the volume decision is made, mix concerns detailed decisions about which individual products to make, in what sequence, and for which customer orders. 4
4.1. Sales and Operations Planning in the Firm
One of the major payoffs of S&OP is better integration between functional areas. Suppose that actual inventory levels do not agree with planned inventory levels and production does hit the plan (schedule), what could be the problem?
Marketing/sales → Demand management → Recall marketing/manufacturing classical conflicts Without the S&OP, the job will or may get done but at the expense of extra inventory, excess capacity, longer lead time, poor customer service, missed new sales opportunities, etc.
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Classical Marketing/Manufacturing Conflict
1. Capacity planning and long range sales forecasting 2. Production scheduling 3. Delivery and distribution 4. Quality assurance 5. Breadth of product line 6. Cost control
Marketing Orientation (customer focus) Manufacturing Orientation (efficiency/cost focus)
Excess capacity is costly Stability Inventory to smooth production High quality is difficult unless features are simple Narrow Blame unreasonable marketing demands 7. New product introduction New products provide production turmoil 6
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4.1. The Sales & Operations Planning Process
Not all sales and operations planning process are the same. Fig.4.2
Run the sales forecasting reports
: updating forecast/actual sales, plan/actual production, and plan/actual inventories, etc. after the month end.
Demand planning
: considering the actual sales, production, and inventories from the past month to develop a new management forecast (sales, production, inventory) for the next 12 months, override the statistical forecasts when appropriate, by involving senior marketing and sales management in the process.
Supply/capacity planning
: check capacity/resource availability for the newly developed SOP and modify operations plan, if necessary.
The pre-SOP meeting
: involving various functional departments to resolve problems, identify areas that need top management intervention /decision.
The executive SOP meeting
: finalize SOP, authorize spending, reach consensus, assess the impact of SOP on business plan, and performance.
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4.1. The Sales & Operations Planning Process
Considering the chase, level, and mixed operations plan (Figures 4.3 through 4.7 and 4.10) Basic tradeoffs: Costs of changing workforce level (hiring & firing), hours worked (over & under time), subcontract Inventory carrying costs Backorder costs Level strategy can be either constant workforce or constant work hours (variable workforce) Example. Problem #2 on page 113.
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Figure 4.5 Chase Plan explanations
In October:
1. Sales=$30 per unit. Thus, $10 millions=333k units ($10 m/$30)
.
2. Operations: employee productivity= 8 units/day; 22 days in October. Thus, 333k units requires 1892 employees (333k/(8x22). 3. Inventory
:
daily sales for the next period= 400k/20 days=20k units/day. DoS=days of supply=ending Inventory/daily sales=60k/20k=3 DoS. Homework: Check November numbers out!
Note: In the History part, actual Sales and actual Inventory are used, but in the Plan (future) part, expected values are used.
4. In December (history): daily sales for next period=253k/20days=12,650; Days of Supply (DoS)= 215k/12,650=16.99=17 days.
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Figure 4.5 Chase Plan explanations
Past 3 months (history):
1. Sales =
actual sales are short of forecast; cumulative difference of
-
100k is about 40% (100k/253k) of January sales.
2. Operations:
actual exceeded plan, cumulative difference is about 45% (115k/253k) of January operations plan.
3. Inventory
: increased from 3 to 17 days of supply
4. The need to adjust the operations plan to bring sales and operations into balance!!!
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Figure 4.5 Chase Plan explanations
Costs
:
1. Chase Plan
implies that planned operations=planned sales from January to December. Thus, operations plan in January=253k implies 1581 employees (253k/(8x20)).
2. Hires: 144.3 employees = 1,581 – 1,437 (in Dec.); hiring cost=144.3 x $200 = $28,850. 3. Inventory: $6440k x 2%=$128,800; 4. Layoffs in June: 909.1 x $500=$454,545.
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Figure 4.6 Chase with 5 DoS explanations
1. To figure out January operations plan, we calculate daily sales for the next period (Feb.)=280,000/21 days=13,333 units/day. 2. 5 DoS = 5 x 13,333 = 66,666=67k units, which is our ending inventory for January.
3. January operations = 253k(sales) – 216k(beg. Inv.) + 67k (ending Inv.) = 105,000 units.
4. 105,000/(8x20) = 656.25 employees. Thus, layoffs=780.8 (1437-656.25). 5. Layoff cost = 780.8 x $500=$390,375.
6. Inventory cost = $2,000k x 2%=$40,000.
Homework: Check February numbers out !!!
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Figure 4.7 Level Plan explanations
1. Level operations strategy is to maintain a constant workforce. The key task is to figure out how many employees would be required. January numbers: 2. Total production = 4333k (12 months sales) – 215k (beg. Inv.) + 67k (5 DoS ending Inv. in Dec.) = 4185k units. 3. Annual employee output = 8x243 days=1994 units/yr. 4. # of employee needed = 4185k/1994 = 2152.8 employees. 5. Hiring=2152.8-1437 (Dec.)=715.8; cost=715.8x$200=$143160. 6. Operations plan = 2153x8x20 = 344k units.
7. Inventory = 215 (Dec. ending) + 344(Jan. production )- 253 (Jan. sales) = 306k.
8. DoS = 306k/(280/21)= 23 days; (280/21=daily sales in Feb.) Homework: Check February numbers out !!!
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Figure 4.10 Mixed Plan explanations
1. Adding employees in April, July and August and laying off in December to better respond to future demand. 2. Chase and Level are two opposite (and extreme) strategies. Mixed operating plan usually outperform chase and level strategies in total costs. 3. Mixed operating plan can be optimized using Integer Programming.
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Sales
Forecast Actual Diff: Month Cumulative
Operations
(M$) (units) (units) Plan (units) (000$)
History
Oct 12.50
5000 4384 -616 1270 2223 Nov 10.00
4000 3626 -374 -990 Plan (units) (# employ) # Work Days/Mo.
Actual (units) Diff: Month Cumulative 5000 72 23 5649 4000 70 19 4091 649 91 740
Target DoS Inv:
Inventory
1270 2223 Dec
Pla n
Jan 16.25
5.00
6500 6065 2000 -435 -1425 6500 114 19 7279 779 1519
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1270 2223 20 Feb 5.00
2000 Mar 7.50
3000 21 23 Actual (units) Days of Supply 2265 10 2730 15 3944 13 Problem #2 on p. 113 15
4.2. Management Obligations in the SOP Process
Top Management Role
The SOP process is inter-functional and needs to be coordinated at the top management level. SOP is also referred to as the “game planning.” Top management must be committed to the SOP process and establish or modify the performance measurement and reward structure to align them with the sales and operations plan. Recall the traditional performance measure and reward as well as marketing/manufacturing conflicts.
Resolve the trade-offs between functions before the game plan is finalized.
One of the game planning process’ intention is to not only produce coordinated and integrated plans, budgets, objectives, and goals that are used by managers to make decisions but also provide the basis for evaluating performance. 16
4.2. Management Obligations in the SOP Process
Functional Roles
Under the normal situations, the primary obligation for ALL functions is to “hit the plan”. That is, sell what’s in the sales plan, produce what’s in the operations plan; no more and no less.
In the uncertain environment (opportunities and threats), the obligation is to “interface and communicate” so that a mismatch between functions won’t be created. e.g., opportunities for selling more arises, what are the implications for production and finance?
Traditional organizational (functional) units vs. strategic business units (SBUs) 17
SBU SBU is an approach to strategic planning that develops a plan based on products or markets (less on organizational units). A company’s products are typically grouped into SBUs with each SBU evaluated in terms of strengths and weaknesses vis à-vis similar business units made and marketed by competitors. These SBU units are evaluated in terms of their competitive strengths, their relative advantages, life cycle, and cash flow, etc.
e.g., GE’s lighting, appliance, medical, finance, etc.
Dell’s PC, server, printer, etc.
Toyota’s Lexus, Scion 18
Scion tC
(Sports Coupe)
Scion xD
(Subcompact)
Scion xB
(Urban Utility) Standard: AC, power windows/lock, airbags, ABS, remote entry, etc. starting from $12,500 .
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4.2. Management Obligations in the SOP Process
Controlling the Operations Plan
Checking the performance against both sales and operation plans, analyze and communicate the sources of variation.
Periodic Reporting MPS ↔ operations plan, Inventory and backlog, Capacity utilization, Delivery performance, weekly weekly weekly daily Identify source of deviations 20
Problem #15 on p. 119
ABC Sales and Operations Planning Spreadsheet Sales
Forecast Actual Diff: Month (M$) (units) (units) Cumulative
Operations
Plan (# employ) (units) # Work Days/Mo.
History
Apr $22.50
1.50
0.78
-0.72
1.50
75 20 May $25.50
1.70
1.95
0.25
-0.47
1.70
77 22 Jun $28.50
Plan
Jul $31.50
1.90
1.63
-0.27
2.10
-0.74
1.90
86 22 1.39
139 10 Actual Diff: Month Cumulative
Inventory
Plan (units) 1.51
0.01
(units) 250000 (000$) $2,625 1.70
0.00
0.01
250000 $2,625 1.88
-0.02
-0.01
Aug $34.50
2.30
2.92
139 21 Sep $37.50
2.50
3.20
139 23 250000 -459999 $2,625 159001 856001 $0 $1,669,508 $8,988,008 Actual Days of Supply (units) 250001 9.6
250000 3.9
250001 4.6
-6.6
2.1
10.3
Sum 6900000 7506000 54
250001 Beg inv 833333 Tgt inv for DOS in Sept 583333 Additional inv required 7483333 3 month total build 138580 Build per day 139 Implied constant labor 21