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Sales and Operations

Planning
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OBJECTIVES

Sales and Operations Planning

Aggregate Operations Planning
Chase and Level strategies
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Sales and Operations Planning

Sales and operations planning (SOP) is

a medium-range planning in which
the marketing and operations functions
together develop plans for how demand will
be met over the next 3 to 18 months
at an aggregate level
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Planning at Aggregate Level

Product families: SOP plans for product families,

rather than individual products
A product family is a group of products that have
similar characteristics of demand and process
e.g.) mountain bikes and road bikes
Overall capacity level: SOP plans on overall
capacity level, rather than individual resources
Time: SOP plans for months or quarters, rather
than weeks or days
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SOP and Other Planning Functions

Product and Service Design
Long Facility Size and Location
range Process Selection and Facility Layout

Forecasting Sales and Operations Planning

Medium Operations Plan Sales Plan
range
Manufacturing Services
Master Production Scheduling Workforce Scheduling

Material Requirements Planning

Short
range Order Scheduling Employee Scheduling
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Matching Aggregate Demand and

Aggregate Production Capacity
10000
10000
8000
Suppose the first 8000 7000
figure represents 6000 5500
6000
4500
aggregate demand 4000

Now suppose the 2000

second figure 0
Jan Feb Mar Apr May Jun
represents the
aggregate capacity 10000 9000
8000
of the company 8000
6000
What we want to do 6000
4500 4000 4000
is make these two 4000

figures match up at 2000

the lowest costs 0
Jan Feb Mar Apr May Jun
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Demand and Supply Options

Demand options
Influencing demand so that it matches
production capacity
Supply options
Adjusting capacity so that it matches demand
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Demand Options

Pricing
e.g.) price reductions for winter clothing in summer
Promotion
e.g.) adverting, direct marketing
Introducing complementary products/services
with different demand cycles
e.g.) heating and air conditioning repairs
Use of backorders
A backorder is a customer order that has not been filled
yet
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Supply Options

Hiring and laying off workers

Overtime
Subcontracting
Contracting with suppliers to carry out some portion of the work
Part-time workers
Inventory
Build inventory during off-peak periods and use it during peak
periods
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Aggregate Operations Planning

Aggregate operations planning develops an

operations plan at an aggregate level to
meet demand at the lowest costs
Outputs of aggregate operations planning
Plan on supply options
e.g.) workforce level, overtime, subcontracting
Production and inventory plan
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Strategies for Aggregate Operations

Planning

Chase strategy
Chase demand by adjusting output level
The output level can be adjusted by varying workforce
size, overtime, and subcontracting
Level strategy
Maintain constant output rate
The plan builds up inventory during off-peak periods
and uses it during peak periods
Mixed strategy
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Example of Aggregate Operations

Planning

Demand and capacity data

Jan Feb Mar Apr May Jun
Demand 9000 7000 5000 8000 8000 9000
Supply options
Regular time 6000 6000 6000 6000 6000 6000
Overtime 1200 1200 1200 1200 1200 1200
Subcontractor 4000 4000 4000 4000 4000 4000

In this example, we are considering three supply options: regular

time, overtime, and subcontracting.
We assume that there will be no hiring or layoff of workers in the
next 6 months.
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Example of Aggregate Operations

Planning (Contd)
Cost data
Regular time: $100 per unit (including labor
and material costs)
Overtime: $115 per unit
Subcontracting: $125 per unit
Inventory-holding costs: $3 per unit per month
Backorder-penalty costs: $10 per unit per month
* Inventory-holding costs and backorder-penalty costs will be
charged against the inventory levels at the end of each period
Inventory
Initial inventory = 200 units
Target inventory at the end of planning horizon
= 400 units
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Example of Aggregate Operations

Planning: Chase Strategy
Chase plan
Period Jan Feb Mar Apr May Jun
Demand 9,000 7,000 5,000 8,000 8,000 9,000
Production 8,800 7,000 5,000 8,000 8,000 9,400
Regular time 6,000 6,000 5,000 6,000 6,000 6,000
Overtime 1,200 1,000 0 1,200 1,200 1,200
Subcontractor 1,600 0 0 800 800 2,200
Inventory level
Beginning 200 0 0 0 0 0
Ending 0 0 0 0 0 400
On-hand inventory 0 0 0 0 0 400
Backorders 0 0 0 0 0 0
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Example of Aggregate Operations

Planning: Chase Strategy (Contd)
6000 units $100 per unit 1200 units $115 per unit
Costs of the chase plan 1600 units $125 per unit
Period Jan Feb Mar Apr May Jun Total
Production costs 938,000 715,000 500,000 838,000 838,000 1,013,000 4,842,000
Regular time 600,000 600,000 500,000 600,000 600,000 600,000 3,500,000
Overtime 138,000 115,000 0 138,000 138,000 138,000 667,000
Subcontractor 200,000 0 0 100,000 100,000 275,000 675,000
Inventory-holding 0 0 0 0 0 1,200 1,200
Backorder penalty 0 0 0 0 0 0 0
Total 938,000 715,000 500,000 838,000 838,000 1,014,200 4,843,200

400 units $3 per unit per month

Total cost of the chase plan = $4,843,200

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Example of Aggregate Operations

Planning: Level Strategy

What is the monthly production requirement?

Total demand over planning horizon: 46,000 units
Total production requirement
= Total demand Initial inventory + Target inventory at the end
= 46,000 200 + 400
= 46,200 units
Monthly production requirement
= Total production requirement / # of months
= 46,200 / 6
= 7,700 units
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Example of Aggregate Operations

Planning: Level Strategy (Contd)

Level plan
Period Jan Feb Mar Apr May Jun
Demand 9,000 7,000 5,000 8,000 8,000 9,000
Production 7,700 7,700 7,700 7,700 7,700 7,700
Regular time 6,000 6,000 6,000 6,000 6,000 6,000
Overtime 1,200 1,200 1,200 1,200 1,200 1,200
Subcontractor 500 500 500 500 500 500
Inventory level
Beginning 200 -1,100 -400 2,300 2,000 1,700
Ending -1,100 -400 2,300 2,000 1,700 400
On-hand inventory 0 0 2,300 2,000 1,700 400
Backorders 1,100 400 0 0 0 0

200+7700-9000 -400+7700-5000
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Example of Aggregate Operations

Planning: Level Strategy (Contd)

Costs of the level plan

Period Jan Feb Mar Apr May Jun Total
Production costs 800,500 800,500 800,500 800,500 800,500 800,500 4,803,000
Regular time 600,000 600,000 600,000 600,000 600,000 600,000 3,600,000
Overtime 138,000 138,000 138,000 138,000 138,000 138,000 828,000
Subcontractor 62,500 62,500 62,500 62,500 62,500 62,500 375,000
Inventory-holding 0 0 6,900 6,000 5,100 1,200 19,200
Backorder penalty 11,000 4,000 0 0 0 0 15,000
Total 811,500 804,500 807,400 806,500 805,600 801,700 4,837,200

1100 units $10 per unit per month 2300 units $3 per unit per month

Total cost of the level plan = $4,837,200