14
e
Operations and
Supply Chain
Management
CHASE | SHANKAR | JACOBS
191
SALES AND
OPERATIONS
PLANNING
Chapter Nineteen
McGraw-Hill/Irwin
Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
192
LO191: Understand what sales and
operations planning is and how it coordinates
manufacturing, logistics, service, and
marketing plans.
LO192: Construct and evaluate aggregate
plans that employ different strategies for
meeting demand.
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Learning Objectives
LO193: Explain yield management and why
it is an important strategy.
193
Sales and operations planning is a process that helps
firms provide better customer service, lower
inventory, shorten customer lead times, stabilize
production rates, and give top management a handle
on the business.
The process consists of a series of meetings,
finishing with a high-level meeting where key
intermediate-term decisions are made.
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
What Is Sales and Operations
Planning?
This must occur at an aggregate level and also at the
detailed individual product level.
Aggregate means at the level of major groups of products.
194
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reserved.
Major Sales and Operations
Planning Activities
195
Sales and operations planning was coined by
companies to refer to aggregate planning.
The new terminology is meant to capture the
importance of cross-functional work.
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Sales and Operations Planning
Activities Overview
Aggregation on the supply side is done by
product families, and on the demand side it is
done by groups of customers.
196
Long-range planning
Planning focusing on a horizon greater than 1
year, usually performed annually
Intermediate-range planning
Planning focusing on a period from 3 to 18
months, time increments are weekly, monthly, or
quarterly
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Types of Planning
Short-range planning
Planning covering a period from 1 day to 6
months with daily or weekly time increments
197
Specifies the optimal combination of
Production rate (units completed per unit of time)
Workforce level (number of workers needed in a period)
Inventory on hand (inventory carried from previous
period)
Product group or broad category (aggregation)
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Aggregate Operations
Plans
Planning done over an intermediate-range
planning period of 3 to 18 months
198
In general, the external environment is outside
the production planners direct control.
In some firms, demand can be managed.
Complementary products work for firms facing
cyclical demand fluctuations.
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Production Planning
Environment
With services, cycles are more often measured
in hours than months.
199
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reserved.
Inputs to the Production
Planning System
1910
Production planning
strategies are the
plans for meeting
demand. Trade offs
involved include
workers employed,
work hours, inventory
and shortages.
A pure strategy uses
just one of these
approaches, a mixed
strategy uses two or
more.
Vary the number of hours
worked through flexible
work schedules or
overtime
Hiring and laying off are
translated into
subcontracting
Stabl
e
work
force
varia
ble
work
hour
s
Cha
se
stra
teg
y
Match the production rate
by hiring and laying off
employees
Must have a pool of easily
trained applicants to draw
on
Lev
el
stra
teg
y
Demand changes are
absorbed by fluctuating
inventory levels, order
backlogs, and lost sales
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Production Planning
Strategies
Sub
con
trac
ting
1911
Costs associated
with changes in
Basic production
the production
costs
rate
Cost Types
Inventory holding
costs
Backorder costs
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reserved.
Relevant Costs
1912
Cut-and-try approach
Involves costing out various production planning alternatives
and selecting the one that is best
Elaborate spreadsheets developed to facilitate the decision
process
Linear programming
Use of mathematical analysis to determine an optimal plan
Simulation
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Aggregate Planning
Techniques
What-if analysis using simulated demand to evaluate
effectiveness of alternative plans
1913
Because
inventory
holding cost is
in $/unit,
material cost is
not relevant
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Cut and Try JC
Company
1914
January ending
inventory becomes
February
beginning
inventory.
For the Excel template visit
www.mhhe.com/sie-chase14e
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Aggregate Planning
JC Company
Excel: Aggregat
e Planning
1915
Produce to exact monthly
production requirements
by varying workforce size
Produce to meet
expected average
demand by maintaining a
constant workforce
Produce to meet the
minimum expected
demand using a constant
workforce and
subcontract to meet
additional requirements
Produce to meet
expected demand for all
but the first two months
using a constant
workforce and use
overtime to meet
additional output
requirements
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Evaluate Alternative
Plans
1916
Production
exactly matches
requirements.
Workers are
added or
reduced as
needed.
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Plan 1: Exact Production;
Vary Workforce
1917
Number of workers is
set to meet average
demand over the
time horizon. This
then determines
production rate and
inventory/backorders
.
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Plan 2: Constant Workforce;
Vary Inventory and Stockout
1918
to meet
minimum
demand (April).
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Plan 3: Constant Low
Workforce; Subcontract
Workforce sized
Demand over
minimum is met with
subcontracting.
1919
Demand in
the first
two
months is
high, so
overtime is
used to
compensat
e. Then,
inventory
can be
built for
high
demand in
June.
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Plan 4: Constant Workforce;
Overtime
1920
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reserved.
Plan Comparison
1921
Graphical
Summary
1922
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
A level schedule holds production
constant over a period of time.
It is something of a combination of the
strategies mentioned here.
For each period, it keeps the workforce
constant and inventory low, and
depends on demand to pull products
through.
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Level Scheduling
1923
Advantages
The entire system can be
planned to minimize
inventory and work-inprocess.
Product modifications are upto-date because of the low
amount of work-in-process.
There is a smooth flow
throughout the production
system.
Purchased items from vendors
can be delivered when
needed, often directly to the
production line.
Requirements
Production should be
repetitive (assembly-line
format).
The system must contain
excess capacity.
Output of the system must
be fixed for a period of time.
There must be a smooth
relationship among
purchasing, marketing, and
production.
The cost of carrying
inventory must be high.
Equipment costs must be low.
The workforce must be multiskilled.
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Level Scheduling
1924
Yield management: the process of allocating the right
type of capacity to the right type of customer at the
right price and time to maximize revenue or yield
Can be a powerful approach to making demand more
predictable
Has existed as long as there has been limited
capacity for serving customers.
Widespread scientific application began with
American Airlines computerized reservation system
(SABRE).
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Yield Management
1925
Demand can
be segmented
by customer
Fixed costs are
high and
variable costs
are low
Product can be
sold in
advance
Inventory is
perishable
Demand is
highly variable
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Yield Management
Success Factors
1926
Hotels offer one set of rates during the week and
another set during the weekend.
The variable costs associated with a room are low in
comparison to the cost of adding rooms to the
property.
Available rooms cannot be transferred from night to
night.
Blocks of rooms can be sold to conventions or tours.
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Yield Management
Hotels
Potential guests may cut short their stay or not show
up at all.
1927
Yield management
is most common
when price is
variable and
duration is
predictable.
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Yield Management
Levers
1928
Pricing structures must appear logical to the
customer and justify the different prices.
Must handle variability in arrival or starting times,
duration, and time between customers.
Must be able to handle the service process.
Must train employees to work in an environment
where overbooking and price changes are standard
occurrences that directly impact the customer.
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights
reserved.
Yield Management
Systems
The essence of yield management is the ability to
manage demand.
1929
