operations management chapter 13.docx

8/14/2019 operations management chapter 13.docx

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CHAPTER 13

SALES AND OPERATIONS PLANNING

LEARNING OBJECTIVES

Explain business planning. Explain sales and operations planning. Identify different aggregate planning strategies and options for

changing demand and/or capacity in aggregate plans.

Develop aggregate plans, calculate associated costs, andevaluate the plan in terms of operations, marketing, finance, and

human resources.

Describe the difference between aggregate plans for serviceorganizations and manufacturing companies.


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INTRODUCTION

As a student, you have a limited amount of hours available for you to study. You

probably prepare for an exam in one of two ways. You wait until the night before the exam tocram three to five weeks of studying into one night. Or you regularly review your notes, maybe

two or three times a week, and just do your normal review the night before the exam. While

cramming might work if you have only a single exam to prepare for, sometimes this not a case.

Changing demands on your fixed amount of time (capacity) can create problems in achieving

your objectives. Companies also often have limited capacity to handle changing demands and

typically take one of these two approaches or a combination of the two approaches to satisfy

demand fluctuations. Companies providing perishable products or services are often force to wait

until the last very possible minute in order to assure fresh product or timely services. For

example, consider how Gsnaturally fresh, a salad and vegetable growing company based in

the United Kingdom, must handle both seasonal production.

Lettuce is a perishable item and must be kept refrigerated prior to shipment and during

the transport. Even then, the product stays fresh for only one week. In Northern Europe, demand

for lettuce occurs- year round, decreasing the winter to about half the summer demand. However

lettuce cannot be grown outdoors during the winter months and greenhouse cultivation is

considered to bee to expensive.

GsNaturally fresh responded to the problem by buying a farm and packaging facility

located in Southern Spain to provide the lettuce needed during the winter. The lettuce is

transported daily to the United Kingdom by a fleet of refrigerated trucks, when demand is higherthan expected, the picking rigs and their crews pick into the middle of the night using floodlights.

Staffing is a problem of G naturally fresh. The UK operation maintains a permanent full time

staff while the Spanish workforce is primarily temporary, with very few employees working

through the summer season.

Companies typically use a planning approach that tries to level the workload, or they try

to change capacity to meet demand fluctuations. Companies trying to level the workload to carry

inventory, use back orders, and try to level demand. Companies changing capacity to meet

demand fluctuations use overtime, hiring and firing, and or subcontracting

The level and timing resources for production are detailed in a company aggregate plan.

The master production schedule determines how those resources are to be used. Lets look at the

role of aggregate planning in you company strategic business plan.


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THE ROLE OF STRATEGIC PLANNING

Aggregate planning is an integral part of the business planning process. This process

begins when your company stop management gathers input finance, marketing operations and

engineering to develop a strategic business plan. The strategic business plan, with its long term

focus provides your company, direction and objectives for the next 2 to 10 years. The strategic

business plan Is normally updated and reevaluated annually. The strategic business plans also the

starting point for sales and operations planning. It states the company objectives for profitability

growth rate and return on investment.

Sales and operations planning integrate the medium range functional plans developed, by

marketing operations, engineering and finance. Sales and operations planning begin with themarketing plan developed by marketing group based on information shared with operations,

finance, and engineering.

Marketing Plan. Identifies the markets to be served, desired levels of customer service, product

competitive advantage, profit margins, and the market share needed to achieve the objectives of

the strategic business plan.

Aggregate Plan

Includes the budgeted levels of finished products, inventory, backlogs, workforce size, and

aggregate production rate needed to support the marketing plan.

Financial Plan. Identifies the sources and uses of funds; projects cash flows, profit, return on

investment; and provides budgets in support of the strategic business plan.

Engineering Plan. Identifies new products or modifications to existing products that are needed

to support the marketing plan.

Master Production. The anticipated production schedule for the company expressed in specific

configurations, quantities, and dates.


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TYPES OF AGGREGATES PLANS

Level aggregate plan.A planning approach that produces the same quantity each time period.

Inventory and back to orders are used to absorb demand fluctuations.

Chase aggregate Plan.A planning approach that varies production to meet demand each

period.

Hybrid Aggregate Plan.A planning approach that uses a combination of level and chaseapproaches while developing the aggregate plan.

Demand-based options.A group of options that respond to demand fluctuations through the useof inventory or back- orders , or shifting the demand person.

Finish goods inventory.Products available for shipment to the customer.

Back orders.Unfilled customer orders.

Shifting demand .A marketing strategy that attempt to shift demand from peak periods to

nonpeak-periods to smooth out the demand pattern.

CAPACITY-BASED OPTIONS

Overtime. Work beyond normal established operation hours that usually requires a premium be

paid to the workers.

Undertime.A condition occurring when there are more people on the payroll than are needed to

produce the planned output.

Subcontracting.Sending production work outside to another manufacturer or service provider.

Hiring and firing.Long term option for increasing or decreasing capacity.

Point of departure.The percentage of normal capacity is currently using.

Magnitude of the change.The relative size of the change needed.

Duration of the change.The expected length of time the different capacity level is needed.


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DEVELOPIMG THE AGGREGATE PLAN

Here are the steps in developing an aggregate plan:

STEP 1 Identify the aggregate plan that matches your company objectives: level chase ,

or hybrid.

STEP 2 Based on aggregate plan, determine the aggregate production

If you use the level plan with inventories and back orders, the aggregate production rate is set

equal to average demand. In addition, if you allow no back orders, the size of the workforce is

change initially so that all demand is met on time.

If you use chase aggregate plan, calculate how much output capacity you need each period.

Calculate how many units will be subcontracted.

STEP 3 Calculate the size of the workforce

If you use the level aggregate plan, calculate how many workers you need to achieve the average

production rate needed.

If you change capacity each period with the hires and fires, calculate how many workers you

need each period and make the necessary change in the workforce.

If you change capacity through a variety of options, calculate how much of a particular option

you need each period.

STEP 4 Test the aggregate plan.

Using the production rate and initial workforce size, calculate your inventory levels (excesses

and shortages), any shortage you face, expected number of employees hired and fired, and when

you will need overtime.

Calculate the total costs for your plan.

STEP 5 Evaluate the plans performance in terms of costs, customer service, human

resources, and operations.

After you develop a plan, it is critical to evaluate it in terms of costs, customer service,

operations, and human resources. Cost comparisons are simple if you are comparing similar

ending positions - that is, plans with the same ending inventory level or producing the same

number of units.


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The comparisons are less clear when plans produce different quantities and leave

different ending inventories. In this case, you can use a per unit cost comparison. To do this

customer service, measure how many back orders were placed during each period and

throughout the duration of the plan. Decide whether this is an acceptable level of customer

service to satisfy marketing objectives. Asses the plan first in terms of operations, then in terms

of human resources. Are the workers putting in excessive overtime one of the month and doing

little the next? How does this plan affect the workforce? Does it lower morale or does it provide

stability for the workers?

When you evaluate the plan from sexual perspectives, you can decide how it can best

satisfy your companysobjectives

AGGREGATE PLANS FOR SERVICE COMPANIES WITH NONTANGIBLE

PRODUCTS

Yield Management. Allocated scarce resources maximize yield.

AGGREGATE PLANNING WITHOM OM: HOW IT ALL FITS TOGETHER

Aggregate planning determines the resources available to operation to support the overallbusiness plan. It is critical that accurate demand forecasts available (Chapter 8 )so that a

reasonable production plan can be developed. A company needs to determine the aggregate

production rate output required to determine the appropriate size of the workforce. After these

determinations have been made, the company can calculate its inventory levels, back- order

levels, capacity requirement, and customer service levels. If the plan requires seven day a

week operations, appropriate staff schedules need to be developed.

The aggregate plan specifies the number of employees needed. This allows the company

to determine how much equipment and workspace are needed, as well as to provide the input

needed for a developing a workplace layout (Chapter 9) within operations area. Aggregateplanning provides the resources needed by operation to achieve the companysstrategic

objective.

Aggregate planning master production scheduling, and rough-cut capacity affect

functional area throughout an organization. The MPS is a basis for a communication among

those functional areas. Lets look at how each area is affected.


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Accountingis affected because the aggregate plan details the resources needed by

operations during the next 12 to 18 months. Accounting uses the information and project

earnings. It also set a benchmark for measuring the effectiveness of operations.

Marketingis involved because the aggregate plan supports the marketing plan.

Marketing must know whether operations can provide the necessary output at a price that allowsmarketing to achieve its targeted profit margins. Furthermore, the aggregate plan gives marketing

insight into operations goals and activities for the year.

Information system (IS)maintains the databases that support demand forecast and other

such information used to develop the aggregate plan.

Purchasing calculates long term needs based on the aggregate plan. The aggregate plan

gives purchasing information about the future that facilitates long- term relationships and

contracts with suppliers. This information also allows purchasing to evaluate quality discounts.

Manufacturing learns from the aggregate plan what resources are available to achieve its

goals; how many workers, how much work can be subcontracted, how much can be inventory

held, and so forth.

In most companies, the operation manager develops aggregate plan. The operations

manager submits an annual operation budget request based on the resources identified in the

aggregate plan, which justifies new hiring or expected hiring during the year and planned or

budgeted levels of overtime, subcontracting, and inventory.

When the plan is implemented, the operation manager measures operations performance

against the plan, checking progress at least monthly. The operation manager also evaluatesperformance against the authorized operations budget. Variances need to be explained at all

levels and the plan updated. At that point, the past month is dropped from the aggregate plan and

replaced by an additional month the end of the aggregate plan. The monthly review and update

allow the company to monitor its performance, maintain its medium term plan was developed.


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THE SUPPLY CHAIN LINK

Aggregate planning assures the necessary resources to satisfy an organizations objectives

(profit, customer service, inventory investment, etc.). It determines both the output rate and theworkforce size. These resources are based on product demand and reflect the customer service

objectives of the company. The master production scheduled is shared with all members of the

supply chain so that everyone knows expected completion dates and availability of different

products. Members of the chain also know when demand differs from the plan as well as any

problems encountered by operations affect the availability quantity or date for different products.

This allows members of the chain to respond to potential problems and not make unsustainable

delivery commitments. The master production schedule is the primary means of communication

within the supply chain.

CHAPTER HIGHLIGHTS

1. Planning begins with the development of the strategic business plan that provides yourcompany direction and objectives for the next 2 to 10 years. Marketing develops a plan

that enables the company to satisfy the goals of the strategic business plan. The aggregate

plan identifies the resources needed by operations to support the marketing plan.

2. Sales and operations planning integrate plans from the other functional areas andregularly evaluate the company performance. The process begins with a comparison of

actual demand and sales against planned demand. Forecasts are updated and the market is

reevaluated, and any changes in the marketing plan are reviewed by operation.

3. The level aggregate plans maintain the same size workforce and produce the same outputeach period. Inventories and back orders absorb fluctuations in demand. The chase

aggregate plan changes the capacity each period to match demand.

4. Demand patterns can be smoothed through pricing incentives, reduce prices for out ofseason purchases, or nonprime service times. Capacity can be changed by using overtime

or under time, hiring or firing employees, subcontracting, using temporary employees,

and so forth. You develop the aggregate plan by identifying the options you want to use,

calculating the production rate; calculating the size of the workforce needed to reach the

production rate; calculating the cost of the plan ;and evaluating the plan in terms of costs,

customer service, operations, and human resources.


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5. The different in aggregate in planning for companies that do not provide tangible productis that inventory is no longer an option. In many service organizations, it is critical to

control labor costs. Hotels, airlines, car rentals, and cruise lines use yield management

techniques to match demand to supply.

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