Forecasting and Demand Presentation
Forecasting is essentially a reactive approach that considers fluctuations in demand to be mostly outside the firm’s control.
Rather than simply forecasting and reacting to changes in demand, however, business executives would prefer to influence the
timing, pattern, and certainty of demand to whatever extent they can. They do this through demand management activities that
adjust product characteristics including price, promotion, and availability. The purpose is to influence product demand to achieve
sales objectives and to accommodate the supply chain resources and capacities that a firm has in place.
1. How would you require extra resources to expand and contract capacity to meet varying demand for your current
organization?
2. How does backlogging smooth out certain orders to demand fluctuations?
3. When does customer dissatisfaction create an inability to meet all demands?
4. How would you buffer a system through the use of safety stocks (excess inventories), safety lead time (lead times with
a cushion) or safety capacity (excess resources) at work?
5. 10 – 12 slides excluding cover and reference page
6. Three outside sources
EXAMPLE TO USE: Beats Earbuds: use Beats earbuds as an example in your discussion.
Due: November 1
Chapter 13
Sales and Operations Planning
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Learning Objectives
13-1 Describe the role and the process of sales and operations planning.
13-2 Define the contents of an aggregate plan.
13-3 Explain the relevant costs in developing an aggregate plan.
13-4 Contrast different types of aggregate production strategies.
13-5 Develop alternative aggregate production plans.
13-6 Explain the differences in aggregate planning in services versus manufacturing industries.
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Harvesting the Fruits of S&O P at Sunsweet Growers
Learning Objective 13-1
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Sales and Operations Planning
Sales and Operations Planning (S&O P): process for integrating marketing and operations plan to develop a tactical plan.
Attempt to balance supply and demand.
Learning Objective 13-1
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Sales and Operations Planning Overview
Figure 13-1 Overview of Sales and Operations Planning
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Balancing Objectives 1
Table 13-1 Sales and Operations: Balancing Objectives
| Sales | Operations |
| Aggregate forecasts | Detailed forecasts |
| Many product variations | Few product variations |
| Rapid-response | Long production runs |
| High service | Stable production schedules |
| Maximize revenue | Maximize output; minimize costs |
Learning Objective 13-1
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Balancing Objectives 2
Table 13-1 Finance and Operations: Balancing Objectives
| Finance | Operations |
| Maximize financial returns | Minimize costs |
| Reduce financial risk | Reduce variance |
| High returns on investment | Maintain up-time |
| Focus on customers with highest contribution margins | Focus on grouping orders together to enhance operational efficiency or to reduce setups |
Learning Objective 13-1
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Benefits of Sales & Operations Planning 1
Quantitative benefits:
Improved forecast accuracy.
Higher customer service.
More stable supply.
Better new product introduction.
Learning Objective 13-1
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Benefits of Sales & Operations Planning 2
Quantitative benefits:
Better organizational teamwork.
Faster and better aligned decision making.
Greater accountability for performance.
Better business visibility.
Learning Objective 13-1
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Demand Planning and O M
Figure 13-2 The S&O P Process
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Levels of S&O P Maturity 1
Table 13-3 Sales and Operations Maturity Model
| Stage 1: Marginal Process | Stage 2: Typical Process | Stage 3: Classic S&O P Process | Stage 4: I B P Process |
| Informal meetings – Sporadic scheduling – Desired outcomes rarely addressed | Routine meetings – Regular cadence established – Spotty attendance and preparation | Disciplined meetings – 100% preparation and participation – Roles clearly defined – Clearly defined outcomes: | Event-driven meetings – Address changes or supply-demand imbalances – Strategic as well as tactical planning |
| Disjointed processes – Separate, misaligned plans – Unclear involvement with shott-term outlook | Interfaced processes – Demand plans reconciled – Supply plans aligned to demand plans – Supply plans aligned to demand plans – Sales directors and department managers | Integrated processes – Demand & supply plans jointly aligned; constraints identified; some risks identified – Execs, directors, managers: from ops, sales, finance – C P F R with limited number of suppliers and customers | Extended processes – Demand, supply, and capital plans aligned internally and externally using collaboration hub – Extensive risk/ scenario planning – C P F R with all important suppliers & customers – Frequent outcome reviews & process improvements |
Learning Objective 13-1
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Levels of S&O P Maturity 2
Table 13-3 Sales and Operations Maturity Model
| Stage 1: Marginal Process | Stage 2: Typical Process | Stage 3: Classic S&OP Process | Stage 4: IBP Process |
| Minimal technology Multitude of spreadsheets. Sequential updates. Much data cleansing and manual translation | Interfaced applications Demand planning and multi-facility E R P and advanced planning systems interfaced on a one-way basis. Incomplete data. Business intelligence available but not routinely used | Integrated applications Integrated, concurrent demand and supply planning packages. Business intelligence, analytics, scenario evaluation tools. Master data consistently defined and hạrmonized. External information brought in manually | Full set of integrated technologies Advanced S&O P workbench. External facing collaborative software integrated with internal systems. Master data harmonized throughout the supply chain |
| Traditional measures Many metrics, function specific, outcomes only | Interfaced measures Consolidated set of K P Is Cross-functional awareness | Integrated meásures Functional and aligned K P Is approved by team; trade-offs addressed. Cross-S O P process scorecard. Industry benchmarking | Strategic measures Profit-based metrics. Measures of strategic initiative attainment. Aligned with customer promises. Best in class benchmarking |
Learning Objective 13-1
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S&O P: Recent Trends and Developments
Advances in digital technology such as:
Analytics.
Big Data.
Internet of Things (I o T).
Blockchain.
These developments are:
Driving down costs.
Improving overall performance.
Enabling S C to be more responsive.
Learning Objective 13-1
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Aggregate Production Planning
Aggregate Production Planning:
Balances production, inventory, resources and demand.
Specifies production rates, inventory, employment levels, backlogs, possible subcontracting, and other resources needed to meet the sales plan.
Learning Objective 13-2
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Aggregate Production Planning Costs
Holding Inventory: having inventory on hand.
Regular Production: average labor and benefits.
Overtime: working more hours than standard.
Hiring: finding, acquiring and training new employees.
Fire/Layoff: separation packages.
Backorder/lost sales: expediting supply, lost goodwill.
Subcontracting: unit cost and loss of control.
Learning Objective 13-3
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Aggregate Planning Strategies 1
Level: produce at a constant rate, use changing inventory levels to buffer supply and demand.
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Creating a Level Aggregate Plan
Level: produce at a constant rate, use changing inventory levels to buffer supply and demand.
P = level production rate
E I = desired ending inventory level
B I = beginning inventory
N = Number of planning periods
Learning Objective 13-4
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Aggregate Planning Strategies 2
Chase: change production to match demand, inventory remains relatively stable and low.
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Aggregate Planning Strategies 3
Chase: change production to match demand, inventory remains relatively stable and low.
Hire and Fire Employees: Produce all units internally by hiring workers in high-demand months and firing/laying off workers in low-demand months.
Use Overtime: Produce internally the quantity required to meet demand in the lowest-demand month and use overtime production to meet demand in other months.
Subcontract: Produce internally the quantity required to meet demand in the lowest-demand month and use subcontracting to meet demand in other months.
Discussion question:
What circumstances would favor a chase plan over a level plan?
Learning Objective 13-4
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Aggregate Planning Strategies 4
Figure 13-3 Retail Sales by Week
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Aggregate Planning Strategies 5
Hybrid: combination of level and chase strategies.
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Level Aggregate Plan Example 13-1 1
Example 13-1
The level production rate for the Sodas Galore plan is:
Determine the number of workers needed to produce the required quantity each month:
= 10 production employees
Learning Objective 13-5
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Level Aggregate Plan Example 13-1 2
P = level production rate
= demand in period i
EI = desired ending inventory level
BI = beginning inventory
N = Number of planning periods
Learning Objective 13-5
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Level Aggregate Plan Example 13-1 3
Determine the number of workers to hire or fire.
Table 13-5 Sodas Galore Planning Data
| Current workforce | 8 workers |
| Average monthly output per worker | 4,000 cases per month |
| Inventory holding cost | $0.30 per case per month |
| Regular wage rate | $20.00 per hour |
| Regular production hours/month | 160 hours |
| Overtime wage rate | $30.00 per hour |
| Hiring cost | $1,000 per worker |
| Subcontracting cost | $1.15 per case |
| Firing/layoff cost | $1,500 per worker |
| Beginning inventory | 5,000 (all safety stock) |
8 workers: Need to hire 2 additional workers.
Learning Objective 13-5
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Level Aggregate Plan Example 13-1 4
Develop the plan.
Table 13-6 Sodas Galore Level Production Plan
Beginning inventory = 5,000; Beginning workers = 8
| Month | Demand | Regular Production | Overtime or Subcontract Production | Ending Inventory* | Workers Required (4,000 cases/ worker) | Hire | Fire/Lay Off |
| Jan. | 24,000 | 40,000 | 0 | 21,000 | 10 | 2 | 0 |
| Feb. | 32,000 | 40,000 | 0 | 29,000 | 10 | 0 | 0 |
| March | 32,000 | 40,000 | 0 | 37,000 | 10 | 0 | 0 |
| April | 48,000 | 40,000 | 0 | 29,000 | 10 | 0 | 0 |
| May | 60,000 | 40,000 | 0 | 9,000 | 10 | 0 | 0 |
| June | 44,000 | 40,000 | 0 | 5,000 | 10 | 0 | 0 |
| Total | 240,000 | 240,000 | 0 | 130,000 | 2 | 0 |
Learning Objective 13-5
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Level Aggregate Plan Example 13-1 5
Ending Inventory*
21,000 = Beginning Inventory + Production − Demand
= 5,000 + 40,000 − 24,000
= 21,000
29,000 = Beginning Inventory + Production − Demand
= 5,000 + 40,000 − 24,000
= 21,000
Note: the Ending inventory of prior period becomes the Beginning Inventory of the next period.
Learning Objective 13-5
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Creating a Chase Aggregate Plan
Chase: change production to match demand, inventory remains relatively stable and low.
Three options to consider:
Produce everything in house, vary the workforce level.
Produce everything in house, workforce level to meet lowest demand period, use overtime for higher demand.
Produce everything in house, workforce level to meet lowest demand period, use subcontractor to produce higher demand.
Learning Objective 13-5
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Chase Plan Example 13-2 1
Table 13-7 Chase Plan: Adjust Workforce Size
Beginning inventory = 5,000; Beginning workers = 8
| Month | Demand | Regular Production | Overtime or Subcontract Production | Ending Inventory* | Workers Required (4,000 cases/ worker) | Hire | Fire/Lay Off |
| Jan. | 24,000 | 24,000 | 0 | 5,000 | 6 | 0 | 2 |
| Feb. | 32,000 | 32,000 | 0 | 5,000 | 8 | 2 | 0 |
| March | 32,000 | 32,000 | 0 | 5,000 | 8 | 0 | 0 |
| April | 48,000 | 48,000 | 0 | 5,000 | 12 | 4 | 0 |
| May | 60,000 | 60,000 | 0 | 5,000 | 15 | 3 | 0 |
| June | 44,000 | 40,000 | 0 | 5,000 | 11 | 0 | 4 |
| Total | 240,000 | 240,000 | 0 | 30,000 | 9 | 6 |
Learning Objective 13-5
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Chase Plan Example 13-2 2
Regular production:
Under the Chase plan, Production = Demand.
To produce 24,000 units, 6 workers Are needed.
Fire/ layoff:
Since at the beginning of the period, there are 8 Workers, two will be laid off.
Learning Objective 13-5
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Chase Plan – Overtime or Subcontract Example 13-3
Table 13-8 Chase Plan: Use Overtime or Subcontract Labor
Beginning inventory = 5,000; Beginning workers = 8
| Month | Demand | Regular Production | Overtime or Subcontract Production | Ending Inventory* | Workers Required (4,000 cases/ worker) | Hire | Fire/Lay Off |
| Jan. | 24,000 | 24,000 | 0 | 5,000 | 6 | 0 | 2 |
| Feb. | 32,000 | 24,000 | 8,000 | 5,000 | 6 | 0 | 0 |
| March | 32,000 | 24,000 | 8,000 | 5,000 | 6 | 0 | 0 |
| April | 48,000 | 24,000 | 24,000 | 5,000 | 6 | 0 | 0 |
| May | 60,000 | 24,000 | 36,000 | 5,000 | 6 | 0 | 0 |
| June | 44,000 | 24,000 | 20,000 | 5,000 | 6 | 0 | 0 |
| Total | 240,000 | 144,000 | 96,000 | 30,000 | 0 | 2 |
Overtime or subcontract production: Units needed each month are met by either overtime work or subcontracting.
Learning Objective 13-5
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Comparison of Five Plans at Sodas Galore Example 13-4
Table 13-9 Sodas Galore: A Hybrid Solution
Beginning inventory = 5,000; Beginning workers = 8
| Month | Demand | Regular Production | Overtime or Subcontract Production | Ending Inventory* | Workers Required (4,000 cases/ worker) | Hire | Fire/Lay Off |
| Jan. | 24,000 | 32,000 | 0 | 13,000 | 8 | 0 | 0 |
| Feb. | 32,000 | 32,000 | 0 | 13,000 | 8 | 0 | 0 |
| March | 32,000 | 32,000 | 0 | 13,000 | 8 | 0 | 0 |
| April | 48,000 | 32,000 | 8,000 | 5,000 | 8 | 0 | 0 |
| May | 60,000 | 32,000 | 28,000 | 5,000 | 8 | 0 | 0 |
| June | 44,000 | 32,000 | 12,000 | 5,000 | 8 | 0 | 0 |