Chap004-Sales & Operations Planning R1

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Manufacturing Planning and Control

MPC 6th Edition

Chapter 4

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Sales and Operations Planning

The Sales and Operations Planning (SOP) process is used to develop an overall business plan to integrate the functional planning efforts within the company. SOP links strategic goals to production and coordinates the planning efforts of various groups such as marketing, finance, operations, and human resources.

SOP is top management’s handle on the business.

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Agenda

4-4

SOP Functions SOP provides the key communication links for

top management to coordinate the various planning activities in a business

Strategic Planning

Marketing Planning

Resource Planning

Financial Planning

Demand Management

Rough-Cut Capacity Planning

Sales & Operations Planning (Volume)

Sales Plan Operations Plan

Master Production Scheduling (Mix)

Front End

MPC Boundary

4-5

SOP Fundamentals

The role of SOP is to balance supply and demand at the volume level

Balance between supply and demand

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SOP Communication

The plan must be expressed in terms that are meaningful to non-manufacturing executives

The operations portion of the plan must be stated in terms that MPC functions can useAggregate units by product line, dollar

value, etc.

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Value of SOP

The SOP process provides visibility of the interactions between sales, marketing, production, and finance

Critical trade-off decisions are documented Manufacturing performance is controlled in a

clear fashion This leads to better integration among

functional areas and better response to the marketplace

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SOP Process

End of month

Statistical forecastsField sales worksheets

Management forecastFirst-pass spreadsheets

Recommendations and agenda

Capacity constraintsSecond-pass spreadsheets

Decisions and game plan

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SOP Process – Key Activities

Updating the sales forecast Reviewing the impact of operations plan

changes–can current capacity and materials support the changes?

Identifying alternatives where problems exist Formulating recommendations for top

management Communicating the information to top

management

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SOP Discipline

For the SOP process to be routine and effective, replanning must occur when conditions indicate the need

Mechanisms for maintaining support for the plans are importantSenior executive involvement is a

minimum requirement

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Communicating SOP Information–Displays

Information can be conveyed in several waysCharts (monthly forecast, cumulative

production, alternative plans)Tabular displays (easily captured and

communicated using spreadsheets)

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SOP Tabular DisplayA planning factor is used to convert sales $ to units

The display includes both history and the plan

Using a chase strategy can lead to large variations in planned production

Planning assumptions are clearly displayed

Financial results of the plan are calculated and displayed

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Production Strategies

Chase–production output is changed to match sales quantities

Level–production is constant, resulting in inventory build-up and depletion over time

Mixed–combination of chase and level designed to result in acceptable levels of flexibility and inventory

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Chase Strategy

A spreadsheet with these calculations can be found here.

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Chase Strategy

0

200

400

600

800

1000

1200

1400

1600

Jan Feb Mar Apr May Jun

Demand forecast

Chase

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Level Strategy

A spreadsheet with these calculations can be found here.

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Level Strategy

0

200

400

600

800

1000

1200

1400

1600


Demand forecast

Level

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Karma strateji (Mixed Strategy)

0

200

400

600

800

1000

1200

1400

1600


Demand forecast

mixed

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Example: Chase Strategy

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Example: Level Strategy

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Example: Mixed Strategy

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© 2011 Pearson Education, Inc. publishing as Prentice Hall

Roofing Supplier Example 1

Table 13.2

Month Expected DemandProduction

DaysDemand Per Day

(computed)

Jan 900 22 41

Feb 700 18 39

Mar 800 21 38

Apr 1,200 21 57

May 1,500 22 68

June 1,100 20 55

6,200 124

= = 50 units per day6,200

124

Average requirement =

Total expected demand

Number of production days

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Figure 13.3

70 –

60 –

50 –

40 –

30 –

0 –Jan Feb Mar Apr May June = Month

22 18 21 21 22 20 = Number ofworking days

Pro

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per

wo

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Level production using average monthly forecast demand

Forecast demand

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Table 13.3

Cost Information

Inventory carrying cost $ 5 per unit per month

Subcontracting cost per unit $20 per unit

Average pay rate $10 per hour ($80 per day)

Overtime pay rate $17 per hour (above 8 hours per day)

Labor-hours to produce a unit 1.6 hours per unit

Cost of increasing daily production rate (hiring and training)

$300 per unit

Cost of decreasing daily production rate (layoffs)

$600 per unit

Plan 1 – constant workforce

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Table 13.3

Cost Information







$300 per unit


$600 per unit


MonthProduction

Days

Production at 50 Units

per DayDemand Forecast

Monthly Inventory Change

Ending Inventory

Jan 22 1,100 900 +200 200

Feb 18 900 700 +200 400

Mar 21 1,050 800 +250 650

Apr 21 1,050 1,200 -150 500

May 22 1,100 1,500 -400 100

June 20 1,000 1,100 -100 0

1,850

Total units of inventory carried over from onemonth to the next = 1,850 units

Workforce required to produce 50 units per day = 10 workers

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Table 13.3

Cost Information







$300 per unit


$600 per unit


MonthProduction

Days

Production at 50 Units

per DayDemand Forecast

Monthly Inventory Change

Ending Inventory

Jan 22 1,100 900 +200 200

Feb 18 900 700 +200 400

Mar 21 1,050 800 +250 650

Apr 21 1,050 1,200 -150 500

May 22 1,100 1,500 -400 100

June 20 1,000 1,100 -100 0

1,850

Total units of inventory carried over from onemonth to the next = 1,850 units

Workforce required to produce 50 units per day = 10 workers

Costs Calculations

Inventory carrying $9,250 (= 1,850 units carried x $5 per unit)

Regular-time labor 99,200 (= 10 workers x $80 per day x 124 days)

Other costs (overtime, hiring, layoffs, subcontracting) 0

Total cost $108,450

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Figure 13.4

Cu

mu

lati

ve d

eman

d u

nit

s7,000 –

6,000 –

5,000 –

4,000 –

3,000 –

2,000 –

1,000 –

–Jan Feb Mar Apr May June

Cumulative forecast requirements

Cumulative level production using average monthly

forecast requirements

Reduction of inventory

Excess inventory

6,200 units

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Table 13.2


DaysDemand Per Day

(computed)

Jan 900 22 41

Feb 700 18 39

Mar 800 21 38

Apr 1,200 21 57

May 1,500 22 68

June 1,100 20 55

6,200 124

Minimum requirement = 38 units per day

Plan 2 – subcontracting

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70 –

60 –

50 –

40 –

30 –



Pro

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per

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ay

Level production using lowest

monthly forecast demand

Forecast demand

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Table 13.3

Cost Information







$300 per unit


$600 per unit

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Table 13.3

Cost Information

Inventory carry cost $ 5 per unit per month


Average pay rate $ 5 per hour ($40 per day)

Overtime pay rate $ 7 per hour (above 8 hours per day)



$300 per unit


$600 per unit

In-house production = 38 units per day x 124 days

= 4,712 units

Subcontract units = 6,200 - 4,712= 1,488 units

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Table 13.3

Cost Information

Inventory carry cost $ 5 per unit per month


Average pay rate $ 5 per hour ($40 per day)

Overtime pay rate $ 7 per hour (above 8 hours per day)



$300 per unit


$600 per unit


In-house production = 38 units per day x 124 days

= 4,712 units

Subcontract units = 6,200 - 4,712= 1,488 units

Costs Calculations

Regular-time labor $75,392 (= 7.6 workers x $80 per day x 124 days)

Subcontracting 29,760 (= 1,488 units x $20 per unit)

Total cost $105,152

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Table 13.2


DaysDemand Per Day

(computed)

Jan 900 22 41

Feb 700 18 39

Mar 800 21 38

Apr 1,200 21 57

May 1,500 22 68

June 1,100 20 55

6,200 124

Production = Expected Demand

Plan 3 – hiring and layoffs

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70 –

60 –

50 –

40 –

30 –



Pro

du

ctio

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ate

per

wo

rkin

g d

ay Forecast demand and monthly production

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Table 13.3

Cost Information







$300 per unit


$600 per unit

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Table 13.3Table 13.3

Cost InformationCost Information

Inventory carrying costInventory carrying cost $ 5 per unit per month$ 5 per unit per month

Subcontracting cost per unitSubcontracting cost per unit $10 per unit$10 per unit

Average pay rateAverage pay rate $ 5 per hour ($40 per day)$ 5 per hour ($40 per day)

Overtime pay rateOvertime pay rate $ 7 per hour $ 7 per hour (above 8 hours per day)(above 8 hours per day)

Labor-hours to produce a unitLabor-hours to produce a unit 1.6 hours per unit1.6 hours per unit

Cost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)

$300 per unit$300 per unit

Cost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)

$600 per unit$600 per unit

MonthMonthForecast Forecast

(units)(units)

Daily Daily Prod Prod RateRate

Basic Basic Production Production

Cost Cost (demand x (demand x

1.6 hrs/unit x 1.6 hrs/unit x $10/hr)$10/hr)

Extra Cost of Extra Cost of Increasing Increasing Production Production (hiring cost)(hiring cost)

Extra Cost of Extra Cost of Decreasing Decreasing Production Production (layoff cost)(layoff cost) Total CostTotal Cost

JanJan 900900 4141 $ 14,400$ 14,400 —— —— $ 14,400$ 14,400

FebFeb 700700 3939 11,20011,200 —— $1,200 $1,200 (= 2 x $600)(= 2 x $600) 12,40012,400

MarMar 800800 3838 12,80012,800 —— $600 $600 (= 1 x $600)(= 1 x $600) 13,40013,400

AprApr 1,2001,200 5757 19,20019,200 $5,700 $5,700 (= 19 x $300)(= 19 x $300) —— 24,90024,900

MayMay 1,5001,500 6868 24,00024,000 $3,300 $3,300 (= 11 x $300)(= 11 x $300) —— 24,30024,300

JuneJune 1,1001,100 5555 17,60017,600 —— $7,800 $7,800 (= 13 x $600)(= 13 x $600) 25,40025,400

$99,200$99,200 $9,000$9,000 $9,600$9,600 $117,800$117,800

Table 13.4Table 13.4

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Comparison of Three Plans

Table 13.5

Cost Plan 1 Plan 2 Plan 3

Inventory carrying $ 9,250 $ 0 $ 0

Regular labor 99,200 75,392 99,200

Overtime labor 0 0 0

Hiring 0 0 9,000

Layoffs 0 0 9,600

Subcontracting 0 29,760 0

Total cost $108,450 $105,152 $117,800

Plan 2 is the lowest cost option

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Mathematical Approaches Useful for generating strategies

Transportation Method of Linear Programming

Produces an optimal plan

Management Coefficients Model Model built around manager’s experience and

performance

Other Models Linear Decision Rule

Simulation

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Management Coefficients Model

Builds a model based on manager’s experience and performance

A regression model is constructed to define the relationships between decision variables

Objective is to remove inconsistencies in decision making

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Other Models

Linear Decision Rule

Minimizes costs using quadratic cost curves

Operates over a particular time period

Simulation

Uses a search procedure to try different combinations of variables

Develops feasible but not necessarily optimal solutions

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Summary of Aggregate Planning Methods

TechniquesSolution

Approaches Important Aspects

Graphicalmethods

Trial and error

Simple to understand and easy to use. Many solutions; one chosen may not be optimal.

Transportation method of linear programming

Optimization LP software available; permits sensitivity analysis and new constraints; linear functions may not be realistic.

Table 13.8

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Summary of Aggregate Planning Methods

TechniquesSolution

Approaches Important Aspects

Management coefficients model

Heuristic Simple, easy to implement; tries to mimic manager’s decision process; uses regression.

Simulation Change parameters

Complex; may be difficult to build and for managers to understand.

Table 13.8

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Management Obligations

Commit to the SOP processEstablish the SOP frameworkPut the right team togetherSet meetingsParticipate in the process

Modify performance measures and reward structures to align with the plan

Force resolution of trade-offs between functions Lead the cultural change

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Functional Roles

The primary obligation for all functions involved is to “hit the plan”

A cross-functional team approach is important Executive champion/sponsor–keep top management focused on the process,

clear major obstacles, and acquire resources SOP process owner–provide leadership for the SOP process and implementation Demand planning team–provide demand data and represent forecasting,

marketing, and sales functions Supply planning team–provide supply system information and represent

manufacturing and purchasing functions Pre-SOP team–manage cross-functional development of SOP Executive SOP team–upper management representative of each functional area

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Defining Product Families

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Integrated Planning

Integration among sales, marketing, and production is key Sales and marketing need to sell what is planned

(overselling is just as bad as underselling)• Opportunities need to be evaluated via changes to the SOP

Manufacturing’s job is to achieve the plan–exactly (overproduction and underproduction are equally bad)

The end result is good customer service Breakdowns in the plan must be quickly reported by the

functional area responsible

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Strategic Planning

A direction-setting activityCan be an extension of budgetingMore recently, plan is based on

products and markets rather than organizational units

SOP must support strategic plans

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Operations Plan Control

The SOP process should be widely understood Planned results for each functional area should be

clearly communicatedThe seriousness of the plan must also be reinforced

Key issuesWhen and how to change the plan?How stable should the plan be from period to

period?

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Principles

The operations plan isn’t a forecast. It is a statement of desired production output.

The operations plan is included in the SOP process to maintain agreement with other functional plans.

Trade-offs required to frame the operations plan must be made prior to final approval

Top management involvement is imperative in the SOP process. The SOP process should relate directly to the strategic plan.

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Principles The MPC system should be used to

perform routine activities and provide routine data, allowing management time to be devoted to important tasks.

The MPC system should facilitate what-if analysis at the SOP level.

Reviews of performance against SOP are needed to prompt replanning when necessary.

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Quiz–Chapter 4 The four fundamental issues in Sales and Operations Planning

are __________. Sales and Operations Planning balances supply and demand at

the ______ level. Many key Sales and Operations Planning linkages are outside the

Manufacturing Planning and Control (MPC) system. (True/False) A strategy which matches monthly supply to forecasted demand is

________. A strategy which maintains a consistent monthly output is

_________. The primary obligation for any functional area is to “hit the plan.”

(True/False)

Documents

Chap004-Sales & Operations Planning R1