Sales and Operations Planning Alessandro Anzalone, Ph.D. Hillsborough Community College, Brandon Campus 1. Purpose of Sales and Operation Planning 2. General Design of Sales and Operations Planning 3. Approaches to Sales and Operations Planning 4. Strategies for Sales and Operations Planning 5. Balancing Resources for Sales and Operations Planning 6. Qualitative Issues 7. Some Business Environment Issues 8. References 1
S&OPs tend to be a major source for the planning of: 1. Inventory levels 2. Cash flow 3. Human Resource needs a. Number of people b. Skill levels c. Timing of need d. Training programs 4. Capital needs 5. Production outputs 6. Capacity planning (e.g., equipment) 7. Sales and marketing activities iti a. Sales promotions b. Advertising c. Pricing d. New product introductions e. Expansion of markets Major objectives of the S&OP: 1. Support and measure the business plan 2. Support the customer 3. Ensure that plans are realistic 4. Manage change effectively 5. Manage finished good inventory and/or backlog better to support customer service 6. Control costs 7. Measure performance 8. Build teamwork 2
Often products and/or services are aggregated along family lines in the S&OP (thus the origin of the term aggregate planning ). The key determinant is grouping together products or services that will utilize similar resources. This makes sense when you realize that the function of the activity i is to plan resources. There is at least one other important reason for the aggregation. The primary source of demand estimates that drive the development of the plan is forecasting. Forecasts tend to be more accurate when developed in aggregate as opposed to plans for specific products or services. These forecasts need to be developed and then coordinated with strategic plans that could provide significant influence on the actual demand. Examples of plans that could impact demand include: Advertising campaigns Promotions Pricing changes Strategic moves into new markets Moves against competition Development of new products New uses for existing products 3
The primary focus of developing S&OP is to establish decisions about sales volumes, customer service goals, rates of production, inventory levels, and order backlogs. In order to accomplish this process, it is important for Sales, Marketing, Operations, Finance, and Product Development to all work together, guided d by the strategic plan and vision i for the future of the firm. Once the strategic planning process is completed in a firm, it is generally used to make a business plan, which is usually expressed in financial terms. Since many of the decisions made in the S&OP will impact the financial plans, it is important that these two planning processes are reconciled for agreement. Since in most firms the business plan is owned by top management, it is clear that those top managers must also be involved in the S&OP process. There are other reasons top management involvement is important their involvement provides a clear message to all in the firm that the process and outcome of the process are important activities, and therefore the resulting plans should be followed. The Make-to-Stock View of an S&OP 4
The Make-to-Order View of an S&OP When the product is a make-to-order product, there is generally no finished goods inventory. The orders are taken and then production starts to that order. The orders that exist awaiting production are typically called a backlog. The Make-to-Order View of an S&OP 5
Mathematically, there are several approaches used to develop plans. In the past some companies would often try to put the major information into mathematical algorithms to search for an optimal combination of products to maximize an objective function, often defined in terms of profitability. While that approach is still taken in some environments where capacity and outputs are well defined and not too complex (such as in some process industries such as chemicals), many companies opt for different approaches for several reasons: Environments are often too complex to capture all the major variables and conditions adequately without making the model very difficult to set up, solve, and manage. When simplifying assumptions are made to make the mathematical model manageable, the simpler model often does not adequately reflect the environment itself. Many managers have not been adequately trained in modeling techniques to the point where they can understand how to manage the process. A second approach is to simulate the production environment in a computer simulation, allowing rapid and effective solutions to scenarios that can be input into the program. This approach is gaining in popularity as fast and efficient computers become plentiful and inexpensive, and as the simulation i programming packages become more powerful and easier to use. While it is often difficult to initially build the simulation model, once built the approach can be quite effective in developing what if approaches to the planning process. The third popular approach is really a subset of the second. It involves simulating the demand on an production resource environment in the form of a computer spreadsheet. As with a simulation of the entire production environment, once the spreadsheet format has been established it becomes relatively easy to investigate various approaches in a what if format. 6
Trade-off Approaches The general objective of developing a good S&OP is to find the best alternative to align resources to meet the expected demand under certain operating conditions. i Often best means an attempt to maximize firm profits, but other conditions can also be established to define best in the context of the firm s strategic plan. Examples of other conditions may be: Attempting to meet all expected customer demand Attempting to minimize inventory investment Attempting to minimize the adverse impact on people, often experienced with volatility in the workforce caused by frequent layoffs Trade-off Approaches There are three general categories of approaches used. They are: Level Chase Combination 7
Level. As the name implies, a level planning approach establishes a level set of resources and implies the demand will fluctuate around those available resources, or, in some cases, attempts to alter the demand patterns themselves to more effectively match the resource levels established. blihd This approach tends to be more common and certainly more appealing in environments where resources are difficult or expensive to alter. This also tends to be the approach used in many lean production environments. Examples include: Professional services, such as doctors and dentists. Hotels and airlines. In both cases the resources (rooms and seats, respectively) are again expensive and difficult to alter in quantity. Some manufacturing processes have similar characteristics. Some chemical processes cannot be turned off without expensive and timeconsuming startup activities, and they additionally cannot be sped up or slowed down. The one luxury that manufacturing processes have over the two previous examples is the ability to inventory the output as an alternative to altering the demand. 8
Chase. This approach represents the other extreme, in that demand is not altered, but resources are. In fact in a pure chase environment the resources are continually being raised or lowered to meet the demand as it fluctuates under normal market conditions. As the approach is the opposite of level, l so too are the typical characteristics i of the environments where chase strategies may be appealing or, in some cases, the only alternative. These tend to be environments where demand is difficult or impossible to alter and where attractively simple and/or inexpensive methods to alter the resource base are available. Examples of such environments include: Mid-tier suppliers of manufactured products. The demand for such products are often resulting from customers two or more levels down the supply chain, making it difficult if not impossible to alter demand. For example, a supplier of light bulbs for automobiles is reacting to demand from the automobile manufacturers, which in turn are reacting to the consumers of the automobiles. The light bulb manufacturer has little ability to influence the demand for automobiles themselves. Service industries where demand is difficult to predict and equally difficult to alter. Some examples include: Grocery stores and banks, where demand is often not recognized until the customer actually walks in and declares what they want. Professional tax accounting services, which h must attempt to deliver much of their service during the tax season with little opportunity to alter the demand pattern. Some process industries such as electric utilities. 9
Combination. This approach is by far the most common approach. As the name implies, companies using this approach will mix and match, altering demand and resources in such a way to maximize performance to their established criteria, including profit, inventory investment, and the impact on people. 10
There are several options open to most companies for accomplishing the planning of resources. In general, they fall into two categories. One focuses on the supply side (Operations) to attempt to change the production supply. The other focuses on the demand side (Marketing and Sales) ) to attempt to alter demand d patterns to meet production outputs. The strategies are summarized next. Internal strategies (focusing on operations the supply side): Hire and fire As the name implies, this strategy focuses on altering the number of workers. Temporary workers In some industries, this alternative is becoming increasingly i popular. Overtime/slack time The overtime alternative has been common in many companies for a number of years. Recently, companies in some environments are recognizing that it occasionally may be a wise move to continue to keep and pay workers, but to not expect them to produce product unless there is demand for that product. Subcontracting Also called outsourcing in some environments, this option has also become popular in some companies in recent years. Basically, it means that the company will contract with a supplier or other contractor to produce some or all of a required output. 11
Internal strategies (focusing on operations the supply side): Inventory This is a very common option in manufacturing companies. Basically, the implication is that inventory will be produced during times of low demand and used to meet demand during times of high demand. d Backlog As the name implies, this means the company will take the customer order even if it does not have inventory or capacity to meet the immediate demand, but will promise delivery when capacity is available. Do not meet demand Again, as the name implies, this options means the company will simply decline to take a customer order if they do not have the inventory or capacity to meet the order requirements. Change production rates This option is rarely used, since it has a potentially negative impact on the workers. It implies the capability to slow down or speed up the rate of production. It can potentially have a negative impact on both morale and output quality. External strategies (focusing on the customer to alter demand rates) indude the following: Pricing As the name implies, this involves changing the price of the product or service. Generally lowering the price will increase demand while raising i prices will decrease demand. d Promotions Offering special incentives ( rebates, for example) are occasionally used to increase demand. Advertising A very common strategy used to increase customer awareness and increase demand. Reservations Often used when capacity is scarce or very expensive (such as in some restaurants, in doctor s offices, dentist s offices, etc.), this approach smoothes demand, allowing both better customer service and more effective utilization of the scarce or expensive resource. Package offerings A special type of promotion, the package offers tend to link popular items with less popular items to smooth the overall demand. 12
1. The human factor. Some of these approaches imply the manipulation of humans in the operation. The most obvious is the use of layoffs and/or hiring, as well as overtime. 1. Layoffs will often impact the morale of the people. 2. Hiring, i too, has implications i 3. The use of temporary workers can also cause some problems, not only with the obvious impact of learning curve, but also cost efficiencies for full-time workers. 4. Even with a stable workforce, the assumption of a fixed output per worker built in to the sample model clearly may not hold due to the impact of learning and experience. 2. The customer factor. 3. The forecast factor. 4. External environmental factors. There are often constraints or pressures from the environment outside the organization that will constrain or at least impact the ability to create an ideal S&OP. Some of the more common of these include: 1. Labor contracts or union activities that can constrain the ability to obtain the right number of people with the right skills. Also, the cost of these resources will potentially be impacted. Even without union activity the size and/or cost of the labor pool can be impacted by availability of labor skills due to location. 2. Government regulation, especially concerning environmental, health, and safety issues, can impact both costs and resources. 3. Competitive forces in the market can always impact demand. The forecast, which is the usual starting point for making the S&OP, is based on a projection of demand from past data, but clearly strategic moves by competitors in the market are sometimes hard to project and their impact on the market difficult to estimate. 13
Level of detail. The issue here is first to determine whether the time aggregation should be in weeks, months, quarters, or some other unit of time. The general rule to dictate the logical time aggregation is to link it to the volatility in the market the company is serving. Keeping in mind that the primary purpose of this level l of planning is to plan resources, one must first determine how quickly change is likely to occur in the market, and how much such a change is likely to impact the resources that are being planned. Also at issue is whether the operation can or chooses to react to changes quickly. A highly capital-intensive operation producing a high- volume standard product, for example, is more likely to look at quarterly figures instead of monthly, especially if their strategy is largely based on level planning. The level of aggregation of products or services must also be addressed. Time horizon. The next question is how far into the future should the plan go? The general answer is that the plan should have a horizon at least as long as the time it takes to make the change in the resource base being planned. For example, if the resources are workers, we must know how long it will take to hire and train (if necessary) the workers necessary. The same is true for equipment how long will it take to obtain and implement any equipment changes necessary? When making these determinations, one must have some ideas as to the present conditions, including: Flexibility of the existing workforce can they be moved from one resource base to another with relative ease? Flexibility of the existing equipment can it be used for producing multiple categories of aggregated outputs? Ease of obtaining capital and the amount of time it takes to obtain the capital most resource changes (especially resource additions) will require financing, and the company must know how that will be done and how long it will take to obtain. 14
1. Stephen N. Chapman, The Fundamentals of Production Planning and Control, Prentice Hall, 2006, ISBN-13: 978-0130176158. 2. http://logistics.about.com/od/tacticalsupplychain/a/sandop.htm com/od/tacticalsupplychain/a/sandop htm 3. http://www-01.ibm.com/software/data/cognos/solutions/manufacturing/salesand-operations-planning.html 15