Sales and Operations
Planning
(Aggregate Planning)
Sales and Operations
Planning
• Strategic and tactical
considerations
• Top-down planning
• Bottom-up planning
• Optimization techniques
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 2
Back to Pennington Cabinet
• Strategic Capacity Level:
Five machines, nine assembly teams
• Company produces make-to-stock
cabinets for sale at Lowe’s, etc.
• Effective capacity:
5,000 jobs per year
OR
about 420 jobs per month
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 3
Pennington (continued)
Raw Demand for next 6 months:
January
150 jobs
February
250
March
350
April
450
May
600
June
650
What are our options . . . ?
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 4
Pennington (again) . . .
Raw Demand
600
Need 450
Monthly capacity = 420
300
April
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 5
Sales and Operations
Planning (SOP)
• Purpose: Select capacity options
over the intermediate time horizon
• Capacity options:
– Workforces
– Shifts
– Overtime
– Subcontracting
– Inventories
– etc.
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 6
Time Horizon View . . .
Short-Range Plan
(days, weeks out)
SOP
(months out)
Long-Range Plan
(years out)
Capacity levels
considered
“frozen” in the
short-term
Changes in
adjustable
capacity
possible
Changes in
fixed
capacity
possible
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 7
SOP continued
(2 - 18 months out)
• Outside of time frame  strategic planning
• Inside of time frame  tactical planning
“Big Picture” approach to planning
• Families or groups (aggregation) of:
– Products
– Resources
– Technologies or skills
• Provide “rough” estimates
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 8
Position in the Overall
Business Planning Cycle
Decisions
Long-Range
Plans
SOP
Short-Range
Plans
Product and process
“Bricks and Mortar”
Employment and overall
inventory levels
What demand to meet?
Specific products and times
Scheduling of people and
equipment
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Time Frame
18+ months
2 to 18 months
Less than 2 months
Chapter 12, Slide 9
Inputs to the Process
Strategic Capacity Levels
 Existing buildings
 Processes
Demand Management
 Forecasts of customer
demand
 Need for spares, etc.
 Pricing
SOPs
External Capacities
 Suppliers
 Subcontractors
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 10
Advantages of SOP
• Negotiated process
– “Agreed” demand
• Functional coordination
– Budgets and cash flow analyses
• Reduces operations task to
“meeting the plan”
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 11
SOP Approaches
Top-Down
Bottom-Up
• Similar products OR
stable mix
• Different products AND
unstable mix
• Standards available for
planning
• Requires forecasts and
production data for
individual products
– time, cost requirements
from history and/or
planning documentation
• Can “Average” product
• Can be extremely dataintensive
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 12
Top-Down Planning
1. Develop the aggregate sales forecast
and planning values.
2. Translate the sales forecast into
resource requirements.
 Personnel, equipment, materials
3. Generate alternative production plans.
 Chase, level, mixed
4. Select the best of the plans.
 Lowest cost, best fit to capability
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 13
Top-Down Example I
(Product Data)
Product
% of Total Labor/Unit
A100
10%
40 hours
B200
50%
20 hours
C300
20%
15 hours
D400
5%
10 hours
E500
10%
20 hours
F600
5%
10 hours
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 14
Top-Down Example II
(“Average” Products)
Product
% of Total Labor/Unit
A100
10%
40 hours
B200
50%
20 hours
C300
20%
15 hours
D400
5%
10 hours
E500
10%
20 hours
F600
5%
10 hours
10%(40) + 60%(20) + 20%(15) + 10%(10) = 20 hours
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 15
Top-Down Example III
(Conditions or Constraints)
• Agreed upon demand to be met for
upcoming 12 month period
• Can vary workforce and inventory levels
• No backordering
• “Average” unit requires 20 worker hours
• Each worker works 160 hours per month
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 16
Top-Down Example IV
(Demand Forecast for 12 months)
Month
Demand
Month
Demand
March
1592
September
2504
April
1400
October
2504
May
1200
November
3000
June
1000
December
3000
July
1504
January
2504
August
1992
February
1992
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 17
Top-Down Example V
(Other tidbits of data …)
• Hiring cost = $300
• Firing cost = $200
• Inventory holding cost = $6 / unit / month
• Start and end with 227 workers (goal)
• Start and end with about 1000 units in
inventory (goal)
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 18
Detail of First Six Months
from Level Strategy
Demand
Demand in
Employee
Hours
Employees to
Meet
Production
Plan
Actual
Employees
Actual
Production
March
1592
31840
199
252
2016
0
25
1424
April
1400
28000
175
252
2016
0
0
2040
May
1200
24000
150
252
2016
0
0
2856
June
1000
20000
125
252
2016
0
0
3872
July
1504
30080
188
252
2016
0
0
4384
August
1992
39840
249
252
2016
0
0
4408
Month
Firings
Hirings
Ending
Inventory
Note: We develop a level strategy by setting “Actual Employees”
equal to the average required for the 12 month planning period
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 19
Detail of First Six Months
from Chase Strategy
Demand
Demand in
Employee
Hours
Employees to
Meet
Production
Plan
Actual
Employees
Actual
Production
March
1592
31840
199
199
1592
28
0
1000
April
1400
28000
175
175
1400
24
0
1000
May
1200
24000
150
150
1200
25
0
1000
June
1000
20000
125
125
1000
25
0
1000
July
1504
30080
188
188
1504
0
63
1000
August
1992
39840
249
249
1992
0
61
1000
Month
Firings
Hirings
Ending
Inventory
Note: We develop a chase strategy by setting “Actual
Employees” equal to the number needed in each period
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 20
Another View ...
Chase SOP
30000
25000
20000
15000
10000
5000
Ju
ly
Au
Se gus
t
pt
em
be
r
O
ct
ob
er
No
ve
m
De be
r
ce
m
be
Ja r
nu
a
Fe ry
br
ua
ry
M
Ap
ril
M
ay
Ju
ne
0
ar
ch
Cumulative Production
Level SOP
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 21
Cost Details from the
Spreadsheets ...
Cost of current plan:
Level strategy
Totals:
Costs:
Firing:
25
$5,000
$205,844
Hiring:
25
$7,500
Cost of current plan:
Chase strategy
Totals:
Costs:
Firing:
250
$50,000
Inventory:
32224
$193,344
$197,000
Hiring:
250
$75,000
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Inventory:
12000
$72,000
Chapter 12, Slide 22
Top-Down Example
(Other Issues …)
• Are complete costs shown?
– Expand out for budget and cash flow analysis
• “Input” (suppliers) and “output” (logistics
and warehousing) considerations
– Lead time, materials availability, storage
space?
• Variations in actual production
– Scrap, rework, equipment breakdowns
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 23
Top-Down Example
(Expand the options …)
We can now subcontract production
• Maximum subcontract of 1400 units per
month
• Cost is $5 more per unit than internal
production cost
• Will this option:
– 1) increase costs?
– 2) decrease costs?
– 3) have no effect on costs?
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 24
Second Approach:
“Bottom-Up” SOP
• Products with very different
requirements
• Requires forecasts and production
data for individual products
• Can be extremely data-intensive
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 25
Iterative Approach
(Similar to Top Down)
Develop Production
Plans for Distinct
Families or Otems
NO
Determine
Total
Load
Check feasibility:
– Bottleneck processes
– Key suppliers
– Other resources (cash)
Feasible?
YES
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Implement Plan
Chapter 12, Slide 26
Detail from Bottom Up
Plan
Bill of Labor
CSEs
Home Gyms
Assembly
50
2
Painting
2
3
Month
Hours of
Assembly
Hours of
Painting
CSEs
Home Gyms
Assembly
Maximum
Painting
Maximim
January
30
200
1900
2200
660
750
February
25
205
1660
2200
665
750
March
20
210
1420
2200
670
750
April
15
215
1180
2200
675
750
May
20
210
1420
2200
670
750
June
50
180
2860
2200
640
750
Total:
160
1220
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 27
… and Load Profile for
Assembly
Assembly Load Profile
3500
3000
2500
2000
Assembly
Max.
1500
1000
500
0
1
2
3
4
5
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
6
Chapter 12, Slide 28
Smoothing Production in
April, May, and June . . .
Bill of Labor
CSEs
Home Gyms
Assembly
50
2
Painting
2
3
Month
Hours of
Assembly
Hours of
Painting
Assembly
Max.
Painting
Max
CSEs
Home Gyms
January
30
200
1900
2200
660
750
February
25
205
1660
2200
665
750
March
20
210
1420
2200
670
750
April
25
215
1680
2200
695
750
May
30
210
1920
2200
690
750
June
30
180
1860
2200
600
750
Total:
160
1220
NOTE: Total production over the six months isn’t changing, just the timing
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 29
… and the New Load
Profile
Assembly Load Profile
2500
2000
1500
Assembly
Max.
1000
500
0
1
2
3
4
5
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
6
Chapter 12, Slide 30
Options for Services
 Smooth out demand:
Appointments
Discounts and promotions
Seasonal complements
 Tiered workforce:
Full-time and part-time
Customer involvement
 Minimize on-line activities
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 31
Self-Test
 Go into SOP.xls and try to develop a aggregate
production plan with lower costs than either the pure
chase or pure level strategies. Do this by varying
the actual workforce in place, making sure you keep
inventory levels above 0 at all times.
 Suppose firing and hiring costs were to double while
inventory holding cost per unit was cut in half. How
do you think this would affect the relative
attractiveness?
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 32
Advanced Topic:
Optimization Modeling
• What is optimization modeling?
• Essential conditions
• Application to operations problems
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 33
Optimization Modeling
Family of mathematical techniques
used to allocate limited resources
among competing demands in an
optimal way
What is our financial objective?
What are our constraints?
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 34
Optimization Example 1
Product mix:
Find the product mix that will
maximize revenue, given limits on
materials, labor hours, and machine
hours available
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 35
Optimization Example 2
SOP:
Find the workforce and inventory
levels which will minimize hiring,
firing, and inventory costs while still
meeting demand.
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 36
Optimization Example 3
Transportation Problem:
Minimize the cost of shipping items from
different plants to different stores
150
100
Plants
Stores
300
200
150
300
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 37
Optimization Example 4
Material Yield:
Minimize the amount of scrap
generated by cutting steel, fabric,
wood, etc.
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Scrap
Material
Chapter 12, Slide 38
Optimization
Essential Conditions I
1. Explicit objective
 Maximize revenue or profit
 Minimize costs
2. Some constraint(s)
 Resource limits
 Demand requirements
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 39
Optimization
Essential Conditions II
3. Conditions can be expressed
mathematically
Revenue = $1000X
Variable cost = $310X
Assembly hours needed = 15X
4. Divisibility
OK to make half a unit or hire two
thirds of an individual
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 40
SOP Optimization
Two major types of problems
1. Maximize profit or revenues subject
to resource constraints
2. Minimize costs subject to demand
requirements
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 41
Maximization Problem I
1. CSE:
Home Gym:
$1000 per unit
$150 per unit
2. Labor requirements:
Assembly
CSE
50
Home Gym
2
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Painting
2
3
Chapter 12, Slide 42
Maximization Problem II
3. Hours available per month
Assembly
Painting
2200 hours
750 hours
4. Sales of home gyms limited to 150
per month
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 43
In mathematical form:
(CSE  C, Home Gym  H)
Maximize: $1000C + $150H
Subject to the following conditions:
50C + 2H < 2200
(Assembly hours constraint)
2C + 3H < 750
(Painting hours constraint)
H < 150
(Demand limit on home gyms)
C, H > 0
(think about it!)
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 44
Bottom Up Plan to Allocate
Capacity to Maximize Profits
Revenue:
Maximum
that can be
Actual
sold per Production
Labor Requirements
Before
Solving
$
Assembly Painting
CSEs
Home Gyms
Assembly
Painting
50
2
Hours
Actual
Available Hours
2200
750
Price
2 $
3 $
1,000
50
10000
150
0
0
Slack
Hours
0
0
2200
750
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 45
Bottom Up Plan to Allocate
Capacity to Maximize Profits
Revenue:
Solving
Maximum
that can be
Actual
sold per Production
Labor Requirements
and
After
$ 45,500
Assembly Painting
CSEs
Home Gyms
Assembly
Painting
50
2
Price
2 $
3 $
1,000
50
10000
150
38
150
Hours
Actual
Slack
Available Hours
Hours
2200
2200
0
750
526
224
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 46
Key Points
• This is the most revenue we could
generate, given the constraints
• “No slack” assembly time, Home gym
demand
• More painting time or more CSE demand
wouldn’t change anything
• More constraints can only make the
problem more difficult, fewer constraints
can only help
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 47
Minimization Problem
SOP:
“Meet the production plan with the
minimum total hiring, firing, and
inventory cost”
• Take earlier SOP problem and solve using
optimization techniques.
• Can you figure out how the problem would
be defined?
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 48
Highlight from
Optimization Solution
Unit Demand
Employees
1592.0
1400.0
1200.0
1000.0
1504.0
1992.0
2504.0
2504.0
3000.0
3000.0
2504.0
1992.0
227.0
147.4
147.4
147.4
147.4
147.4
301.0
331.0
331.0
331.0
331.0
331.0
331.0
227.0
Production
1179.2
1179.2
1179.2
1179.2
1179.2
2408.0
2648.0
2648.0
2648.0
2648.0
2648.0
2648.0
Hirings
0.0
0.0
0.0
0.0
0.0
153.6
30.0
0.0
0.0
0.0
0.0
0.0
0.0
Firings
79.6
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
104.0
Inventory
1000.0
587.2
366.4
345.6
524.8
200.0
616.0
760.0
904.0
552.0
200.0
344.0
1000.0
Annual Cost = $130,200
(Note: Solution didn’t let inventory go below 200)
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 49
What to Take Away from this ...
• Essential conditions:
Explicit objective
Constraints
Linearity
Divisibility
• Write out an objective function or
constraint for simple problem
• Interpret simple results
©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain
Management — Bozarth & Handfield
Chapter 12, Slide 50