Sales & Operations Planning

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Sales & Operations PlanningSales & Operations PlanningSales & Operations PlanningSales & Operations Planning

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OverviewOverviewOverviewOverview

Production-Planning HierarchyProduction-Planning Hierarchy Aggregate PlanningAggregate Planning Master Production SchedulingMaster Production Scheduling Types of Production-Planning and Control SystemsTypes of Production-Planning and Control Systems Wrap-Up: What World-Class Companies DoWrap-Up: What World-Class Companies Do

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Production Planning HierarchyProduction Planning HierarchyProduction Planning HierarchyProduction Planning Hierarchy

Master Production Scheduling Master Production Scheduling

Production Planning and Control SystemsProduction Planning and Control Systems

Pond DrainingPond DrainingSystemsSystems

Aggregate PlanningAggregate Planning

PushPushSystems Systems

PullPullSystemsSystems

Focusing onFocusing onBottlenecksBottlenecks

Long-Range Capacity PlanningLong-Range Capacity Planning

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Production Planning HorizonsProduction Planning HorizonsProduction Planning HorizonsProduction Planning Horizons

Master Production Scheduling Master Production Scheduling







Long-Range Capacity PlanningLong-Range Capacity PlanningLong-RangeLong-Range

(years)(years)

Medium-RangeMedium-Range(6-18 months)(6-18 months)

Short-RangeShort-Range(weeks)(weeks)

Very-Short-RangeVery-Short-Range(hours - days)(hours - days)

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Production Planning: Units of MeasureProduction Planning: Units of MeasureProduction Planning: Units of MeasureProduction Planning: Units of Measure

Master Production SchedulingMaster Production Scheduling







Long-Range Capacity PlanningLong-Range Capacity PlanningEntire Entire

Product LineProduct Line

ProductProductFamilyFamily

SpecificSpecificProduct ModelProduct Model

Labor, Materials,Labor, Materials,MachinesMachines

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Capacity Planning, Aggregate Planning, Master Schedule, and Short-Term Capacity Planning, Aggregate Planning, Master Schedule, and Short-Term SchedulingScheduling

Capacity Planning1. Facility Size2. Equipment Procurement

Aggregate Planning1. Facility Utilization2. Personnel needs3. Subcontracting

Master Schedule1. MRP2. Disaggregation of master plan

Short-term Scheduling1. Work center loading2. Job sequencing

Long-term

Intermediate-term

Intermediate-term

Short-term

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Relationships Between OM ElementsRelationships Between OM Elements

Marketplaceand Demand

Research and Technology

Product Decisions

Process Planning & Decisions

Aggregate Plan for Production

Detailed Work Schedules

Master Production Schedule

PriorityPlanning &Scheduling

Demand Forecasts, orders

External Capacity

Plant Capacity

Raw Materials Available

Inventory On Hand

Work Force

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Hierarchical Production PlanningHierarchical Production Planning

Annual demand byitem and by region

Monthly demandfor 15 months by

product type

Monthly demandfor 5 months by

item

Forecasts needed

Allocatesproduction

among plants

Determinesseasonal plan by

product type

Determines monthlyitem production

schedules

Decision ProcessDecision Level

Corporate

Plant manager

Shopsuperintendent

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Why Aggregate Planning Is NecessaryWhy Aggregate Planning Is NecessaryWhy Aggregate Planning Is NecessaryWhy Aggregate Planning Is Necessary

Fully load facilities and minimize overloading and Fully load facilities and minimize overloading and underloadingunderloading

Make sure enough capacity available to satisfy Make sure enough capacity available to satisfy expected demandexpected demand

Plan for the orderly and systematic change of Plan for the orderly and systematic change of production capacity to meet the peaks and valleys of production capacity to meet the peaks and valleys of expected customer demandexpected customer demand

Get the most output for the amount of resources Get the most output for the amount of resources availableavailable

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InputsInputsInputsInputs

A forecast of aggregate demand covering the selected A forecast of aggregate demand covering the selected planning horizon (6-18 months)planning horizon (6-18 months)

The alternative means available to adjust short- to The alternative means available to adjust short- to medium-term capacity, to what extent each medium-term capacity, to what extent each alternative could impact capacity and the related costsalternative could impact capacity and the related costs

The current status of the system in terms of The current status of the system in terms of workforce level, inventory level and production rate workforce level, inventory level and production rate

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OutputsOutputsOutputsOutputs

A production plan: aggregate decisions for each A production plan: aggregate decisions for each period in the planning horizon aboutperiod in the planning horizon about workforce levelworkforce level inventory levelinventory level production rateproduction rate

Projected costs if the production plan was Projected costs if the production plan was implementedimplemented

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Medium-Term Capacity AdjustmentsMedium-Term Capacity AdjustmentsMedium-Term Capacity AdjustmentsMedium-Term Capacity Adjustments

Workforce levelWorkforce level Hire or layoff full-time workersHire or layoff full-time workers Hire or layoff part-time workersHire or layoff part-time workers Hire or layoff contract workers Hire or layoff contract workers

Utilization of the work forceUtilization of the work force OvertimeOvertime Idle time (undertime) Idle time (undertime) Reduce hours workedReduce hours worked

. . . more. . . more

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Medium-Term Capacity AdjustmentsMedium-Term Capacity AdjustmentsMedium-Term Capacity AdjustmentsMedium-Term Capacity Adjustments

Inventory levelInventory level Finished goods inventoryFinished goods inventory Backorders/lost salesBackorders/lost sales

SubcontractSubcontract

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ApproachesApproachesApproachesApproaches

Informal or Trial-and-Error ApproachInformal or Trial-and-Error Approach Mathematically Optimal ApproachesMathematically Optimal Approaches

Linear ProgrammingLinear Programming Linear Decision RulesLinear Decision Rules

Computer SearchComputer Search HeuristicsHeuristics

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Comparison of Aggregate Planning MethodsComparison of Aggregate Planning Methods

MethodMethod AdvantagesAdvantages LimitationsLimitations

GraphicalGraphical Simple, easy to use and

understand

Many solutions; solution need not be optimal

Linear Linear ProgrammingProgramming

Provides optimal solution Popular in many industries Sensitivity & dual analysis

provide useful information Sensitivity & dual analysis

provide useful information Constraints readily added

Mathematical functions must be linear, and deterministic -- not necessarily a realistic assumption

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Linear Decision Rules

Provide optimal solution Handle non-deterministic

demand

Incorporates some non-standard costs

Skilled personal required Quadratic model not always realistic Values of variables are

unconstrained Feasible solution is optimal if it

exists - not guaranteed

Management Coefficients

Model

Simple, easy to use and understand

Attempts to duplicate manager’s decision-making process

Simplest, least disruptive, easiest to implement

Solution need not be optimal Assumes past decisions are good Built on individual’s invalidate

model

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Simulation

Places no restrictions on mathematical structure or cost functions

Can test many relationships

No optimal solution guaranteed Often a long, costly, process

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Pure Strategies for the Informal ApproachPure Strategies for the Informal ApproachPure Strategies for the Informal ApproachPure Strategies for the Informal Approach

Matching DemandMatching Demand Level CapacityLevel Capacity

Buffering with inventoryBuffering with inventory Buffering with backlogBuffering with backlog Buffering with overtime or subcontractingBuffering with overtime or subcontracting

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Matching Demand StrategyMatching Demand StrategyMatching Demand StrategyMatching Demand Strategy

Capacity (Production) in each time period is varied to Capacity (Production) in each time period is varied to exactly match the forecasted aggregate demand in exactly match the forecasted aggregate demand in that time periodthat time period

Capacity is varied by changing the workforce levelCapacity is varied by changing the workforce level Finished-goods inventories are minimalFinished-goods inventories are minimal Labor and materials costs tend to be high due to the Labor and materials costs tend to be high due to the

frequent changesfrequent changes

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Developing and EvaluatingDeveloping and Evaluatingthe Matching Production Planthe Matching Production Plan

Developing and EvaluatingDeveloping and Evaluatingthe Matching Production Planthe Matching Production Plan

Production rate is dictated by the forecasted Production rate is dictated by the forecasted aggregate demandaggregate demand

Convert the forecasted aggregate demand into the Convert the forecasted aggregate demand into the required workforce level using production time required workforce level using production time informationinformation

The primary costs of this strategy are the costs of The primary costs of this strategy are the costs of changing workforce levels from period to period, i.e., changing workforce levels from period to period, i.e., hirings and layoffshirings and layoffs

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Level Capacity StrategyLevel Capacity StrategyLevel Capacity StrategyLevel Capacity Strategy

Capacity (production rate) is held level (constant) Capacity (production rate) is held level (constant) over the planning horizonover the planning horizon

The difference between the constant production rate The difference between the constant production rate and the demand rate is made up (buffered) by and the demand rate is made up (buffered) by inventory, backlog, overtime, part-time labor and/or inventory, backlog, overtime, part-time labor and/or subcontractingsubcontracting

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Developing and EvaluatingDeveloping and Evaluatingthe Level Production Planthe Level Production PlanDeveloping and EvaluatingDeveloping and Evaluatingthe Level Production Planthe Level Production Plan

Assume that the amount produced each period is Assume that the amount produced each period is constant, no hirings or layoffsconstant, no hirings or layoffs

The gap between the amount planned to be produced The gap between the amount planned to be produced and the forecasted demand is filled with either and the forecasted demand is filled with either inventory or backorders, i.e., no overtime, no idle inventory or backorders, i.e., no overtime, no idle time, no subcontractingtime, no subcontracting

. . . more. . . more

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Developing and EvaluatingDeveloping and Evaluatingthe Level Production Planthe Level Production PlanDeveloping and EvaluatingDeveloping and Evaluatingthe Level Production Planthe Level Production Plan

The primary costs of this strategy are inventory The primary costs of this strategy are inventory carrying and backlogging costscarrying and backlogging costs

Period-ending inventories or backlogs are determined Period-ending inventories or backlogs are determined using the inventory balance equation:using the inventory balance equation:

EIEItt = EI = EIt-1t-1 + (P + (Ptt - D - Dt t ))

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Aggregate Plans for ServicesAggregate Plans for ServicesAggregate Plans for ServicesAggregate Plans for Services

For standardized services, aggregate planning may be For standardized services, aggregate planning may be simpler than in systems that produce productssimpler than in systems that produce products

For customized services,For customized services, there may be difficulty in specifying the nature and there may be difficulty in specifying the nature and

extent of services to be performed for each extent of services to be performed for each customercustomer

customer may be an integral part of the production customer may be an integral part of the production systemsystem

Absence of finished-goods inventories as a buffer Absence of finished-goods inventories as a buffer between system capacity and customer demandbetween system capacity and customer demand

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Preemptive TacticsPreemptive TacticsPreemptive TacticsPreemptive Tactics

There may be ways to manage the extremes of There may be ways to manage the extremes of demand:demand: Discount prices during the valleys.... have a saleDiscount prices during the valleys.... have a sale Peak-load pricing during the highs .... electric Peak-load pricing during the highs .... electric

utilities, Nucorutilities, Nucor

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A small manufacturing company with 200 employees produces umbrellas. The company produces the following three product lines: 1) the Executive Line, 2) the Durable Line and 3) the Compact line, as shown in the below

Executive Line

Durable Line

Compact Line

Aggregate Planning ExampleAggregate Planning ExampleAggregate Planning ExampleAggregate Planning Example

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0

2000

4000

6000

8000

10000

J a n Fe b Ma r Apr Ma y J un

45005500

7000

10000

8000

6000

Number of working days:Jan: 22Feb: 19Mar: 21Apr: 21May: 22Jun: 20

Aggregate Planning Example: Aggregate Planning Example: Demand for Executive UmbrellasDemand for Executive UmbrellasAggregate Planning Example: Aggregate Planning Example:

Demand for Executive UmbrellasDemand for Executive Umbrellas

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Aggregate Planning Example: Aggregate Planning Example: Cost Information for Executive UmbrellasCost Information for Executive Umbrellas

Aggregate Planning Example: Aggregate Planning Example: Cost Information for Executive UmbrellasCost Information for Executive Umbrellas

Materials $5.00 /unitHolding costs $1.00 /unit/monthMarginal cost of stockout $1.25 /unit/monthHiring & training cost $200.00 /workerLayoff costs $250.00 /workerLabor hours required 0.15 hrs/unit

Straight time labor cost $8.00 /hrBeginning inventory 250 unitsProductive hours 7.25 hrs/worker/dayPaid straight hours 8 hrs/dayBeginning # of workers 7 workers

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Aggregate Planning Example: Aggregate Planning Example: Determining Straight Labor Costs and Output for Executive UmbrellasDetermining Straight Labor Costs and Output for Executive Umbrellas


Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1063.33 918.33 1015 1015 1063.33 966.67$/worker $1,408 1,216 1,344 1,344 1,408 1,280

January159.5 = 22 [days/month] * 7.25 [productive hrs/worker]1063.33 = 159.5 [hrs/worker/month] / .15 [hrs/unit]$1,408 = 8 [$/hr] * 8 [paid hrs/day] * 22 [days/month]

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Aggregate Planning ProblemJan Feb Mar Apr May Jun

Days/month 22 19 21 21 22 20Hrs/worker/month 160 138 152 152 160 145Units/worker 1,063 918 1,015 1,015 1,063 967Labor cost/worker $1,408.00 $1,216.00 $1,344.00 $1,344.00 $1,408.00 $1,280.00

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• 4,500 units is the demand in January (any combination of firm orders and forecast

• 250 is the starting inventory position• 4,250 = 4,500 – 250• 3.997 = 4,250 / 1,063.33• 7 = workforce level at the beginning of

January• 3 = 7 – 4 = workers fired• 4 = workforce level at end of January• 0 = ending inventory level

JanDays/mo 22Hrs/worker/mo 159.5Units/worker 1,063.33$/worker $1,408

JanDemand 4,500Beg. inv. 250Net req. 4,250Req. workers 3.997HiredFired 3Workforce 4Ending inventory 0

Aggregate Planning ExampleAggregate Planning ExampleChase Strategy for Executive UmbrellasChase Strategy for Executive Umbrellas


• Objective: Adjust workforce level so as to eliminate the need to carry inventory from period to period

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Chase StrategyJan Feb Mar Apr May Jun

Demand 4,500 5,500 7,000 10,000 8,000 6,000Beginning inventory 250 0 0 0 0 0Net requirements 4,250 5,500 7,000 10,000 8,000 6,000Beginning # of workers 7 4 6 7 10 8Required workers 4 6 7 10 8 6Workforce adjustment -3 2 1 3 -2 -1Production quantity 4,250 5,500 7,000 10,000 8,000 6,000Ending inventory 0 0 0 0 0 0

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January costs: $21,250.00 = 4,250 [units] * $5 [$/unit]$ 5,627.59 = 3.997 [workers] * 1,408 [$/worker]$ 750.00 = 3 [workers fired] * 250 [$/worker fired]

Chase Strategy CostsJan Feb Mar Apr May Jun

Material cost $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 $203,750.00Labor cost $5,628.00 $7,283.00 $9,269.00 $13,242.00 $10,594.00 $7,945.00 $53,961.00Hiring cost $0.00 $400.00 $200.00 $600.00 $0.00 $0.00 $1,200.00Firing cost $750.00 $0.00 $0.00 $0.00 $500.00 $250.00 $1,500.00Inventory holding cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Inventory stockout cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

TOTAL: $260,411.00

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Aggregate Planning ExampleAggregate Planning ExampleLevel Strategy for Executive UmbrellasLevel Strategy for Executive Umbrellas

JanDemand 4,500Beg. inv. 250Net req. 4,250Workers 6Production 6,380Ending inventory 2,130Surplus 2,130Shortage

• Objective: Adjust inventory level so as to eliminate the need to hire or fire workers from period to period

• Assume that January is started with 6 employees

• 6,380 = 6 [employees] * 1,063.33 [units/worker]

• 2,130 = 6,380 – 4,250 (surplus)

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Level Capacity StrategyJan Feb Mar Apr May Jun

Demand 4,500 5,500 7,000 10,000 8,000 6,000Beginning inventory 250 2,130 2,140 1,230 -2,680 -4,300Net requirements 4,250 3,370 4,860 8,770 10,680 10,300Beginning # of workers 6 6 6 6 6 6Required workers 4 4 5 9 10 11Workforce adjustment 0 0 0 0 0 0Production quantity 6,380 5,510 6,090 6,090 6,380 5,800Ending inventory 2,130 2,140 1,230 -2,680 -4,300 -4,500

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January costs: $8,448 = 6 [workers] * $1,408 [$/worker]$ 31,900 = 6,380 [units] * $5 [$/unit]$ 2,130 = 2,130 [surplus units] * $1 [$/unit held/month]

Level Capacity Strategy CostsJan Feb Mar Apr May Jun Total

Material cost $31,900.00 $27,550.00 $30,450.00 $30,450.00 $31,900.00 $29,000.00 $181,250.00Labor cost $8,448.00 $7,296.00 $8,064.00 $8,064.00 $8,448.00 $7,680.00 $48,000.00Hiring cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Firing cost $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Inventory holding cost $2,130.00 $2,140.00 $1,230.00 $0.00 $0.00 $0.00 $5,500.00Inventory stockout cost $0.00 $0.00 $0.00 $3,350.00 $5,375.00 $5,625.00 $14,350.00

TOTAL: $249,100.00

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Aggregate Planning ExampleAggregate Planning ExampleWhich Plan is Cheaper?Which Plan is Cheaper?

Level CapacityLevel Capacity ChaseChase

$249,100.00 $260,411.00

Clearly, the level capacity plan is cheaper over the selected time horizon

Note: Be cautious in using the chase strategy as many intangibles, such as employee loyalty and commitment to the organization are adversely affected

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Production Plan ExampleProduction Plan Example

110

400

1500 —

1250 —

1000 —

750 —

500 —

250 —

0 —| | | |1 2 3 4

Quarter

Pai

nt

(th

ou

san

ds

of

gal

lon

s)

510

300

Inventoryconsumption

Production plan

Requirements

Inventoryaccumulation

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Staffing Strategies in Services: Level StrategyStaffing Strategies in Services: Level Strategy

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Staffing Strategies in Services: Chase StrategyStaffing Strategies in Services: Chase Strategy

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Aggregate Planning Example via ExcelAggregate Planning Example via Excel

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Aggregate Planning Example via LPAggregate Planning Example via LP

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Aggregate Planning ExampleAggregate Planning Example Computer ApplicationComputer Application


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Aggregate Planning ExampleAggregate Planning ExampleAggregate Planning ExampleAggregate Planning Example

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The EndThe End

Sales & Operations Planning

Documents

selected planning horizon

capacity available

aggregate decisions

forecast of aggregate

expected demand plan

control systems pond

demand research

control systems wrapup