Sales & operations planning

Sales & Operations Planning

Long range planning : annually focus on >1 yearIntermediate range planning : 6 to 18 monthsAggregate ( complete or total ) planning is medium term planning the no. of units of the product to be produced on a weekly ,or monthly basis for the coming 3 to 6 or 12 months in line with overall business of the company which is based on demand forecast provided by the marketing departmentShort range planning : one day to 6 months ( weekly basis )

Necessity of Sales & Operations (aggregate) planning

Demand fluctuations : festive , weatherCapacity fluctuations: holidaysDifficulty in altering production rates: complex engineering productsBenefits of multi-period planning : likely scenarioAggregate production planning is done to match the demand with supply on a period to period basis

Objective is to minimize cost of resources required to meet demand over that periodAggregate planning process is essentially same for service & manufacturing , except inventory build up in manufacturingAfter aggregate planning , manufacturing & service planning are generally different

In manufacturing :Master production scheduleRough cut capacity planningMaterial requirement planningCapacity requirement planningOrder schedulingIn service•After determination of aggregate staffing level ,•Focus is on Work force & customer scheduling during week or hour by hour

Main purpose of aggregate planning is to specify optimal combination of production rate , work force level & inventory on hand to minimize various types of costs related to unplanned productionProduction rate : number Of units completed per unit of time ( per hour / per day )Work force level : number Of workers needed for production

•Inventory on hand : balance of unused inventory carried over from previous period•Otherwise high costs of :•Hiring , •layoff costs ,•overtime ,•inventory costs , excess & shortage costs• shortage leads to stock out • – loss of business & goodwill•Another cost – under-time cost , if capacity is not utilized

Business Plan

Capacity planning

Aggregate capacity planningAggregate output planning

Roughcut capacity planning planningMaster production scheduling

Material requirement planning

Operations

Output planning

Loading

Sequencing

Detailed scheduling

Detailed capacity planning

Shop floor control

Expediting,

Process planning

Strategic capacity planning

Supply network planning

Weekly work force scheduling

Master production scheduling

Daily workforce & customer scheduling

Material requirement planning

Order schedulingShort range

Long range

Medium range

Manufacturing Services

Overview of major operations & supply planning activities

Forecasting & demand Management

Vehicle capacity planning

Sales & Operations (aggregate ) planning

Vehicle loading

Vehicle despatching

Warehouse receipt planning

Logistics

Sales plan Aggregate operations plan

One approach to develop aggregate plan is to simulate various production schedule & calculate corresponding capacity requirement & see if adequate labour & requirement exist at each work centreElse , specify additional requirement : - overtime , sub contracting, extra workers etc.For each product –rough cut planThen cut – and – try or mathematical models for final & lower cost plan

Required inputs for production planning system

Market demand

Current physical capacity

Current work force

Inventory levels

Activities required for production

Competitors behaviour

Economic conditions

Raw material availability

External capacity e.g. sub-contractor

external internal

Planning for Production

Market demand

Current physical capacity

Current work force

Inventory levels

Activities required for production

Competitors behaviour

Economic conditions

Raw material availability

External capacity e.g. sub-contractor

Aggregate Production Planning Strategis

APP Strategy

APP alternative Key features

Chase strategy

Capacity adjustment No inventory carried from one period to another Made to order and project environmentSeveral service system

a. overtime / under-timeb. vary number of shiftsc. hire / lay off workers

Stable workforce

Vary output by varying no. of working hours

Provides workforce continuityAvoids emotional & tangible costs of hiring & firing

a. Flexible work schedulesb,. Overtime

Level Strategy

Inventory based Inventory as the critical link between the periods , made to stock environments , products with low risk of obsolescence

a. Stable workforceb.build inventoryc. backlog / backorder/shortage

Chase : ,worker size is varied according to demand , keeping utilization of workers & inventory size constant – hire & fire costs , morale low, insecurity . during months of heavy demand ,overtime costs Stable workforce : vary output by varying no. Of working hours -. flexible work schedules ,b,. Overtime ,provides workforce continuityAvoids emotional & tangible costs of hiring & firingLevel output rate : inventory size is varied ,keeping workforce & utilization of workers constant – high inventory during low demand/ backorder/ backlog / stock-out

Pure Strategy: when just one variable , say hiring & firing is used to absorb demand fluctuationsMixed Strategy: when two or more used in combination – more in demandSubcontracting: similar to chase but instead of hiring & firing subcontracting is done

Relevant costs1. Basic Production costsa.Fixed costsb.Variable costsc.Including direct & indirect labour

2. Costs associated with change in rate of Productiona.Hiring & training costsb.Firing / lay off costs

3. Inventory Holding (Carrying )costsCost For Storage FacilitiesHandlingInsurancePilferage (Theft)BreakageObsolescenceDeterioration/Depreciation /DegradationTaxesOpportunity Cost Of Capital

4. Backordering or shortage (Stock out ) costsa.Very Difficult to measure or calculateb.Include cost of expeditingc.loss of customer goodwilld.Order may be lost e.Short term & long term losses – customer may go to competitors this time or permanentlyf.Loss of sales revenue

Q13-p-623SHONEY VIDEO trying to determine production plan for next 12 months whose forecast is

month JAN FEB MARAPRMAY JUN JUL AUG SEP OCT NOV DEC TOTAL

demand 600 800 900 600 400 300 200 200 300 700 800 900 6700working days 22 22 22 22 22 22 7 22 22 22 22 22 249manufacturing cost 200 per setopening inventory 200

Production Time labour hours required 10 Hr per Unitno. of workers

inventory holding cost 5 per unit per monthstock out cost 20 per unit per month

develop an agrgregate production plan

A. Production Plan -I : Constant Workforce - Excess / Stockout Inventory

month JAN FEBMAR APR

MAY JUN JUL

AUG

SEPT OCT

NOV DEC

TOTAL

Opening Inventory 200 180.8 -38.4-

357.6

-376.

8 -196 84.8 69.6450.

4731.

2 612392.8 1752.8demand forecast 600 800 900 600 400 300 200 200 300 700 800 900 6700

safety stock 0*forecast) 0 0 0 0 0 0 0 0 0 0 0 0 0TotalRequirement(demand+safety stock) 600 800 900 600 400 300 200 200 300 700 800 900 6700working days per month 22 22 22 22 22 22 7 22 22 22 22 22 249hours per month per worker( working days*8hrs per day) 176 176 176 176 176 176 56 176 176 176 176 176 1992

TOTAL ANNUAL REQUIREMENT 6700LESS OPENING INVENTORY 200ACTUAL PRODUCTION REQUIRED 6500PRODUCTION HOURS REQUIRED 65000NO. OF WORKERS REQUIRED

( TOTAL PRODN HOURS/ANNUAL WKG HOURS )32.630522

WORKERS REQD TO NEXT VHIGHER NO. 33

TOTAL ANNUAL REQUIREMENT 6700

LESS OPENING INVENTORY 200

ACTUAL PRODUCTION REQUIRED 6500

PRODUCTION HOURS REQUIRED 65000

NO. OF WORKERS REQUIRED

( TOTAL PRODN HOURS/ANNUAL WKG

HORS) 32.630522

WORKERS REQD TO NEXT HIGHER NO. 33

total worker 33 33 33 33 33 33 33 33 33 33 33 33 0total working hours available per month 5808 5808 5808 5808 5808 5808 1848 5808 5808 5808 5808 5808 65736

Units Produced( hours Av/hrs per unit) 581 581 581 581 581 581 185 581 581 581 581 581 6574

Total Available inventory 781 762 542 223 204 385 270 650 1031 1312 1193 974 8326

Ending Inventory 181 -38 -358 -377 -196 85 70 450 731 612 393 74 74

Excess Inventory Cost 904 424 348 2252 3656 3060 1964 368 12976

Stock out cost 768 7152 7536 3920 19376

Normal cost 116160

116160

116160

116160

116160

116160

36960

116160

116160

116160

116160

116160 1314720

TOTAL COST 1347072

month JAN FEBMAR APR

MAY JUN JUL

AUG

SEPT OCT

NOV DEC

TOTAL

Opening Inventory 200 180.8 -38.4-

357.6

-376.

8 -196 84.8 69.6450.

4731.

2 612392.8 1752.8demand forecast 600 800 900 600 400 300 200 200 300 700 800 900 6700

P-617 demand & working daysmonth JAN FEB MAR APR MAY JUN TOTALdemand 500 600 650 800 900 800 4250working days 22 19 21 21 22 20 125Materials 100 per unitinventory holding cost 10 per unit per monthstock out cost 20 per unit per monthsubcontracting cost 100 per unit per month

( 200 subcontracting cost less 100 material cost)

hiring cost 50 per workerfiring / layoff cost 100 per workerlabour hours required 4 per unitstraight( normal)time cost 12.75 per workerovertime cost 18.75 per workerbeginning inventory 200 unitssafety stock reqd 0% of month demand

what is cost of following production strategiesa. produce exactly to meet demand , vary work force ( assume opening workforce equal to first month's requirement)b. constant workforce (10), very inventory & allow shortagesc.constant workforce(10) use subcontracting

month JAN FEB MAR APR MAY JUNTOTAL

Beginning Inventory 200 0 0 0 0 0demand forecast 500 600 650 800 900 800 4250safety stock 0*forecast) 0 0 0 0 0 0production Requirement( forecast+safety stock- beginning inventory) 300 600 650 800 900 800 4050ending inventory(beginning inventory+production Requirement-demand forecast) 0 0 0 0 0 0A. Production Plan -I : Exact Production -

vary workforce


Production Requirement 300 600 650 800 900 800production hours Required 1200 2400 2600 3200 3600 3200('=production equirement * 4 hrs/unit)working days per month 22 19 21 21 22 20hours per month per worker( working days*8hrs per day) 176 152 168 168 176 160

Workers required ( (production hours Required / hours

per month per worker6.81818

215.7894

715.4761

919.0476

220.4545

5 20

Workers required ( rounding to next 7 16 16 20 21 20integerNew workers required (opening workers =1st months requirement of 7 workers 0 9 0 4 1 -1

hiring cost(new workers*50) 0 450 0 200 50 700

workers laid off 0 0 0 0 0 1

layoff cost(workers laid off *100) 0 0 0 0 0 100 100

Straight time cost ( Production hours 15000 30000 32500 40000 45000 40000 202500*12.50)

TOTAL COST 203300

B.PRODUCTION PLAN 2- Constant Workforce (10): Vary inventory & Stock out

month JAN FEB MAR APR MAY JUN TOTALBeginning Inventory 200 140 -80 -310 -690 -1150working days per month 22 19 21 21 22 20

hours per month( 10 workers * working days*8hrs per day) 1760 1520 1680 1680 1760 1600Actual Production( hours per month/ 4 hrs per unit) 440 380 420 420 440 400

Total Stock Available(=Beginning Inventory+ Actual Production) 640 520 340 110 -250 -750

Demand per month 500 600 650 800 900 800

ending (closing Inventory) 140 -80 -310 -690 -1150 -1550integerinventory Cost ( inventory *10) 1400 1400

shortage cost( shortage*20) 1600 6200 13800 23000 31000 75600


TOTAL COST 202000

C.PRODUCTION PLAN 3- Constant Workforce (10): Subcontractmonth JAN FEB MAR APR MAY JUN TOTALBeginning Inventory 200 140Demand 500 600 650 800 900 800production Requirement 300 460 650 800 900 800working days per month 22 19 21 21 22 20

hours per month( 10 workers *

working days*8hrs per day) 1760 1520 1680 1680 1760 1600

Actual Production( hours per month

/ 4 hrs per unit) 440 380 420 420 440 400

unit subcontracted ( production Reqmnt- 0 80 230 380 460 400actual Production)unit excess 140 0 0 0 0 0

inventory Cost ( inventory *10) 1400 1400

subccontracting cost( =subcntract units*100) 8000 23000 38000 46000 40000 155000


TOTAL COST 281400

SUMMARY

PLAN HIRING LAYOFFSUBCONTRACT

STRAIGHT

SHORTAGE

EXCESS TOTAL

TIMEINVENTORY COST

1

Exact productio 700 100 202500 203300vary workforce

2Constant workforce, vary 125500 75600 1400 202500inventory

3Constant workforce 155000 125000 1400 281400Subcontract

P-604- Sales & Operations Planning - Operations & Supply Chain Management - Chase A cut & try example- JC Pennywhat is cost of following production strategies

a. produce exactly to meet demand , vary work force , 8 hrs per day

b. produce to meet expected average demand over next six month by maintaining constant work force , 8 hrs per day

c. produce to meet minimum expected demand ( April 0 using constant workforce on regular time . Subcontract to meet additional requitrements

d.produce to meet expected demand for all but first two months using a constant workforce on regular time.use overtime to meet additional

requirements. June ending inventory to be as close as possible to June safety stock

demand & working daysmonth JAN FEB MAR APR MAY JUN TOTALBeginning Inventory 400 450 375 275 225 275demand forecast 1800 1500 1100 900 1100 1600 8000working days 22 19 21 21 22 20 125

Materials 100 per unitinventory holding cost 1.50 per unit per monthstock out cost 5 per unit per monthsubcontracting cost 20 per unit per month

(120 subcontracting cost less 100 material cost)

hiring cost 200 per workerfiring / layoff cost 250 per workerlabour hours required 5 per unitstraight( normal)time cost 4 per workerovertime cost 6 per workerbeginning inventory 400 unitssafety stock reqd 25% of month demand

Beginning inventory 400 450 375 275 225 275Demand forecast 1800 1500 1100 900 1100 1600safety stock 0*forecast) 450 375 275 225 275 400production Requirement( forecast+safety stock- beginning inventory) 1850 1425 1000 850 1150 1725 8000ending inventory(beginning inventory+production Requirement-demand forecast) 450 375 275 225 275 400

A. Production Plan -I : Exact Production - vary workforce

month JAN FEB MAR APR MAY JUN TOTALProduction Requirement 1850 1425 1000 850 1150 1725production hours Required 9250 7125 5000 4250 5750 8625('=production equirement * 5 hrs/unit)working days per month 22 19 21 21 22 20hours per month per worker( working days*8hrs per day) 176 152 168 168 176 160demand & working days

Workers required ( (production hours Required / hoursper month per worker 52.55682 46.875 29.761925.2976232.6704553.90625

Workers required ( rounding to next 53 47 30 26 33 54integerNew workers required (opening workers =1st months requirement of 53 workers 0 -6 -17 -4 7 21

Workers hired 0 0 0 0 7 21

hiring cost(new workers*200) 0 1400 4200 5600

workers laid off 0 6 17 4 0 0

layoff cost(workers laid off *100) 0 1500 4250 1000 0 0 6750

Straight time cost ( Production hours 37000 28500 20000 17000 23000 34500 160000*4)

TOTAL COST 172350

B.PRODUCTION PLAN 2- Constant Workforce (10): Vary inventory & Stock out

month JAN FEB MAR APR MAY JUN TOTALBeginning Inventory 400 8 -276 -32 412 720working days per month 22 19 21 21 22 20no. of workers required( no. of units 8000 40* 5 hrs per unit/125 days/8 hrs per dayhours per month( 40 workers * working days*8hrs per day) 7040 6080 6720 6720 7040 6400Actual Production( hours per month/ 5 hrs per unit) 1408 1216 1344 1344 1408 1280

Total Stock Available(=Beginning Inventory+ Actual Production) 1808 1224 1068 1312 1820 2000

Demand per month 1800 1500 1100 900 1100 1600

ending (closing Inventory) 8 -276 -32 412 720 400integersafety stock 450 375 275 225 275 400

excess inventory 0 0 0 187 445 0

inventory Cost ( inventory *1.5 280.5 667.5 948

shortage units 276 32

shortage cost( shortage*5) 1380 160 1540


TOTAL COST 162488

C.PRODUCTION PLAN 3- Constant Low Workforce : Subcontract

month JAN FEB MAR APR MAY JUN TOTALproduction Requirement 1850 1425 1000 850 1150 1725 8000

working days per month 22 19 21 21 22 20hours per month( 25 workers *no. of workers for minimum 850-April

25.29762

Actual Production hours available 4400 3800 4200 4200 4400 4000

actual Production- 5 hrs per unit) 880 760 840 840 880 800

unit subcontracted ( production Reqmnt- 970 665 160 10 270 925actual Production)subcontracted cost 19400 13300 3200 200 5400 18500 60000


TOTAL COST 160000

D.PRODUCTION PLAN 4- Constant Workforce : Overtime


Beginning Inventory 400 177 554 791

production Requirement 53 47 30 26 33 54 0

working days per month 22 19 21 21 22 20hours per month( 25 workers *

no. of workers for minimum (8000-400)/12l 38

Actual Production hours available 6688 5776 6384 6384 6688 6080

actual Production- 5 hrs per unit) 1338 1155 1277 1277 1338 1216

demand Forecast 1800 1500 1100 900 1100 1600

unit available before overtime -62 -345 177 554 791 407actual Production)units overtime 62 345

overtime cost=units5*6 per hour 1872 10344 12216

safety stock 450 375 275 225 275 400

units excess 0 0 0 329 516 7

inventory cost 0 0 0 492.9 774.3 10.8 1278


TOTAL COST 165494

SUMMARYPlan A Plan B Plan C Plan D

ExactPrdnconst work constlow constant

vary workforce, vary

work force workforce

forceinv &stock

sub contract overtime

out1hiring 5600 0 0 02layoff 6750 0 0 03excess inventory 0 948 0 12814shortage 0 1540 0 05subcontract 0 0 60000 06overtime 0 0 0 122107straight tim 160000 160000 100000 152000

total cost 172350 162488 160000 165491

Yield management In service Operations -Managing Demand strategies 1.Partitioning demand- business visitors generally walk in between 11am to 1 pm. So schedule other appointment before or after that2.Price incentives & promotion of off-peak demand – telephone , hotels , day of the weak3.Develop complementary services-a.AC & Heating Servicesb.-skiing equipment in winter and mountain racing bikes in summer

4.Yield management - it involves / deals with 1. Ability to segment markets2. Perishable inventory- News paper boy problem3. Advance sales-railways , aeroplanes4. Fluctuating demand5. Accurate , detailed information systems

Industries that utilize fully yield management techniques are

1. Transportation – oriented industries e.g. airlines , railways , car rental , shipping , vacation oriented tour operatrors ,Cruise ships, resorts

And other capacity constrained industriesa. Hotelb. Medicinec. Storage facilitiesd. Broadcasting ( selling commercial time)

Yield management how is it done1. Overbooking – accepting more requests than

capacity2. Assigning capacity amounts to different market

segments3. Differential pricing in different market segments4. Yield management , is misnomer , actually

concerned with managing revenuePurpose of yield management technique is to sell

right capacity to right customer at right priceAirlines charging differential fare for the same seat

– higher price from price – insensitive business customers and lower prices to price – sensitive vacationers

Sales & operations planning

Engineering

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