Sales & Operations Planning (S&OP)

Sales & Operations Planning (S&OP)

• Both micro and macro decisions are made through life.
• "What to eat for lunch" is an example of a micro decision
• "Where to live" and "what to study" are examples of macro decisions
• Macro decisions change the course of one's life
• A company must also make both micro and macro decisions every day.
• Some macro decisions are strategic
• Examples of strategic decisions are technology selection and market entry
• Some macro decisions are more tactical
• Examples of tactical decisions are planning company-wide workforce and production levels, and setting sales targets
• S&OP, also called Macro Planning at the tactical level
• The purpose of the S&OP process is to develop the top-down sales and operations plans
• These plans can be for the entire firm or for a subset of the firm such as a product line or a particular plant
• S&OP process begins with demand forecasts and turns them into targets for both sales and operations plans
• S&OP seeks to make aggregate level plans that all divisions as well as suppliers can work to
• The output of S&OP is an aggregate plan
• S&OP is used to resolve the tension between sales and operations divisions, in order to satisfy demand while maximizing profit
• Sales divisions are assessed on revenue
• Operations divisions are assessed on cost
• S&OP should not be determined by the operations people alone
• Instead, it should be agreed on by all functions of the company (operations, human resources, marketing, and finance) and its supply chain
• S&OP is therefore a structured, collaborative and cross-functional decision-making process
• This process aligns competing objectives and constraints
• Each functional part of a firm and the supply chain has its own limitations and constraints, making coordination difficult
• Coordinated planning effort has evolved to a process known as Sales and Operations Planning (S&OP)

S&OP Process

• Inputs to the S&OP Process:
• Company policies like avoiding firing personnel, limiting inventory levels, and maintaining customer service levels
• Strategic objectives such as capturing a certain market share, and achieving targeted levels of quality or profit/service
• Capacity constraints (from operations and other parties in the supply chain) like plant capacity, outsourcing capacity, supplier's capacity, etc
• Financial constraints, such as loans, cash turnover and working capital
• Demand constraints, such as pricing policy and promotions
• Sales Planning in the S&OP process:
• Preliminary demand figures are obtained using a forecasting model and then adjusted based on opinions from key customers/sales personnel in the field
• Forecasts are adjusted for planned promotions, and product introductions
• Customer service level is set, representing the % demand to be satisfied on time (i.e., not backordered)
• Operations (production) Planning in the S&OP process:
• The sales plan is shared with operations function and converted to a production plan (operations plan or aggregate plan) as economically as possible
• The production plan, monthly by product/service line or family, includes:
• Workforce level needed, other resources' levels needed (like machinery, logistics), quantity and mix of products, overtime and outsourcing levels, and anticipated inventory levels
• The two plans, sales and operations, must be reconciled resulting in an annual S&OP that must be updated monthly
• Operations plan, production plan, and aggregate plan are used interchangeably

The Role of S&OP in a Supply Chain

• S&OP is an important supply chain issue
• To be effective, S&OP requires input from both upstream and downstream stages in the chain, impacting supply chain performance
• Good demand forecasts require collaboration with downstream supply chain stages
• "Collaborative forecasting"
• Several constraints in S&OP are from supply chain partners (mainly upstream - like suppliers) outside the company
• A production plan for a company defines demand for her suppliers and establishes supply constraints for her customers
• Ideally, all stages of supply chain should work together, optimizing supply chain performance
• "collaborative planning"
• Independent aggregate plans are unlikely to align.
• This lack of coordination results in supply chain shortages or oversupply
• S&OP balances and trades off between conflicting preferences of the supply and demand sides of the supply chain
• Doing this will offer many value creation opportunities
• S&OP is viewed as essential for synchronizing the entire supply chain and improving its efficiency
• S&OP is driving benefits such as better customer demand satisfaction, reduced inventories, and minimized operating costs
• S&OP is also used as a set of decision-making processses
• Balancing demands and supply, integrating marketing, financial planning and operations
• Linking high level strategic plans with day-to-day operations

Aggregate Planning in S&OP

• Aggregate planning is an important part of S&OP.
• It is the actual output and is a core operations component of S&OP and is also called macro production planning
• Capacity has a cost, hence it is limited and scarce
• Lead times are often long
• Companies make these decisions long before demand is known
• Aggregate planning is not limited to manufacturing firms
• Service industry must determine staffing needs
• Example, hospitals plan staffing levels for nurses
• Through aggregate planning:
• A company figures ideal levels of capacity, production, outsourcing, inventory, stockouts, and pricing/ promotions to meet known but dynamic demand over 3 to 18 months
• These are tactical level decisions
• In this time frame:
• It's too early to determine production levels by SKU
• It's too late to arrange for additional capacity
• Aggregate planning answers the question: "How should a firm best utilize the facilities that it currently has?"

Aggregate Planning in S&OP - Planning Horizon

• Planning horizon (T): specified (3 to 18 months).
• Its choice is critical
• Too short T: production duration not reflected.
• Too long T: inaccuracy in forecasts
• Plan frequency and planning horizon depend on the industry specifics
• End-of-horizon effect: "/₁=0" is a poor strategy
• A company must also specify the duration of each period within the planning horizon (e.g., weeks, months, or quarters)
• Generally, aggregate planning takes place over months or quarters as the periods
• The longer the periods considered (e.g., days, weeks, or months), the higher the level of time aggregation
• Fine time grid can be used in the earlier part of model's planning horizon (e.g., weeks or days) and a coarser time grid (e.g., months or quarters) in the later part.
• Rolling horizon: new forecasts are appended and old forecasts are updated
• Rolling horizon (and plans) are almost always used
• The action period above is fixed
• Time fences show when the level of certainty changes and referred to as frozen (fixed), slushy (somewhat fixed), and liquid (highly flexible) time periods

Aggregate Planning in S&OP- Aggregation Issues

• In tactical/strategic models, it is often necessary to aggregate certain entities example: (products, resources as workforce and machines) of the production system
• Instead of dealing with individual machines, use machine group or a department
• Product aggregation is important because:
• Demand forecasts in medium- or long-term models on the level of individual products could involve too much uncertainty
• Forecasts on the level of groups of products will presumably have smaller errors
• Also, detailed and accurate data on products might not be available and expensive to obtain, especially in large companies
• Grouping (or aggregating) the products under a business area starts with family level in product hierarchy
• Use aggregate product by lumping products/services that share a common process to form a group
• For similar items an "average" item (TV sets, sedans, printing; but not custom furniture, castings, contract construction), an "average" request is needed from a call center
• For dissimilar items but commonalities aggregate by weight, volume, service classification, amount of worker hours, monetary value; e.g., castings in tons, glass in m^2
• All in all, appropriate aggregating scheme not always obvious, depends on the context of the particular production planning problem and the level of aggregation required
• Products A, B & C requires 5, 2.5 and 0.75 hours to produce, respectively.
• Monthly demands are 200, 100 and 1,000 units for A, B and C, respectively.
• An equivalent monthly demand for an aggregate product in production hours = (5 × 200 ) + (2.5 × 100) + (0.75 × 1,000) = 2,000 hours.
• An aggregate product in monetary terms is computed using production costs instead of time.

Aggregate Planning in S&OP - Costs

• Costs (not all are out-of-pocket, some are opportunity costs, all costs are incremental):
• Aggregate plans use a cost-sensitive performance measure
• The costs affecting the aggregate plan:
• Regular time cost, overtime and undertime (idle time) costs, subcontracting/outsourcing costs, inventory holding costs, shortage costs (backorder cost or lost profit from lost sales), and smoothing cost (production rate-change cost)
• Regular time costs:
• Costs of producing one unit of output during regular working hours
• Includes payroll of regular employees, material costs, and other manufacturing expensives
• Regular payroll costs become a sunk cost when all production is carried out on regular time, since the number produce = number demanded over the planning horizon
• If there is no overtime or worker idle time, not to be included in the total cost
• Overtime and outsourcing costs:
• Cost of production of units not produced in regular workings hours
• Overtime is production by regular-time employees beyond the normal work day
• Outsourcing is the production of items by an outside supplier
• Holding & Shortage (Backorder) costs:
• Holding costs exist as a result of having capital tied up in inventory
• These are expressed in terms of money per unit held per planning period
• Assumed to be linear in the number of units being held at a particular point in time
• These costs include capital tied up in inventory (opportunity cost), insurance, taxes, breakage, spoilage, pilferage, and costs of storage
• Shortage costs happen as a result of negative inventory level
• Expressed in terms of money per unit short per planning period
• Shortages exists when forecasted demand exceeds the system capacity or when demands are higher than anticipated
• Unit that must be backordered is not delivered on time
• Excess demand is generally backordered
• Special handling of backordered items and loss of revenue/ goodwill are included in the calculations
• Smoothing costs:
• Occur because of the changing production levels from over a period of time
• Most salient smoothing cost in aggregate planning is the cost of changing the size of workforce, included hiring and firing
• Hiring costs cover advertising, interviewing and training needed
• Firing (laying off) costs cover severance pay, morale decline and loss of goodwill
• Idle time cost:
• This covers the underutilization of equipment capacity or worker
• Ignored unless an expense exist during idleness or in startup after idling

Aggregate Planning in S&OP - Demand Options

• Operation managers meet aggregate plans by adjusting capacity (supply) and/or demand
• S&OP involves proactive demand management
• Through demand options, firms smooth out changes in the demand pattern over the planning period
• Manufacturers that utilize use the demand options must have that explored by marketing department and those reasonable options incorporated into the demand forecast

Aggregate Planning in S&OP - Demand Options

• Demand management: modifying or influencing demand in several ways through demand options
• Advertising can be used to promote demand during slack periods and shift demand from peak periods
• Dynamic pricing is used for reducing peak demand or for building up demand in off-peak periods utilizing incentives and sales promotion
• Example
• Winter Coat specials in May
• Special rates for midnight flights
• Cheaper kwh electricity rates for overnight userrs
• Off-peak restaurant specials
• Weekend hotel discounts
• Development of complementary offerings: firms can produce products that have countercyclic seasonal trends
• This involves idle resources and creating demand for those
• Example
• Offering cakes in the winter when they manufacturr ice cream
• Hotels can offer packages for organizations Offering both lawn mowers and snow blowers
• Restaurants can offer breakfast
• Cross Selling: This is when you offer an additional product/ service to an existing customer
• The action period above is fixed
• Time fences show when the level of certainty changes and referred to as frozen (fixed), slushy (somewhat fixed), and liquid (highly flexible) time periods

Aggregate Planning in S&OP - Supply and Supply Options

• A/P evaluates options in adjusting capacity to find an economic strategy to satisfy demand
• Capacity adjustment is often defined in terms of supply/options, often not trying to change but absorb
• Changing inventory level
• Constant product each period for even use of throughout time
• Holding even will account demand usage
• Cost of options:
• Not an option for service operations
• Varying production rates overertime and undertime
• Competent stay is maintained to avoid
• A common option fluctuates and are temporary
• The cost for hiring happens as well
• It can be used if worker skills are scarce with unions
• May be resticted by union contract or company poliecies
• Outsourcing is when you must meet quakity and time requirments.

Aggregate planning in S&OP

• Supplies and supply options, where we have
• Cooperative arrangements similar to subcontracting
• Involve partner firms that are typically the competitors
• The firm chooses to share capacity
• Ex: Hotels or Airlines that can shift customers
• Part time temporary workers which have:
• A good part for not having skilled jobs
• Less costly for temporary workers
• Disadvanges with them for high, low scedualing
• Backorders if customer waits for process and lost sales
• Customer is unwilling to provide

Strategies for Aggregate Planning

• Changing inventory levels for -> level production
• Chase demand strategy for (Zero inventory strategy) or matching production to demand rate
• This does by various machinery capacity is
• Machine-paced and workforce level
• The costs overtime of this strategy include
• There are pure versus mix strategies for aggregate production plan
• Pure just involves single strategy and just level state
• Mixed uses extreme strategies for aggregate plan
• Not one of these guarantees opimal

Aggregate Planning Approaches

• There are various different planning approches such as
• Spread sheet methods
• Linear promgramming
• Transporation model
• Goal programing