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Production planning by spreadsheet for a start-up firm

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Production planning by spreadsheet for a start-up firm

Steve Walton a; Richard Metters a
a
Goizueta Business School, Emory University, Atlanta, GA, USA

Online Publication Date: 01 September 2008

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Planning & Control,19:6,556 — 566
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 Production Planning & Control
Vol. 19, No. 6, September 2008, 556–566

Production planning by spreadsheet for a start-up firm

Steve Walton and Richard Metters*
Goizueta Business School, Emory University, Atlanta, GA, USA
(Received 10 July 2007; final version received 24 June 2008)

Theories on the life cycle of firms combined with stage model theories of information technology adoption
indicate that start-up firms may have different needs than mature firms. In particular, start-up firms’ need for
simplicity, development speed, adaptability, transparency and clarity often trump cost minimisation in the
characteristics looked for in production planning tools.
Here, a case study is presented of a start-up firm with geographically distant suppliers and geographically
dispersed warehouses and customers. Production planning needed to move from Post-it notes to a formal system.
A spreadsheet-based production planning system was custom built that allowed the firm to decide on purchases
and have dynamically adjusted available-to-promise information to help the sales force.
Keywords: MRP; production planning; spreadsheet
Downloaded By: [Metters, Richard] At: 18:07 5 December 2008

1. Introduction After a brief discussion of PEARL’s specific

There comes a time in the life of a successful start-up
firm when the back of the envelope is no longer good
enough. That time came for PEARLProtected
(PEARL) near the end of 2005. PEARL outsourced
the manufacturing of their product to two different
factories in China earlier in the year. Each factory had
different lead times and costs. Selling only within the
USA for now, PEARL set up an East Coast and a
West Coast warehouse – each with vastly different
shipping times from the Chinese factories. Further,
PEARL sells to a number of different customers in
three different market segments, through several
different agents, each with their own view of what
constitutes acceptable lead time.
Questions that were either unanswered or took too
long to answer were fundamental to the business: given
markets with promised but future deliveries,
and inventory on the books but on boats from
China to the USA East Coast, how much inventory
do we really have? Most importantly, can I promise
the customer that I’m on the phone with now the
product they want at the time they want it? In short,
PEARL realised it needed a structured way to
plan production, manage inventory and keep the
sales force informed with accurate and timely avail-
able-to-promise (ATP) data, and it needed this
solution quickly. PEARL solved their problem with a
flexible tool that could be up and running quickly:
the spreadsheet.
business, we turn to the more general question of the
differing needs of information technology systems in
start-up firms. At that point, we will discuss the
specific application at PEARL.
2. PEARL’s business
If you awake to a fire in your home, and your bedroom
is not on the ground floor, the available choices may
not look good. If you cannot get down the staircase,
it’s a jump in the dark from the window onto whatever
surface – be it tree branches, concrete, or a fence – lies
below. PEARL provides an answer for this problem.
PEARL manufactures and sells Permanently-attached
Escape And Rescue Ladders for multi-level homes.
PEARL started business in 2004 by securing the
intellectual property for an escape ladder that is
attached to a metal pan. The metal pan is then
installed in a house inside the wall below a window,
permanently attached to the frame of the house.
During a fire, the case is opened and the ladder
unfurled out the window. Rather than the rope-based
ladders of the past that are difficult to climb even when
one’s life is not at stake, this product has wide metal
steps, providing secure footing for an exit. The product
is named PEARL and is colloquially referred to as a
‘ladder in a box’. A typical installation would include
three PEARL ladders in a home, one for each upstairs
bedroom.

*Corresponding author. Email: richard_metters@bus.emory.edu

ISSN 0953–7287 print/ISSN 1366–5871 online

ß 2008 Taylor & Francis
DOI: 10.1080/09537280802305582
http://www.informaworld.com
 Production Planning & Control
The product is sold into three distinct channels:
direct to builder, building products distributor, and
direct to consumer. Each channel has a different sales
cycle, different price points, different delivery expecta-
tions and different sales methods, and so PEARL has
different people in charge of each segment.
Like most other firms, PEARL needs to determine
some basics: how much to order and when from each
of its suppliers. But the most important problem for
PEARL is to dynamically evaluate ATP to customers.
ATP inventory is the amount that can be promised to
customers on specific dates. Many businesses do not
require ATP logic from their production planning
software since customers purchase what is on the shelf.
However, the major marketing channels for PEARL
purchase for future delivery. For example, a home
builder constructing a development would want, say,
100 units delivered 2 months from the date of
purchase. The units should not arrive sooner, because
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they would both crowd the workplace and become
easy theft targets, nor should they arrive later and hold
up the workflow. Consequently, sales are not straight-
forward – if a customer wants to purchase now, you
can’t just take a look at what’s in the warehouse, as
that inventory already may be promised to another
customer.
3. Needs of start-up firms
In general, research on start-up firms and their
operational decisions is sparse. Shane and Ulrich
(2004) noted that there were only 18 papers on the
entire topic of entrepreneurship in the first 50 years of
the journal Management Science, and the bulk of those
were concerned with finance rather than operations.
This manuscript concerns MRP systems in start-up
firms. On a related but larger topic, Levy and Powell
(1998, p.187) report that ‘there is little research into
information systems for SMEs (Small and Medium
Enterprises).’
However, there are some differences between start-
ups and mature firms that have been the subject of
research. Archibald et al. (2002, p. 1161) stated that
‘(n)ew start-up companies . . . have a different objective
than established companies’. Theories of the life cycle
of the firm (e.g. Sasser et al. 1978, Carman and
Langeard 1980, Wright and Thompson 1986) indicate
that different management styles, human resource
methods and control systems may be appropriate at
different stages of a firm’s growth. In Sasser et al.’s
(1978) view, the entrepreneurial phase is characterised
by a high involvement of the founder in all aspects and
a need for low-cost, experimental processes.
557
The information technology literature echoes this
sentiment, but in a different fashion. It has been
proposed that, even in mature firms, information
technology and systems follow stages of development.
The ‘stage’ theory was elucidated over several publica-
tions (e.g. Nolan 1973, Gibson and Nolan 1974, Nolan
1979). The stage model has become ‘an accepted
description of how changes in organizational informa-
tion systems take place over time’ (King and Kraemer
1984, p. 466). Here, we investigate a firm in the first
stage, which Nolan (1973) terms the ‘initiation’ stage in
its information systems development. In the initiation
phase, information systems are introduced to meet
basic needs and there is minimal planning. More recent
studies echo this theory. Cragg and King (1993) have
documented that firms seek different types of informa-
tion systems at different stages of growth.
We believe that spreadsheets are better adapted
to meet many of these different objectives of start-ups
than the primary alternative: speciality software.
Spreadsheets have strengths and weaknesses as busi-
ness tools. The strengths of spreadsheet applications
tend to match the needs of start-ups. We describe these
briefly here and elaborate below. Specifically, start-up
firms often require high levels of flexibility, transpar-
ency and simplicity from their processes. Quick
implementation is often essential. The weaknesses of
spreadsheets coincide with the needs of larger firms.
Cost minimisation and an ability to deal with highly
complex environments are key needs of large firms.
Saving pennies per unit produced is usually trivial to
a start-up firm, but means millions of dollars per year
to a large firm. Speciality software with complex logic
inherently is better at getting the right-hand side of the
decimal place correct. Larger firms more often have a
significant need to get an infrastructure decision right
the first time, instead of needing a quick decision.
For example, implementing an enterprise resource
planning (ERP) system in a large firm then changing
vendors after 6 months would wreak havoc.
Consequently, the ability to do fast prototyping on a
spreadsheet is not as important. Lastly, transparency is
not as important an issue in large firms that can hire
specialists to deal with complex software.
The workforce of a start-up firm can often be
limited to a small management team or just one person
with an idea. Because of this, expertise does not exist at
all in many sub-functions and expertise is thin in many
major functional areas. Each individual may wear
many hats in the organisation. Babich and Sobel (2004,
p. 936) noted a similar set of responsibilities: ‘for a
small firm, say a start-up, the responsibilities of COO
and CFO are often delegated to a single person or a
small group of people who are obliged to be involved
 558 S. Walton and R. Metters
actively in all types of decisions’. Consequently, there is
a premium on process simplicity and transparency.
Speciality software can be intimidating to those who
are not in the field, creating concerns about where
numbers come from, and unintended consequences of
programming or input errors. Having in-house exper-
tise has been called a ‘critical success factor’ or a
‘determinant of success’ for MRP systems in general
(Burns and Turnipseed 1991). But in small firms in
particular, having in-house expertise has been noted as
important to MRP system success (DeLone 1988, Ang
et al. 2002, Petroni 2002). A large firm may have a
dedicated individual who can take the time to under-
stand all the ins and outs of new software and who uses
an application many times per day. In contrast, a start-up
firm may have an individual running a process as one
of many tasks, and the lack of frequency of use means
that the forgetting curve may dominate the learning
curve. Complex processes that save a few dollars but
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are difficult to operate are not appropriate. Because
spreadsheets are so well known and integrated
throughout the business world, even first-time users
to a spreadsheet application can have an intuitive
understanding of the format and choices available.
This is further compounded when software is used by
many firm employees and requires a training period
and learning curve for every user.
While all firms require sales and marketing
personnel, a primary objective of management at a
start-up firm frequently is creating awareness of their
product/service and generating customers. Unlike an
established firm, where repeat customers may come
to them, there is a more simple equation for start-ups:
no sales calls ¼ no revenue. Generating initial sales of
an unknown product/service requires enormous time.
Again, this basic need for a start-up argues for the type
of environment the spreadsheet can provide: a simple
tool that does not occupy the time of upper manage-
ment. Although a spreadsheet model may be complex,
the basic learning curve on spreadsheet use usually has
been climbed by every member of the firm prior to
their employment.
The start-up environment is also more likely to be
plagued by radical change. Flexibility in small firm
information systems is a key to success (Levy and
Powell 1998). Shifts in what processes are done, who
does them, and how they are performed are somewhat
routine occurrences as start-up firms jockey to find
market position, determine the competitive landscape,
and discover new methods – it’s part of being new.
Because of this, the competitive priorities for manage-
ment tools are flexibility and the ensuing fast
implementation of a new tool. The time requirements
for dedicated software such as ERP systems is known
to be notoriously long for larger systems. Further,
many dedicated systems require user flexibility, rather
than adapt flexibly to the user: it has often been noted
that implementing an ERP system requires a firm to
change its processes, rather than the ERP system
changing to reflect current processes. As opposed to
dedicated software, spreadsheet models can be rapidly
built and changed.
The failure risk of start-ups is high. The legend that
‘80% of start-ups fail in five years’ may not quite be
true (Watson and Everett 1996), but the point is all too
real that start-ups fail at a much higher rate than
established firms. There is a significant risk that all, or
a great portion of, the founders’ money will be lost.
Because of this risk expensive software that cannot be
sold at the bankruptcy auction is less acceptable than
the cost of a spreadsheet – which everyone in the firm
typically already owns. Further, specialised software
often requires consultants to install and calibrate.
If such software packages have a large initial cost but a
positive ROI over 10 years, they are well suited to an
established firm, but perhaps not for a start-up.
In short, start-up firms have a number of char-
acteristics that cause them to obey Woolsey’s (2006)
reminder of Occam’s razor – ‘don’t use a complex tool
when a simple tool will get you within 90þ percent of
the right answer’. Here, the simple tool used is the
spreadsheet. In addition to the production planning
application presented here, other applications that may
best be handled by spreadsheets in start-up firms
include accounts payable, accounts receivable, budget-
ing, sales planning and – perhaps – general ledger.
4. The experience at PEARL
PEARL exemplified many of the general character-
istics noted above: they needed a simple-to-manage
production planning system that balanced analytic
complexity with speed of deployment, flexibility and
transparency. This meant that speciality software that
would require a learning curve was not viewed
favourably. Instead, we generated a production plan-
ning module in Microsoft Excel 2003 that included
forecasting, lot sizing, production planning and order
release, and ATP.
The requirements of simplicity and transparency
cannot be overstressed. As is typical of many start-up
firms, the five employees/owners of the firm are
generalists that perform many functions. The same
person who handles production planning may also be
in charge of accounting, treasury, sales or marketing.
If the company succeeds, a dedicated professional will
handle production planning. But in the entrepreneurial
 Production Planning & Control
phase, the task is performed by someone who can give
it only a small portion of their time and who is not an
expert in operations management. The firm founders
were serial entrepreneurs who were facile with spread-
sheets due to prior use. So a spreadsheet-based
solution created an intangible, but important, level of
confidence in the process. Using a spreadsheet created
an atmosphere where the end users could more easily
take ownership of the process, and modify it if events
changed. To keep the spreadsheet at a level where
company employees could modify it themselves, only
Excel functions were used – the Excel programming
language VBA was not employed. There are some
commercial MRP packages with input/output in Excel,
or completely designed in Excel, but those packages are
designed for the many contingencies that more
complex corporate environments face, so they are
more complex and less user-friendly to the particular
users involved in this case.
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There are different types of start-up firms that
require different kinds of effort at inception. Starting a
restaurant on a busy street may require more attention
to product quality than marketing. Start-up firms with
a different twist on an existing, established product
would concentrate on acquiring share versus competi-
tors. PEARL, in contrast, was offering a new product.
Though escape ladders have their antecedents in fire
escape systems that have been around for over 100
years, the market penetration of fire escape products in
single family residences can comfortably be said to
be 51%. So, establishing a market presence and
translating that presence to product sales is the
primary goal. The team at PEARLProtected needed
to focus its efforts at trade shows, builder calls and
other activities that would generate market knowledge
of the product and eventually sales. Consequently, the
strategic need was for an easy-to-use operational
system that would support them without requiring
detailed knowledge on the part of the sales force.
The nature of PEARL’s supply chain complexity is
such that Portougal and Robb (2000) would say they
may not benefit from highly sophisticated software.
Eventually, if PEARL succeeded and grew, it would be
worthwhile to invest the time and money to purchase a
speciality production planning system – which even-
tually did occur. But for a time PEARL was in an
in-between state: the supply chain was too complex to
keep using the back of an envelope, but not complex
enough to justify a commercial system. Further, the
time involved in choosing among the more than 100
such systems available, as well as the cost to customise
for their configuration now, when they would likely
have different configurations in the near future, made
that less attractive.
559
5. Building a production planning system
The first steps of developing a spreadsheet model
involved organising the basic operational data in
Excel. Excel has significant functionality to manipulate
dates, which is important because so much of produc-
tion planning involves matching things like planned
orders and booked customer orders by date. However,
keeping dates matched required considerable logic to
code. For example, we have forecasts for each of
the next 20 weeks, and we have a booked order from
a customer set for delivery on 12 December 2006.
If today is 8 September 2006, then we need to match
that booked order to the forecast for week 14. This
required three distinct pieces of logic to accomplish.
First, we needed to use Excel’s date functions to
determine the beginning date of the current week.
Second, we needed to compare the delivery date to the
date of the current week to determine the number of
days between now and the delivery date. Finally we
needed to convert this measure in days into weeks since
we had selected weeks as the unit of analysis for our
model. We have included the logic by which we
accomplished this in Appendix 1. The same logic that
we applied to determining the week an order is to be
shipped was applied to determining the week in which
a shipped order would arrive at the appropriate
distribution centre.
The remaining work and challenges revolved
around converting forecasts, booked customer orders,
current inventory and placed production orders into
the standard production planning structure so as to
plan order releases and to determine ATP for the sales
force. The next sections describe this process.
5.1. Production planning and order releases
The basic logic of production planning to set order
releases is relatively straightforward, and can be
summarised as:
(1) Determine projected on hand inventory at the
beginning of that week.
(2) From this projected on hand amount, add any
production orders (aka replenishments) that
are already scheduled to arrive in that week.
(3) From this result, subtract off either actual
booked customer orders or forecasted customer
orders, whichever is larger. This result is the
projected on hand inventory at the end of the
week.
(4) If this projected on hand ending inventory is
negative, schedule a new production order for
that week. The size of the production order is
predetermined by a lot-sizing method.
 560 S. Walton and R. Metters
Figure 1. Customer booked orders spreadsheet.
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Figure 2. Production plan example.
(5) Check to confirm that the total production
orders in any week does not exceed currently
available total capacity, and adjust as needed.
(6) Repeat these steps for all weeks included in the
planning horizon.
The simplicity of the logic belies the difficulty of coding
this logic into a dynamic, real-world application using
Excel. In a real-world application, there are many
moving parts that must be managed independently,
and then synchronised. We organised our Excel
worksheet into five separate tabs that reflected distinct
moving parts. We did this to allow each business issue
to be easily managed by PEARL. We then developed
and coded the logic needed to transform these business
issues into a production plan. One tab was the business
constants of lead times, actual current on hand
inventory, shipping costs, purchase price, order size,
etc. A second tab was the forecasts. The third tab was
booked customer orders. The fourth tab was the
scheduled production orders, and the final tab was the
actual production plan derived from the data managed
in these other four tabs.
We chose to structure the data entry area for the
customer booked orders and scheduled production
orders so that a row represented an individual order.
Figure 1 shows the structure of the customer booked
order sheet. The advantage of organising the data in
this way is that it allowed PEARL to easily track all
relevant information for each order. However, struc-
turing the data in this way created a challenge. As can
be seen in Figure 1, allowing the data to be organised
by order causes the ‘weeks to ship’ column to be
unpredictable. Yet, eventually all of the booked orders
must be tallied for each week in order to be used in the
production planning process. We addressed this
challenge by using the SUMIF function, which allowed
us to sum all customer booked orders (and by analogy,
all of the scheduled production orders) conditioned on
the week in which they were scheduled.
With all of the data now available in a consistent
organisation, we were able to easily execute the logic
described above. Figure 2 shows the first 2 weeks of the
production schedule. Week 0 is the current week.
The production plan shown in Figure 2 is for the week
of 4 September 2006. In that week we have forecasted
427 units; this information is dynamically linked to the
forecasting tab. We have no booked customer orders
for this week; this information is linked to the section
of the customer booked order tab described above that
reorganises the data to match the structure of the
production plan. We have no replenishments sched-
uled; this information comes from the production
orders tab. After conducting the capacity check, we
have no concerns about exceeding available capacity
(no surprise since we aren’t ordering anything). Given
that our on hand at the beginning of week 0 was 671
(not shown on the production plan, but coded in the
business constants tab), and we have no replenish-
ments, no booked orders and forecasts for 427 units,
we end week 0 with 244 projected on hand. The coding
of the logic to create the production plan from the
various tabs is, as the steps listed above suggest,
straightforward. The only challenge was creating and
maintaining the dynamic links between the source data
in the various tabs and the calculations in the
production plan. With the basic production plan
 Production Planning & Control
complete, we were ready to turn our attention to the
more difficult piece of coding, ATP.
5.2. Available-to-promise
The method used to determine the timing of planned
order releases leads to an important weakness that must
be addressed through the additional calculation of
ATP. Consider the portion of the production plan
shown in Figure 2. At the beginning of the current week,
week 0, there are 671 units on hand (not shown in
the sheet, but an input to the page). Following
the production planning logic described in the
previous section, add in replenishments of zero and
subtract off the larger of forecasts and booked
orders yields an projected on hand at the end of
week 0 of 244 (671 þ 0  max(427.0) ¼ 244). For
week 1, the ending projected on hand is 617
(244 þ 800  max(427.0) ¼ 617). But in week 0 how
Downloaded By: [Metters, Richard] At: 18:07 5 December 2008
many more units could your sales force really sell?
The fact of the matter is that there are actually 671 units
left to be sold because we have in fact sold NONE of
the forecasted 427. This is where the logic of ATP is so
important. Sales force information based on projected
on hand tends to misstate the number of units
of product actually available. This happens because
by definition projected on hand includes forecast
information, not just actual sales information. ATP
fixes this problem.
ATP is determined over the horizon between actual
scheduled replenishments, and is calculated by taking
the sum of all booked orders over this horizon and
subtracting that sum from the replenishment amount.
Figure 3 shows the results of this approach for several
weeks. The first ATP, which in our model occurred in
week 0, is calculated as actual beginning on hand
inventory minus booked orders (671  0 ¼ 671). For all
subsequent blocks, ATP is calculated as the
Figure 3. Available-to-promise calculations.
561
replenishment amount minus all booked orders in that
block. Figure 3 shows that weeks 1, 2 and 3 comprise a
block. This is so because a new block begins with the
replenishment in week 4. ATP for block composed of
weeks 1, 2 and 3 is calculated as 800  432 ¼ 368 units
left to be sold.
While the logic of ATP is fairly straightforward, the
computation of ATP in Excel is not, particularly if
one is trying to build a dynamic model, as we were.
The main challenge in coding the ATP calculation is
determining the block of weeks that should be included
in each ATP calculation. That determination must be
dynamic so that it is able to adapt to the ever-changing
business environment PEARLProtected operates in.
To extract the booked orders from the production
plan, we developed a matrix that evaluated whether an
individual booked order should be associated with
a particular block of weeks for determining ATP.
Figure 4 shows this matrix. In this matrix, each row
represents a week in the production plan, and each
column reflects the booked orders in that particular
week. We coded in logic that determined which week of
production a booked order should be associated
with (we have provided in Appendix 2 this logic). An
‘X’ in Figure 4 means that the booked orders in that
week should not be associated with the production
plan in the same week.
Figure 5 provides a specific example of what
connects the production plan with the determination
of ATP. The top portion of Figure 5 shows the
production plan, and the lower portion shows the off
screen calculations used to match booked customer
orders to the appropriate ATP block. We will use the
determination of ATP for weeks 4 and 5, row 62, to
demonstrate the interpretation of Figure 4. In row 62,
cells B62, C62 D62 and E62 are in grey because there
is no way to meet booked orders for weeks 0–3 with
production in week 4. In the top portion of Figure 5,
 562 S. Walton and R. Metters

cells F7 and G7 are booked customer orders that
should be included in the determination of ATP for the
block of weeks 4 and 5. Through the logic described in
Appendix 2, we caused the 50 units shown in F7 to be
correctly associated with row 62, and X’ed out in cells
F58–F61. A similar procedure is used for the 600 units
of booked customer orders shown in G7. Week 6
begins a new block for ATP calculations, so week 6
and beyond should not be included in the ATP
calculation for weeks 4 and 5. Our model places an
‘X’ in the remainder of row 62, marking it as not
Downloaded By: [Metters, Richard] At: 18:07 5 December 2008
included in the ATP. Cell F52 tallies up all of the
booked orders included in the block of weeks 4 and 5
(650 units). This is then subtracted from the replen-
ishment amount of 1200 to arrive at the ATP of 550.
5.3. Forecasting
Forecasts proved to be problematic. Being a new firm,
there was no historic data on which to base a forecast.
Consequently, a qualitative forecast along the lines
of Fisher and Raman (1996) was implemented.

Figure 4. Booked order matrix.

Figure 5. Production schedule and available-to-promise calculation.

 Production Planning & Control
However, it was noted that the forecasts would need to
be redone frequently when better information was
available. So we proceeded to develop an application
knowing that once we had that in place, we could work
to get better forecasts and change the information in
our production planning model.
The lack of an accurate forecast raised a more
fundamental question. In addition to not knowing
anything about what average demand would be, we
had no information about the variability of demand.
The lack of information about the variability of demand
would play a significant role in how we made decisions
about lot sizes since we had no systematic way to think
about safety stocks.
5.4. Lot sizing and safety stock
Many lot-sizing approaches have been explored in the
Downloaded By: [Metters, Richard] At: 18:07 5 December 2008
OR literature. Here, however, instead of using the more
complex lot-sizing approaches found in the literature,
we decided to use a fixed order quantity of one full cargo
container, with lot-for-lot logic in the MRP system.
The manufacturing facilities are in China, custo-
mers are in the USA, and the weight/value ratio of the
product makes air shipment prohibitively expensive, so
the basic unit of transportation is the cargo container.
However, one need not order in full container loads.
Both plants offered quantity discounts, and the plants
had slightly different pricing structures and payment
terms. One plant’s price was 4% higher, but offered
considerably more favourable payment terms (net 45
days versus net 10 days). If demand were constant
between time periods, analysis of the relevant costs,
including quantity discounts, would tell us that a lot
size of almost half a container is optimal. Of course,
demand here is not constant between time periods.
Consequently, when we applied more sophisticated
methods, the resulting order size varied considerably.
We decided to make a full container load the
standard lot size. Experimental work indicates that
more sophisticated lot-sizing systems can affect costs by
several percentage points (Bahl et al. 1987). The reasons
for our decision are similar to the reasons for using
spreadsheets in the first place. A dynamically adjusted
lot size would better minimise total inventory costs.
However, the firm members needed transparency and
certainty, rather than minimised costs. When concen-
trating on sales, it was far easier for them to note that
a cargo container load was coming in every time a
shipment is made, rather than have to consult the
production planning spreadsheet each time for the
‘mystery number’ that would be determined by a more
exact lot-sizing heuristic. In general, while costs
563
certainly cannot be ignored, cost minimisation is
simply not the goal of the production planning
process in this firm. While the right lot-sizing technique
would indeed be important if this firm succeeds,
at this point in time, the goals of simplicity and
clarity trumped cost.
A safety stock decision also had to be made.
The decision was made to have large amounts of safety
stock. This does result in excess inventory, with all the
negative aspects as discussed by Schonberger (1999).
However, the goals of the firm indicated that the risk
of lost sales was several orders of magnitude higher
than the risk of holding too much in inventory.
Archibald et al. (2002) indicated that start-up firms
should hold less safety stock than an established firm,
if the goal of the start-up firm was to avoid using up
their limited amount of capital and avoid bankruptcy.
In the view of Archibald and coworkers giving up
greater profits from more sales is balanced against
running out of capital. The goal of this firm, however,
is different. The founders did not merely wish to avoid
bankruptcy, and they had access to funds that would
not be a limiting factor in holding inventory. Rather,
the goal of the firm was to show potential buyers of the
firm that this idea was a ‘gold mine’ worth tens of
millions of dollars, so the team could sell the firm and
move on to their next start-up. To achieve this, lost
sales due to stockouts could not be tolerated.
6. Results
The objective of this project was not cost savings.
Rather, this work was intended to ease the sales
process. We do have significant strategic results to
report, and for a start-up company like PEARL, these
results were critical. Management at PEARL knew
they had a good production planning tool that
provided accurate and timely ATP information for
the sales force. This meant that the staff could focus on
tasks that are essential to virtually any start-up firm
with a new product: gaining market exposure and
driving sales of the product. The real metrics for our
work would be number of hours not distracted by
production planning issues and the resultant exposure
and sales. This is virtually impossible to quantify.
However, we can report several indirect measures
for the success of our model. First, PEARLProtected
has won several local and national awards for building
products, including the prestigious Home Safety
Council’s Product Innovation for Consumer Safety.
They have been featured on local and national media
outlets, including The Wall Street Journal,
Forbes.com, HGTV, The Early Show on CBS and
 564 S. Walton and R. Metters
Extreme Makeover: Home Edition. Of course we do
not claim that our model caused them to have this sort
of success. We do take credit for a portion of the
success, though, because we know that they were able
to focus their attention where it needed to be, and not
on production planning.
7. Conclusion
Here, a start-up firm that was beginning to encounter
the complexities of a moderate supply chain needed a
more formal system. In the long run, assuming
corporate growth, a dedicated software solution
incorporating formalised statistical forecasting
procedures and data- and literature-based safety
stock and lot-sizing algorithms should be used.
However, at this stage in corporate development, a
spreadsheet-based system was appropriate for reasons
Downloaded By: [Metters, Richard] At: 18:07 5 December 2008
of development speed, cost and system transparency to
users. There are lessons to be learned from our
experience developing the production planning
solution for PEARL.
In an entrepreneurial environment, there are
usually a small number of extremely busy employees
performing tasks with which they may have little
experience. No matter how easy-to-use some specia-
lised software may be, the cost in time of software
selection, the financial cost of implementation and
customisation, and the level of trust in terms of
unknown bugs and unforeseen changes may make
any unfamiliar dedicated software a risk not worth
taking. However, all the employees in a start-up
are typically wise in the ways of spreadsheets.
The spreadsheet is a familiar environment that
automatically brings with it a comfort level for end
users, enabling them to trust results and take
ownership of tools. Here, if unusual or perplexing
results were proposed by the spreadsheet model, a brief
period of investigating would either satisfy the
end-users as to the accuracy of the results or lead to
a change that all understood. Perplexing answers from
a speciality software package that perhaps no-one on
the executive team, or maybe only one person, under-
stood leads to distrust and non-use of the system.
This lack of trust can have serious consequences. In a
prior project one of the authors has worked on, the
new leveraged buyout owners of a large pencil
manufacturer ($350M annual sales) desired to turn
off the MRP system because they could not cope
with the systems’ outputs.
A spreadsheet is also a good tool in the start-up
phase of a firm due to its adaptability. The environ-
mental description of one product, two warehouses,
and two suppliers is accurate – but it was not clear
that this was going to be the problem to solve
shortly before this plan was put in place, nor is it
clear that it will be the plan in the near future. For this
particular firm, a dozen or more product line exten-
sions are awaiting the success of the first. It is easily
possible for the supply chain to take radically
different structures, such as selling to international
markets, or pulling manufacturing back domestically.
It might take the direction of ignoring the builder
market and focusing on one-off sales to individual
homeowners, which would necessitate a different
warehouse structure. Further, each of the product
line extensions may have different supply chain
structures. These types of considerations and wild
oscillations on the strategic level are normal in start-up
firms, and the flexibility, low cost, and adaptability
of spreadsheet-based solutions are ideal for this
environment.
However, the weaknesses of this approach should
also be weighed. Our approach is not web-enabled and
is not meant to be used in an environment where there
is a large number of users. Even at PEARL, this
approach is meant only to be a stopgap measure
between the ‘back-of-the-envelope’ stage and a stage
where a formal, more complex system would be
appropriate.
Beyond this specific application, spreadsheets are
useful in this environment because of the uncertainties
and time frames involved. Firms that are still early in
their life cycle must often grapple with what decisions
should be made, and what questions should be asked.
In the case of PEARL, other decisions that had to be
made prior to the one depicted here were whether to
make and market the product themselves or sell the
idea, whether to source internationally or domestically,
and the warehouse structure – just to name some of the
operational issues. These one-off analyses lend them-
selves to the quick and cheap capabilities of the
spreadsheet.
As has been said before by so many, we cannot
let the best get in the way of the good. So many
problems that businesses face require a good answer,
quickly. Start-up firms, in particular, face unique
operational challenges. Limited funds and limited
time call for cheap, quick solutions. Consequently,
although commercial software would eventually be
appropriate for this application, the spreadsheet
offers a quick and cheap method to obtain reasonable
solutions here, and for many of the problems faced by
new ventures.
In this particular application, we had a specific
decision to make concerning lot sizing. We made the
decision to go with a simplistic lot size of a full cargo
 Production Planning & Control
container, and lot-for-lot logic. The authors of this
work have several prior publications in the field of
production planning and are well aware of alternatives.
Applying the collective wisdom of nearly 50 years of
research into dynamic lot-sizing methods, an alter-
native and numerically superior algorithm could have
been applied to PEARL. Here, however, a more
important business objective than minimising inven-
tory cost is simplicity and transparency. Getting buy-in
and trust from managers unaccustomed to production
planning issues such as seemingly complex lot-sizing
algorithms was aided by having a simple rule that
made sense to the management team, that could easily
be relied upon. Instead of asking ‘how much is going to
be in that shipment?’ the quantity of one full container
was known and trusted.
It may be said that, in the start-up, entrepreneurial
environment, rapid prototyping and deployment may
be more important than methodological rigour. This is
Downloaded By: [Metters, Richard] At: 18:07 5 December 2008
not to say be lazy in our methodology, far from it.
Business decision makers rely on us for rigour, but
everything must be in balance. Excel is an excellent
tool for rapid prototyping. While it did not come up in
our work, since PEARL was migrating to an off-
the-shelf planning package, Excel is also an excellent
platform for model proof-of-concept, which would be
a good way to get end-user input into the model
development process.
Notes on contributors
Steve Walton is Interim Associate
Dean of the Full-time MBA
Programs and Associate Professor in
the Practice of Information System
and Operations Management at
Goizueta Business School. He has
been at Emory since 1996. He earned
his PhD in Business Administration/
Operations from the University of
North Carolina at Chapel Hill in 1993.
Steve has published in the Journal of Operations
Management, International Journal of Operations and
Production Management, European Journal of Operations
Research and other academic journals. Additionally, Steve is
a co-author for Successful Service Operations Management.
Steve teaches in all of Goizueta’s programs and has been
recognised with seven teaching awards. His research interests
include the application of Six Sigma to service operations,
business-to-business electronic commerce and managing
supply chains for both operational and environmental
improvements.
Steve’s consulting clients include the US State Department,
The Home Depot, Delta Air Lines, McKesson Information
Solutions, The Institute of Nuclear Power Operations,
ORBIS, The Arthur M. Blank Family Office, Siemens
Medical Systems, Solvay Pharmaceuticals and others.
565
Richard Metters is Associate Professor
at the Goizueta Business School,
Emory University. He holds a PhD
from the Kenan-Flagler Business
School, University of North
Carolina, an MBA from Duke
University and a BA from Stanford
University. He has previously pub-
lished over 30 articles including
articles in Management Science, Operations Research, and
Harvard Business Review. He is an Associate Editor of
Decision Sciences and Interfaces. He is the principal author of
the textbook Successful Service Operations Management.
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Appendix 1. Converting a booked order delivery date
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into the week it is due
(1) Assume Order #1 is to be shipped on 12 December
2006, and that today’s date is 8 September, 2006.
(Figure 1 shows the spreadsheet.)
(2) Determine the date of the Monday of the current
week: ¼TODAY()WEEKDAY(TODAY(),2)þ1
will return 04 September 2006, the first day of the
current week. This is stored in cell A2.
(3) Subtract the current date from the shipping date to find
the number of days until shipping, then divide by seven
to convert into weeks, round this result to zero decimal
places: ¼ROUND((F5$A$2)/7,0) will return 14, the
number of weeks from the current week until the order
is to be shipped. This is stored in cell I5.
Appendix 2. The logic for matching booked customer
orders to the appropriate ATP block
We will describe the logic used to determine ATP using the
same weeks 4 and 5 block that was described conceptually in the
body of the article (Figure 5 shows the spreadsheet).
View publication stats
(1) Determine if there is a replenishment order in
the current week, week 4. If there is no replenish-
ment, mark the cell F62 with ‘X’. If there is
a replenishment order, then mark the cell with the
booked customer order amount associated with
that week: ¼IF(F8 ¼ 0,‘X’,F7) will return 50, the
number of units of booked customer orders in week
4. This is stored in cell F62.
(2) Determine if there is a booked order amount in
week 5 that should be included in the ATP
calculation. If the logic in step 1 causes a cell to
be marked with an ‘X’, then no subsequent weeks
need to be included in the ATP calculation, so
mark the current cell with an ‘X’. Otherwise, see if
there is a replenishment order in week 5. If there is,
then mark the cell with an ‘X’. Otherwise, mark the
cell with the booked customer order amount
associated with that week: ¼IF(F62¼‘X’,
‘X’,IF(G$8540, ‘X’,G$7)) will return 600, the
number of booked customer order in week 5. This
is stored in cell F62.
(3) Repeat step 2 for all remaining weeks in the planning
horizon. Because there is a replenishment order in
week 6, the second portion of the logic in step 2 will
cause H62 to be marked with an ‘X’. Once H62 is
marked with an ‘X’, the first portion of the logic in
step 2 will cause all subsequent columns in row 62
will be marked with an ‘X’.
(4) Add up all of the entries in row 62 to determine
the total amount of booked customer orders
to be included in the ATP calculation for weeks
4 and 5: ¼SUM(B62:W62) will return 650. This is
stored in cell F52.
(5) Check to make sure there is a replenishment order in
week 4. If the replenishment amount is 0, mark the
cell as not having a unique ATP amount. Otherwise,
subtract the total amount of booked customer orders
from the replenishment amount: ¼IF(F8 ¼ 0, ‘- -’,
F8-F52) returns 550, the ATP in week 4. This is
stored in cell F13.
(6) Repeat step 5 for all weeks included in the ATP
block to make sure that it is clear that the 550 is ATP
to cover for week 4 and for week 5: ¼IF(G8 ¼ 0, ‘- -’,
G8-G52) returns ‘—’, which signifies that week 5 is
part of the ATP block with week 4. This is stored in
cell G13.