chapter 9

• Sales and operations planning (S&OP) manages supply and demand to maximize overall supply chain profitability.

Responding to Predictable Variability

• Demand changes frequently from period to period due to predictable influences, such as seasonal factors (weather) and non-seasonal factors (promotions, product adoption rates).
• Predictable variability: Change in demand that is forecastable
• These demand changes create problems, from stockouts during peak times to excess inventory during low times.
• Effectively managing supply and demand improves performance for products with predictable variability.
• Companies should balance supply with demand to maximize profitability.
• Broad options to handle variability:
• Managing supply (capacity, inventory, subcontracting, and backlogs.)
• Managing demand (short-term price discounts and promotions).
• S&OP increases profitability by coordinating supply and demand.
• Supply and demand management often are divided into different tasks, with sales managing demand and operations managing supply.
• Lack of coordination hurts supply chain profits.
• Supply chain partners must coordinate S&OP decisions to maximize profitability.
• Top performers implement cross-functional participation in S&OP across the organization.

Managing Supply

• Methods to vary product supply:
• Production capacity
• Inventory
• Combining varying capacity and inventory can reduce amounts required to deal with predictable variability

Managing Capacity

• Time flexibility from workforce: Use flexible work hours to vary capacity with demand.
• Use of seasonal workforce: Employ a temporary workforce during peak season to increase capacity.
• Use of dual facilities: specialized and flexible: Specialized facilities produce a stable output, while flexible facilities handle a variety of products at a higher cost.
• Use of Subcontracting: Subcontract peak production for a stable internal production at lower cost but requires flexible capacity and ability for the subcontractor to lower cost.
• Designing product flexibility into the production processes: Flexible production lines that can be readily adjusted will allow for a change in demand.
• Product lines should be designed so that changing the workers varies the production.

Managing Inventory

• Use common components across multiple products: Design common components for multiple products, which stabilizes the total demand of components even with variability in individual product demand.
• Build inventory of high-demand or predictable-demand products: When products have the same peak demand season, build inventory of more predictable-demand products during the off-season.
• More predictably demanded products can be made in the off-season and stocked until winter.
• Less predictable retail jackets should be produced close to the peak season when demand is known.

Managing Demand

• Supply chains can influence demand through pricing and promotions. Discounting to farmers who take ownership of a planter during the off-season is a good example.
• Promotions shift demand and reduce variability
• Increased demand from promotions results from:
• Market growth: Increased consumption from new or existing customers.
• Stealing share: Customers substitute the firm's product for a competitor's.
• Forward buying: Customers move up future purchases.
• Forward buying shifts future demand whereas the first two factors increase the overall market demand
• Promoting in the peak period with significant forward buying creates more variable demand.

Factors Influencing Timing of Promotion

• Impact of the promotion on demand
• Cost of holding inventory
• Cost of changing the level of capacity
• Product margins
• Use price discounts during low-demand periods to reduce seasonal peak if promotion results in forward buying.
• John Deere discounts during low-demand periods because of high inventory holding costs and production level changes.
• It may be better to offer a peak period discount when the promotion attracts new buyers due to increased margin.

Sales and Operations Planning at Red Tomato

• Promotion decisions are often made by retailers who don't account for the impact on the rest of the supply chain.
• Supply chain members can collaborate on sales and operations planning to maximize profits, such as profits for Red Tomato Tools and Green Thumb Gardens, who need to split the profit.
• Green Thumb likes promotion during the peak-period sales. Red Tomato prefers the low-demand to level the demand.
• S&OP lets the two collaborate to make the best decision

Other Insights

• Discounting tools from $40 to $39 in any period increases demand by 10% and moves demand from the following months forward by 20%.
• Discounting in January results in a higher total profit because it leads to lower seasonal inventory and a somewhat total cost
• Compared to January, discounts in April leads to a greater buildup of workforce and seasonal inventory.
• A price promotion results in higher supply chain profit while a promotion in April is lower when compared to the base case of no promotion
• Price coordination is a must for optimal timing
• The increase in operating costs makes offering a discount in April a less profitable option.

Scenario Considerations

• Optimal action is different if most of the demand increase comes from Market growth or stealing market share rather than from forward buying.
• January promotion is optimal at large increase of supply
• Results are the following:
• Average inventory increase during peak period and decreases during off-peak.
• Overall profitability decreases during peak-demand if there is small increase in demand and significant forward demand.
• It is more profitable to promote during the peak period if there is a small increase in demand.
• Promote in January at $40 and 10% consumption
• Promote in April at $40 and 100% consumption.

Final Considerations

• As product margins decline, promoting during the peak-demand period becomes less profitable.
• If the unit price is $31, it is best to promote Jan rather than Apr with forward buying and increase in consumption.
• Firms faced with seasonal demands should use a combination of pricing to control the price and production and inventory
• A supply chain coordinate to maximize profits
• Supply chain partners should collaborate on maximizing their incentives
• Supply chains must work together to get non-optimal collaboration.
• S&OP process is crucial and needs to be aligned.
• S&OP needs a senior leader to provide authority
• Early warning alerts are key within the S&OP process.
• Planners, during demand or supply changes, must alter the old plan, provide a new plan, and account for changes.