Sales & Operations Planning

Dr. Ashutosh Sarkar

Assistant Professor
Vinod Gupta School of Management
Indian Institute of Technology Kharagpur
 Strategic Planning

Sales & Operations Planning

Marketing Plan Financial Planning
(Volume)

Sales Plan Operations Plan Demand

Resource Planning Management

Rough-cut Master Production Schedule

Capacity Planning (Mix)
• SOP links manufacturing to strategic objectives

• Four fundamentals: demand, supply, volume and mix

• Balance between demand and supply

• Volume concerns big-picture decisions

– How much to make
– Production rates for product families

• Mix concerns detailed decisions

– Which individual products to make
– In what sequence
– For which customer
 Materials Planning & Control
History Plan

Oct Nov Dec Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec

Sales
Forecast 333 437 230 253 280 340 300 393 233 287 420 480 427 527 393
(in 1,000 units)
Actual 300 400 200
Difference -33 -37 -30
Operations
Plan 333 437 230 348 366 401 348 383 383 174 401 348 383 348 348
Actual 360 455 300
Difference 27 18 70
Inventory
Plan 100 100 100 310 396 457 506 496 646 534 514 383 339 161 116
Actual 60 115 215

Sample Sales & Operations Plan

 Aggregate Planning
• SOP or Aggregate plan is thus a statement of
– levels of capacity
– Levels of production
– Levels of subcontracting
– Levels of inventory, stockouts, and pricing over a specified time
horizon
– Goal is to maximize profit
– decisions made at a product family (not SKU) level
– time frame of 3 to 18 months
– how can a firm best use the facilities it has?

8-5
 Aggregate Planning
• Specify operational parameters over the time
horizon:
– production rate
– workforce
– overtime
– machine capacity level
– subcontracting
– backlog
– inventory on hand

8-6
 The Aggregate Planning Problem
• Given the demand forecast for each period in
the planning horizon, determine the
production level, inventory level, and the
capacity level for each period that maximizes
the firm’s (supply chain’s) profit over the
planning horizon

8-7
 Information Needed for
an Aggregate Plan
• Demand forecast in each period
• Production costs
– labor costs, regular time (mu/hr) and overtime (mu/hr)
– subcontracting costs (mu/hr or mu/unit)
– cost of changing capacity: hiring or layoff (mu/worker) and cost of
adding or reducing machine capacity (mu/machine)
• Labor/machine hours required per unit
• Inventory holding cost (mu/unit/period)
• Stockout or backlog cost (mu/unit/period)
• Constraints: limits on overtime, layoffs, capital available, stockouts
and backlogs

8-8
 Outputs of Aggregate Plan
• Production quantity from regular time, overtime, and subcontracted time:
used to determine number of workers and supplier purchase levels

• Inventory held: used to determine how much warehouse space and

working capital is needed

• Backlog/stockout quantity: used to determine what customer service levels

will be

• Machine capacity increase/decrease: used to determine if new production

equipment needs to be purchased

• A poor aggregate plan can result in lost sales, lost profits, excess inventory,
or excess capacity
8-9
 Aggregate Planning Strategies
• Trade-off between capacity, inventory, backlog/lost sales

• Chase strategy – using capacity as the lever

• Time flexibility from workforce or capacity strategy – using

utilization as the lever

• Level strategy – using inventory as the lever

• Mixed strategy – a combination of one or more of the first

three strategies
8-10
 Chase Strategy
• Production rate is synchronized with demand by varying machine capacity or
hiring and laying off workers as the demand rate varies

• However, in practice, it is often difficult to vary capacity and workforce on

short notice

• Expensive if cost of varying capacity is high

• Negative effect on workforce morale

• Results in low levels of inventory

• Should be used when inventory holding costs are high and costs of changing
capacity are low
8-11
 Time Flexibility Strategy
• Can be used if there is excess machine capacity

• Workforce is kept stable, but the number of hours worked is varied over time
to synchronize production and demand

• Can use overtime or a flexible work schedule

• Requires flexible workforce, but avoids morale problems of the chase strategy

• Low levels of inventory, lower utilization

• Should be used when inventory holding costs are high and capacity is
relatively inexpensive

8-12
 Level Strategy
• Maintain stable machine capacity and workforce levels with a constant
output rate

• Shortages and surpluses result in fluctuations in inventory levels over time

• Inventories that are built up in anticipation of future demand or backlogs

are carried over from high to low demand periods

• Better for worker morale

• Large inventories and backlogs may accumulate

• Should be used when inventory holding and backlog costs are relatively low

8-13
 Aggregate Planning at
Red Tomato Tools

Month Demand Forecast

January 1,600
February 3,000
March 3,200
April 3,800
May 2,200
June 2,200

8-14
Fundamental Tradeoffs in Aggregate Planning

• Capacity (regular time, overtime, subcontract)

• Inventory
• Backlog / lost sales
Basic Strategies
• Chase strategy
• Time flexibility from workforce or capacity
• Level strategy

8-15
 Aggregate Planning
Item Cost
Materials $10/unit
Inventory holding cost $2/unit/month
Marginal cost of a stockout $5/unit/month
Hiring and training costs $300/worker
Layoff cost $500/worker
Labor hours required 4/unit
Regular time cost $4/hour
Over time cost $6/hour
Cost of subcontracting $30/unit

8-16
 Aggregate Planning
(Define Decision Variables)
Wt = Workforce size for month t, t = 1, ..., 6
Ht = Number of employees hired at the beginning of month t,
t = 1, ..., 6
Lt = Number of employees laid off at the beginning of month t,
t = 1, ..., 6
Pt = Production in month t, t = 1, ..., 6
It = Inventory at the end of month t, t = 1, ..., 6
St = Number of units stocked out at the end of month t,
t = 1, ..., 6
Ct = Number of units subcontracted for month t, t = 1, ..., 6
Ot = Number of overtime hours worked in month t, t = 1, ..., 6

8-17
 Aggregate Planning
(Define Objective Function)
6 6
Min  640W t   300 H t
t 1 t 1
6 6 6
  500 Lt   6 Ot   2 I t
t 1 t 1 t 1
6 6 6
  5 S t   10 P t   30 C t
t 1 t 1 t 1
8-18
 Aggregate Planning (Define
Constraints Linking Variables)
• Workforce size for each month is based on
hiring and layoffs

W t  W t 1  H t  L t, or
W t  W t 1  H t  L t  0
for t  1,..., 6, where W 0  80 .
8-19
Aggregate Planning (Constraints)
• Production for each month cannot exceed
capacity
P t  40 W t  O t 4 ,
40 W t  O t 4  P t  0,
for t  1,..., 6.
8-20
 Aggregate Planning (Constraints)
• Inventory balance for each month

I t 1  P t  C t  D t  S t 1  I t  S t ,
I t 1  P t  C t  D t  S t 1  I t  S t  0,
for t  1,...,6,where I 0  1,000,
S 0  0,and I 6  500 .
8-21
Aggregate Planning (Constraints)
• Over time for each month

O t  10 W t,
10 W t  O t  0,
for t  1,..., 6.

8-22
 Scenarios
• Increase in holding cost (from $2 to $6)
• Overtime cost drops to $4.1 per hour
• Increased demand fluctuation

8-23
Increased Demand Fluctuation

Month Demand Forecast

January 1,000
February 3,000
March 3,800
April 4,800
May 2,000
June 1,400

8-24
 Aggregate Planning in Practice
• Think beyond the enterprise to the entire
supply chain
• Make plans flexible because forecasts are
always wrong
• Rerun the aggregate plan as new information
emerges
• Use aggregate planning as capacity utilization
increases

8-25
 Materials Planning & Control

Week Number
1 2 3 4 5 6 7 8 9 10 11 12
Forecast 5 5 5 5 5 5 15 15 15 15 15 15
Available 25 30 35 40 45 50 45 40 35 30 25 20
MPS 10 10 10 10 10 10 10 10 10 10 10 10
On hand 20

Sample Master Production Schedule: Level Strategy

 Materials Planning & Control

Week Number
1 2 3 4 5 6 7 8 9 10 11 12
Forecast 5 5 5 5 5 5 15 15 15 15 15 15
Available 20 20 20 20 20 20 20 20 20 20 20 20
MPS 5 5 5 5 5 5 15 15 15 15 15 15
On hand 20

Sample Master Production Schedule: Chase Strategy

 Materials Planning & Control
Week Number
1 2 3 4 5 6 7 8 9 10 11 12
Forecast 5 5 5 5 5 5 15 15 15 15 15 15
Available 15 10 5 30 25 20 5 20 5 20 5 20
MPS 30 30 30 30
On hand 20

Sample Master Production Schedule: Lot Sizing

 Materials Planning & Control
Week Number
2 3 4 5 6 7 8 9 10 11 12 13
Forecast 10 10 10 10 10 10 15 15 15 15 15 15
Available 0 -10 10 0 -10 -25 -10 -25 -10 -25 -10 -25
MPS 30 30 30 30
On hand 10

Rolling Through Time

 Materials Planning & Control
Week Number
2 3 4 5 6 7 8 9 10 11 12 13
Forecast 10 10 10 10 10 10 15 15 15 15 15 15
Available 30 20 10 30 20 5 20 5 20 5 20 5
MPS 30 30 30 30 30
On hand
10

Rolling Through Time

 Materials Planning & Control
Week Number
1 2 3 4 5 6 7 8 9 10 11 12

Forecast 5 5 5 5 5 5 15 15 15 15 15 15
Orders 5 3 2
Available 15 10 5 30 25 20 5 20 5 20 5 20
ATP 10 30 30 30 30
MPS 30 30 30 30
On hand 20

Order Promising with a Master Production Schedule

Available to promise = MPS – all orders of that period and subsequent periods
until the next MPS
 Materials Planning & Control
• Material Requirement Planning (MRP) is the detailed
plans for part needs

• For batch manufacturing processes MRP is central to

the development of detailed material requirements
plan

• MRP is characterized with time-phased requirement

records

• MPS is the input to the development of the MRP

 Materials Planning & Control
Period
1 2 3 4 5 6 7 8 9 10

Gross Requirement 10 40 10
Scheduled Receipts 50
Projected Available 4 54 44 44 4 44
Balance
Planned Order 50
Releases
Lead time = one period
Lot size = 50

Sample Material Requirement Plan

 Product Structure Diagram
1605
Shovel Complete

13122 048 118 062 14127 314

(4 required) (4 required)

457 082 11495 2142 019 14127

(2 required) (6 required)

129 1118

Detailed information on the configuration of the product for the manufacture of Shovel
 Bill of Materials
1605 Snow Shovel

13122 Top Handle Assembly (1 required)

457 Top Handle (1 required)
082 Nail (2 required)
11495 Bracket Assembly (1 required)
129 Top Handle Bracket (1 required)
1118 Top Handle Coupling (1 required)

048 Scoop-shaft Connector (1 required)

118 Shaft (1 required)
062 Nail (1 required)
14127 Rivet (4 required)
314 Scoop Assembly
2142 Scoop (1 required)
019 Blade (1 required)
14127 Rivet (6 required)
 Material Requirement Planning

Week
1 2 3 4 5 6 7 8 9 10
Gross 20 10 20 5 35 10
13122 Top requirements
Handle Scheduled
Assembly Receipts
Lead Time = Projected 25 5 5 0 0 0 0 0 0 0
2 available
balance 25
Planned order 5 20 5 35 10
releases
 Material Requirement Planning

Week
1 2 3 4 5 6 7 8 9 10
Gross 5 20 5 35 10
457 requirements
Top Handle Scheduled 25
Lead Time = Receipts
2 Projected 22 17 42 22 17 17 0 0 0 0
available
balance 22
Planned order 18 10
releases
 Material Requirement Planning

Week
1 2 3 4 5 6 7 8 9 10
Gross 10 40 10 70 20
082 requirements
Nail Scheduled 50
(2 required) Receipts
Lead Time = Projected 54 44 44 4 44 44 24 4 4 4
1 available
Lot size=50 balance 4
Planned order 50 50
releases
 Material Requirement Planning

Week
1 2 3 4 5 6 7 8 9 10
Gross 5 20 5 35 10
11495 requirements
Bracket Scheduled
Assembly Receipts
Lead Time = Projected 27 22 22 2 0 0 0 0 0 0
2 available
balance 27
Planned order 3 35 10
releases
 Material Requirement Planning

Week
1 2 3 4 5 6 7 8 9 10
Gross 3 35 10
129 requirements
Top Handle Scheduled
Bracket Receipts
Lead Time = Projected 15 15 12 12 0 0 0 0 0 0
1 available
balance 15
Planned order 23 10
releases
 Material Requirement Planning

Week
1 2 3 4 5 6 7 8 9 10
Gross 3 35 10
1118 requirements
Top Handle Scheduled 15
Coupling Receipts
Lead Time = Projected 39 54 51 51 20 20 20 20 20 20
3 available
Safety balance 39
stock=20
Planned order 4 10
releases