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Copyri ght 2011 by The McGraw-H il l Companies, Inc. All ri ghts reserved.McGraw-Hill/Irwin
ManufacturingPlanning and Control
MPC 6thEdition
Chapter 4
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Sales and OperationsPlanning
The Sales and Operations Planning (SOP) process
is used to develop an overall business plan to
integrate the functional planning efforts within thecompany. SOP links strategic goals to production
and coordinates the planning efforts of various
groups such as marketing, finance, operations,
and human resources.
SOP is top managements handle on the business.
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Agenda
What is SOP?
SOP links with MPC
SOP activities and techniques
Critical SOP issues
State-of-the-art SOP
Principles
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SOP Functions
SOP provides the key communication links fortop management to coordinate the variousplanning activities in a business
Strategic Planning
MarketingPlanning
ResourcePlanning
FinancialPlanning
DemandManagement
Rough-CutCapacityPlanning
Sales & OperationsPlanning (Volume)
Sales Plan OperationsPlan
MasterProductionScheduling (Mix)
Front End
MPC Boundary
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SOP Fundamentals
The role of SOP is to balance supply anddemand at the volume level
Demand Supply
Volume Mix
Sales andOperationsPlanning
Balance between supply and demand
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SOP Communication
The plan must be expressed in termsthat are meaningful to non-
manufacturing executives The operations portion of the plan
must be stated in terms that MPCfunctions can use
Aggregate units by product line, dollarvalue, etc.
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Value of SOP
The SOP process provides visibility of theinteractions between sales, marketing,
production, and finance Critical trade-off decisions are documented
Manufacturing performance is controlled in a
clear fashion This leads to better integration among
functional areas and better response to themarketplace
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SOP Process
Run sales forecastreports
Demand planningphase
Supply planning phase
Pre-SOP meeting
Executive SOPMeeting
End ofmonth
Statistical forecasts
Field sales worksheets
Management forecastFirst-pass spreadsheets
Recommendations andagenda
Capacity constraintsSecond-pass spreadsheets
Decisions
and gameplan
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SOP ProcessKeyActivities
Updating the sales forecast
Reviewing the impact of operations plan
changescan current capacity and materialssupport the changes?
Identifying alternatives where problems exist
Formulating recommendations for topmanagement
Communicating the information to topmanagement
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SOP Discipline
For the SOP process to be routineand effective, replanning must occur
when conditions indicate the need Mechanisms for maintaining support
for the plans are important
Senior executive involvement is aminimum requirement
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Communicating SOPInformationDisplays
Information can be conveyed inseveral ways
Charts (monthly forecast, cumulativeproduction, alternative plans)
Tabular displays (easily captured andcommunicated using spreadsheets)
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SOP Tabular DisplayA planningfactor is usedto convertsales $ to units
The displayincludes both
history and the plan
Using a chasestrategy can lead tolarge variations inplanned production
Planningassumptions are
clearly displayed
Financial results ofthe plan arecalculated anddisplayed
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Production Strategies
Chaseproduction output is changedto match sales quantities
Levelproduction is constant, resultingin inventory build-up and depletionover time
Mixedcombination of chase and leveldesigned to result in acceptable levelsof flexibility and inventory
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Chase Strategy
Calculate hires and fires each period
If Employeest> Employeest-1then Hirest= EmployeestEmployeest-1else Firest=Employees t-1- Employeest
Calculate the number of employees required
Employeest= Planned productiont/Employee productivity
Calculate the operations plan (in units)
Planned productiont= Forecast salestInventoryt-1+Inventoryt
Calculate end-of-month inventory targets
Inventoryt= Target days x Expected Demandt+1/Working dayst+1
A spreadsheet with these calculationscan be found here.
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Level Strategy
Calculate ending inventory levels and days of supply
Inventoryt= Inventoryt-1 + Planned productiontForecast demandtDays of supplyt= Inventoryt/(Expected demandt+1/Working dayst+1)
Calculate the number of employees needed
InventoryT= Expected DemandT+1/Working daysT+1Total production required = Total forecast demandBeginning inventory + Ending inventoryT
Planned production each period = Total production required/Number of periodsEmployees required each period = Planned production each period/Employee productivity per day
A spreadsheet with these calculationscan be found here.
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Level Strategy
0
200
400
600
800
1000
1200
1400
1600
Jan Feb Mar Apr May Jun
Demand forecast
Level
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Karma strateji (MixedStrategy)
0
200
400
600
800
1000
1200
1400
1600
Jan Feb Mar Apr May Jun
Demand forecast
mixed
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Example: Chase Strategy
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Example: Level Strategy
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Example: Mixed Strategy
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2011 Pearson Education,Inc. publishing as Prentice
Hall
Roofing Supplier Example 1
Table 13.2
Month Expected DemandProduction
DaysDemand Per Day
(computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
= = 50 units per day6,200
124
Averagerequirement =
Total expected demand
Number of production days
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2011 Pearson Education,Inc. publishing as Prentice
Hall
Roofing Supplier Example 1
Figure 13.3
70
60
50
40
30
0 Jan Feb Mar Apr May June = Month
22 18 21 21 22 20 = Number ofworking days
P
roductionratep
erworkingday
Level production using averagemonthly forecast demand
Forecast demand
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2011 Pearson Education,Inc. publishing as Prentice
Hall
Roofing Supplier Example 2
Table 13.3
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $20 per unit
Average pay rate $10 per hour ($80 per day)
Overtime pay rate $17 per hour(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate(hiring and training)
$300 per unit
Cost of decreasing daily production rate(layoffs)
$600 per unit
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2011 Pearson Education,Inc. publishing as Prentice
Hall
Roofing Supplier Example 2
Table 13.3
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $20 per unit
Average pay rate $10 per hour ($80 per day)
Overtime pay rate $17 per hour(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate(hiring and training)
$300 per unit
Cost of decreasing daily production rate(layoffs)
$600 per unit
MonthProduction
Days
Productionat 50 Unitsper Day
DemandForecast
MonthlyInventoryChange
EndingInventory
Jan 22 1,100 900 +200 200
Feb 18 900 700 +200 400
Mar 21 1,050 800 +250 650Apr 21 1,050 1,200 -150 500
May 22 1,100 1,500 -400 100
June 20 1,000 1,100 -100 0
1,850
Total units of inventory carried over from onemonth to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
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2011 Pearson Education,Inc. publishing as Prentice
Hall
Roofing Supplier Example 2
Table 13.3
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $20 per unit
Average pay rate $10 per hour ($80 per day)
Overtime pay rate $17 per hour(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate(hiring and training)
$300 per unit
Cost of decreasing daily production rate(layoffs)
$600 per unit
MonthProduction
Days
Productionat 50 Unitsper Day
DemandForecast
MonthlyInventoryChange
EndingInventory
Jan 22 1,100 900 +200 200
Feb 18 900 700 +200 400
Mar 21 1,050 800 +250 650Apr 21 1,050 1,200 -150 500
May 22 1,100 1,500 -400 100
June 20 1,000 1,100 -100 0
1,850
Total units of inventory carried over from onemonth to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
Costs Calculations
Inventory carrying $9,250 (= 1,850 units carried x $5per unit)
Regular-time labor 99,200 (= 10 workers x $80 per
day x 124 days)Other costs (overtime,
hiring, layoffs,subcontracting) 0
Total cost $108,450
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2011 Pearson Education,Inc. publishing as Prentice
Hall
Roofing Supplier Example 2
Figure 13.4
Cumulativedem
andunits
7,000
6,000
5,000
4,000
3,000
2,000
1,000
Jan Feb Mar Apr May June
Cumulative forecastrequirements
Cumulative levelproduction using
average monthlyforecastrequirements
Reductionof inventory
Excess inventory
6,200 units
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2011 Pearson Education,Inc. publishing as Prentice
Hall
Roofing Supplier Example 3
Table 13.2
Month Expected DemandProduction
DaysDemand Per Day
(computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
Minimum requirement = 38 units per day
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2011 Pearson Education,
Inc. publishing as PrenticeHall
Roofing Supplier Example 3
70
60
50
40
30
0 Jan Feb Mar Apr May June = Month
22 18 21 21 22 20 = Number ofworking days
Productionratep
erworkingday
Level productionusing lowest
monthly forecast
demand
Forecast demand
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2011 Pearson Education,
Inc. publishing as PrenticeHall
Roofing Supplier Example 3
Table 13.3
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $20 per unit
Average pay rate $10 per hour ($80 per day)
Overtime pay rate $17 per hour(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate(hiring and training)
$300 per unit
Cost of decreasing daily production rate(layoffs)
$600 per unit
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2011 Pearson Education,
Inc. publishing as PrenticeHall
Roofing Supplier Example 3
Table 13.3
Cost Information
Inventory carry cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
Overtime pay rate $ 7 per hour(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate(hiring and training)
$300 per unit
Cost of decreasing daily production rate(layoffs)
$600 per unit
In-house production = 38 units per dayx 124 days
= 4,712 units
Subcontract units = 6,200 - 4,712= 1,488 units
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2011 Pearson Education,
Inc. publishing as PrenticeHall
Table 13.3
Cost Information
Inventory carry cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
Overtime pay rate $ 7 per hour(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate(hiring and training)
$300 per unit
Cost of decreasing daily production rate(layoffs)
$600 per unit
Roofing Supplier Example 3
In-house production = 38 units per dayx 124 days
= 4,712 units
Subcontract units = 6,200 - 4,712= 1,488 units
Costs Calculations
Regular-time labor $75,392 (= 7.6 workers x $80 perday x 124 days)
Subcontracting 29,760 (= 1,488 units x $20 perunit)
Total cost $105,152
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2011 Pearson Education,
Inc. publishing as PrenticeHall
Roofing Supplier Example 4
Table 13.2
Month Expected DemandProduction
DaysDemand Per Day
(computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
Production = Expected Demand
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2011 Pearson Education,
Inc. publishing as PrenticeHall
Roofing Supplier Example 4
70
60
50
40
30
0 Jan Feb Mar Apr May June = Month
22 18 21 21 22 20 = Number ofworking days
Productionratep
erworkingday
Forecast demand andmonthly production
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2011 Pearson Education,
Inc. publishing as PrenticeHall
Roofing Supplier Example 4
Table 13.3
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $20 per unit
Average pay rate $10 per hour ($80 per day)
Overtime pay rate $17 per hour(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate(hiring and training)
$300 per unit
Cost of decreasing daily production rate(layoffs)
$600 per unit
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2011 Pearson Education,
Inc. publishing as PrenticeHall
Roofing Supplier Example 4
Table 13.3
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
Overtime pay rate $ 7 per hour(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate(hiring and training)
$300 per unit
Cost of decreasing daily production rate(layoffs)
$600 per unit
MonthForecast(units)
DailyProdRate
BasicProduction
Cost(demand x
1.6 hrs/unit x$10/hr)
Extra Cost ofIncreasingProduction(hiring cost)
Extra Cost ofDecreasingProduction(layoff cost) Total Cost
Jan 900 41 $ 14,400 $ 14,400
Feb 700 39 11,200 $1,200(= 2 x $600)
12,400
Mar 800 38 12,800 $600
(= 1 x $600)13,400
Apr 1,200 57 19,200$5,700
(= 19 x $300) 24,900
May 1,500 68 24,000 $3,300(= 11 x $300) 24,300
June 1,100 55 17,600 $7,800
(= 13 x $600)25,400
$99,200 $9,000 $9,600 $117,800
Table 13.4
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2011 Pearson Education,
Inc. publishing as PrenticeHall
Comparison of Three Plans
Table 13.5
Cost Plan 1 Plan 2 Plan 3
Inventory carrying $ 9,250 $ 0 $ 0
Regular labor 99,200 75,392 99,200
Overtime labor 0 0 0
Hiring 0 0 9,000
Layoffs 0 0 9,600
Subcontracting 0 29,760 0Total cost $108,450 $105,152 $117,800
Plan 2 is the lowest cost option
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2011 Pearson Education,
Inc. publishing as PrenticeHall
Mathematical Approaches
Useful for generating strategies Transportation Method of Linear
Programming
Produces an optimal plan Management Coefficients Model
Model built around managers experience and
performance
Other Models
Linear Decision Rule
Simulation
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2011 Pearson Education,
Inc. publishing as PrenticeHall
Management Coefficients Model
Builds a model based on managersexperience and performance
A regression model is constructedto define the relationships betweendecision variables
Objective is to remove
inconsistencies in decision making
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2011 Pearson Education,
Inc. publishing as PrenticeHall
Other Models
Linear Decision Rule
Minimizes costs using quadratic cost curves
Operates over a particular time period
Simulation
Uses a search procedure to try different combinations ofvariables
Develops feasible but not necessarily optimal solutions
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2011 Pearson Education,
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Summary of Aggregate
Planning MethodsTechniques
SolutionApproaches Important Aspects
Graphical
methods
Trial and
error
Simple to understand and
easy to use. Manysolutions; one chosenmay not be optimal.
Transportationmethod of linearprogramming
Optimization LP software available;permits sensitivityanalysis and newconstraints; linearfunctions may not berealistic.
Table 13.8
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2011 Pearson Education,
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Summary of Aggregate
Planning MethodsTechniques
SolutionApproaches Important Aspects
Management
coefficientsmodel
Heuristic Simple, easy to implement;
tries to mimic managersdecision process; uses
regression.
Simulation Changeparameters
Complex; may be difficultto build and for managersto understand.
Table 13.8
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Management Obligations
Commit to the SOP process
Establish the SOP framework
Put the right team together
Set meetings
Participate in the process
Modify performance measures and reward
structures to align with the plan
Force resolution of trade-offs betweenfunctions
Lead the cultural change
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Functional Roles
The primary obligation for all functionsinvolved is to hit the plan
A cross-functional team approach is important
Executive champion/sponsorkeep top management focused on theprocess, clear major obstacles, and acquire resources
SOP process ownerprovide leadership for the SOP process andimplementation
Demand planning teamprovide demand data and represent forecasting,
marketing, and sales functions Supply planning teamprovide supply system information and represent
manufacturing and purchasing functions
Pre-SOP teammanage cross-functional development of SOP
Executive SOP teamupper management representative of each
functional area
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Integrated Planning
Integration among sales, marketing, and productionis key
Sales and marketing need to sell what is planned
(overselling is just as bad as underselling) Opportunities need to be evaluated via changes to the SOP
Manufacturings job is to achieve the planexactly(overproduction and underproduction are equally bad)
The end result is good customer service Breakdowns in the plan must be quickly reported by the
functional area responsible
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Strategic Planning
A direction-setting activity
Can be an extension of budgeting
More recently, plan is based onproducts and markets rather thanorganizational units
SOP must support strategic plans
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Operations Plan Control
The SOP process should be widely understood
Planned results for each functional area should
be clearly communicated The seriousness of the plan must also be
reinforced
Key issues
When and how to change the plan?
How stable should the plan be from period toperiod?
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Principles
The operations plan isnt a forecast. It is astatement of desired production output.
The operations plan is included in the SOPprocess to maintain agreement with otherfunctional plans.
Trade-offs required to frame the operations
plan must be made prior to final approval Top management involvement is imperative
in the SOP process. The SOP process
should relate directly to the strategic plan.
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Principles
The MPC system should be used toperform routine activities and provideroutine data, allowing management time
to be devoted to important tasks. The MPC system should facilitate what-
if analysis at the SOP level.
Reviews of performance against SOPare needed to prompt replanning whennecessary.
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QuizChapter 4
The four fundamental issues in Sales and OperationsPlanning are __________.
Sales and Operations Planning balances supply anddemand at the ______ level.
Many key Sales and Operations Planning linkages areoutside the Manufacturing Planning and Control (MPC)system. (True/False)
A strategy which matches monthly supply to forecasted
demand is ________. A strategy which maintains a consistent monthly output is
_________.
The primary obligation for any functional area is to hit the