Supply Chain Management

Sales & Operations Planning

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Supply Chain Operations Planning Hierarchy

Support the companys strategic plan

Long
LongRange
RangePlanning
Planning Focuses on expensive decisions that take
1-5
1-5years
years significant time to implement

Medium
MediumRange
Range
Support the companys sales plan
Planning
Planning Focuses on capacity/production of existing
6-18
6-18months
months resources (or those easily added/removed)

Support the incoming or existing customer

Short
ShortRange
RangePlanning
Planning orders
0-6
0-6months
months Focuses on daily/weekly scheduling and
allocation decisions

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Sales and Operations Planning What is it?

Medium-term capacity plan for meeting sales

requirements over a six to eighteen month planning
horizon

GOAL: Find a set of adjustments to capacity that

allow the operation to meet production (demand)
requirements and ...
do so at lowest cost or highest profit or minimum
workforce disruption, etc.

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Inputs and Outputs from S&OP

Demand
Demand Strategic
Strategic Capacity
Capacity
Financial
Financial Constraints
Forecasts
Forecasts Objectives
Objectives Constraints
Costs
Costs (production
(productionrates,
rates,
(Labor,
(Labor,Inventory)
Inventory) work
work hours,etc)
hours, etc)

Inventory
Inventory Sales
Levels Salesand
and Workforce
Workforce
Levels Operations
OperationsPlan
Plan Levels
Levels
for
formanufacturing
manufacturing

Production
Production Staffing
Staffing Plan
Plan
Plan
Plan for
for forservice
service
formanufacturing
manufacturing

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So Many NamesAll the Same

Sales and Operations Planning (S&OP or SOP)

Aggregate Production Planning
Production Planning
Production, Sales, and Inventory (PSI)
Staffing Plan (Services)

What does it mean to aggregate for production

planning?

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 Aggregate Production Plan

Nail
Business Level Cosmetics

Product Types Nail Enamel Nail Care

LongLasting Traditional Quick-Drying

Familie Enamel Enamel Enamel
s

Revlon Super Top Speed

Colorstay

Color Illusion Super Top Speed Chrome

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Business Level Nail Cosmetics

Nail
Enamels
Product Types
Traditiona
l
Quick Dry
Long
A product family is a group
Lasting
of SKUs with similar design
who share manufacturing
Familie
resources. Their demand
s
patterns are similar so that
they are often planned as a
unit and costs are often
SKUs Stockkeeping Units
expressed at this level.

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Many Different Ways to Plan

Select a plan to meet productive requirements that

aligns with specific objectives:
Lowest cost
Minimum workforce disruption
Least inventory
Etc..

While meeting any specific constraints:

No demand is ever backlogged
Must end planning horizon with a specified amount of
ending inventory
Do not lay off any employees
Etc..

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 Two Pure Planning Strategies
Demand
Chase Strategy
Workforce levels are adjusted to
match demand requirements over
planning horizon.
Production
No inventory or backorders
Time

Level Strategy Demand

A constant work force level is Production
maintained over planning horizon.
Inventory / demand backorders are
built and dissipated.
OR Time

Mixed Strategy
Workforce levels are allowed to
change and inventory/backorders
can be used.

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Aggregate Planning Strategies

Chase match production rate to production

requirements by varying the workforce (no inventory
buildup or backorders allowed and no planned
overtime)

Level keep a constant workforce with a constant

production rate, thus allowing excess inventory and
inventory backlogs (no hiring or termination of
employees and no planned overtime)

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A Few Technical Assumptions

You can only employ people in whole increments (cannot have 3.2
or 7.9 employees, must be 4 or 8)
If you hire an employee for the month, you must pay them for the
entire month (pay based on employment not their output)
Chase Plan:
You do not make excess units, even if you have capacity
You cannot hire or fire mid-month
If you work in any month, you end that month with zero inventory

Level Plan
You must determine your resource staffing at the beginning of
the time horizon and never change
You fully utilize all your resources each month on physical
production (you produce the maximum and put any excess in
inventory)
You cannot inventory services!

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Consider and Enamel Example

(Est.) Monthly Demand for Enamel Other Data

Production
Demand Month Demand One worker can produce 15
cases/month
1 1280 Starting Inventory = 0
No specific Ending Inventory Target
2 640 Starting Number of Workers = 70

Costs:
3 900 Labor: Worker earns $1600 per month
Hiring: $500 per worker hired
4 1200 Firing: $1000 per worker fired / laid off
Inventory: $20 per unit in inventory at
5 2000 the end of the month
Backorders: $50 per unit on backorder
6 1400 at the end of each month
Month

Imagine you need to develop the production plan

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The Chase Strategy

Number Number
Number Number Labor Hiring Firing
Workers Workers
Month Demand Workers Workers Costs Costs Costs
(before (after
Hired Fired ($) ($) ($)
rounding) rounding)
1280/15=85.33 86-70= (86)(1600)= (16)(500)=
1 1280 85.33 86 16 0 137,600 8,000 0

640/15=42.66 (43)(1600)= (43)(1000)=

2 640 42.66 43 0 43 68,800 0 43,000

900/15=60 (60)(1600)= (17)(500)=

3 900 60 60 17 0 96,000 8,500 0

1200/15=80 (80)(1600)= (20)(500)=

4 1200 80 80 20 0 128,000 10,000 0

2000/15=133..33 (134)(1600)= (54)(500)=

5 2000 133.33 134 54 0 214,400 27,000 0

1400/15=85.33 (94)(1600)= (40)(1000)=

6 1400 93.33 94 0 40 150,400 0 40,000

Labor Hiring Firing

Horizon Costs = 795,200 53,500 83,000

Total Horizon Cost = 931,700

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 The Level Strategy (with backorders)
Average Monthly Demand = 1236.67 # Workers before rounding = 82.44 # Workers after rounding = 83

Back-
Ending Labor Inventory
Number Ending order
Month Demand Production Back- Costs Costs
Workers Inventory Costs
orders ($) ($)
($)

1 1280 83 1245 0 35 132,800 0 1,750

132,800
2 640 83 1245 570 0 11,400 0
1245-1280 = -35
132,800
3 900 83 1245 915 0 18,300 0
1245-640-35= 570
132,800
4 1200 83 1245 960 0 19,200 0
1245+570-900= 915 132,800
5 2000 83 1245 205 0 4,100 0

132,800
6 1400 83 1245 50 0 1,000 0

Labor Inventory Backorders

Production + prior periods ending inventory demand prior periods backorder 796,800 54,000 1,750
= ending inventory if positive or ending backorder if negative
Total L/I/B Costs = 852,550

Dont forget hiring/firing at start of horizon: Hire (83-70)=13 workers @ cost of Total Horizon Cost = 859,050
13(500) =6500

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Comparing the Pure Strategies

Which one is lower cost?

Chase: $931,700
Level: $859,050

What would happen if?

Hiring (or new employee training) costs increased?
Firing costs increased?
Inventory holding costs decreased?
Backorder costs decreased?

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The Chase Strategy In-Class Exercise

Assume the same data from before, except demand

Number Number
Number Number Labor Hiring Firing
Workers Workers
Month Demand Workers Workers Costs Costs Costs
(before (after
Hired Fired ($) ($) ($)
rounding) rounding)

1 600 40 40 0 30 64000 0 30000

2 500 33.33 34 0 6 54400 0 6000
3 1400 93.33 94 60 0 150400 30000 0
4 1200 80 80 0 14 128000 0 14000
5 1100 73.33 74 0 6 118400 0 6000
6 500 33.33 34 0 40 54400 0 40000
Horizon Costs 569600 30000 96000

Total Cost 695600

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The Level Strategy In-Class Exercise

Back-
Ending Labor Inventory
Number Ending order
Month Demand Production Back- Costs Costs
Workers Inventory Costs
orders ($) ($)
($)

1 600 59 885 285 0 94400 5700 0

2 500 59 885 670 0 94400 13400 0
3 1400 59 885 155 0 94400 3100 0
4 1200 59 885 0 160 94400 0 8000
5 1100 59 885 0 375 94400 0 18750
6 500 59 885 10 0 94400 200 0

566400 22400 26750

Total demand = 5300 Original # workers= 70
Average demand = 883.33 # workers needed= 59 L / I / B Cost 615550
# workers = 58.89 Firing / Layoff costs = 11000 Total Cost 626550

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