CHAPTER 11
AGGREGATE SALES
AND
OPERATIONS
PLANNING
Learning Objectives
After completing the chapter you will:
 Understand what Sales and Operations Planning is
and how it coordinates Manufacturing, Logistics,
Service and Marketing plans
 Learn how to construct Aggregate Plans that
employ different strategies for meeting demand
 Understand what Yield Management is and how it
is an important strategy for leveling demand
Sales and Operations Planning
 Sales and operations planning
 Process that helps firms
Provide better customer service
 Lower inventory
 Shorten customer lead times
 Stabilize production rates
 Give top management a handle on the business


The process is designed to help a company
Get demand and supply in balance
 Keep them in balance over time

Sales and Operations Planning
 The end goal is
 An agreement on the best course of action (between various
departments)

to achieve the optimal balance between supply and demand
 Balance must occur
 At an aggregate level
 At the detailed individual product level
Sales and Operations Planning
 Aggregate planning
 This activity requires

An integrated effort with cooperation from
 Sales
 Distribution and logistics
 Operations
 Finance
 Product development
Sales and Operations Planning
Sales and Operations Planning
Sales and Operations Planning
 Sales plan
 Developed by marketing
 3 to 18 month plan
 Units of aggregate product groups
 Aggregate operations plan
 Translating annual and quarterly business plans into broad
labor and output plans for the intermediate term
 Objective

Minimize the cost of resources required to meet demand over that
period
Sales and Operations Planning
 Aggregation


Supply side: product families
Demand side: groups of customers
 S & OP cycle

Typically, a monthly
 S & OP links


Strategic plans and business plan
Detailed operations and supply process (manufacturing, logistics,
service activities)
Sales and Operations Planning
 Time dimension in Exhibit 11.1
 Long-range planning
Done annually
 Horizon greater than one year


Intermediate-range planning
Covers 3 to 18 months
 With time increments, weekly, monthly, quarterly


Short-range planning
Covers one day to six months
 With daily, weekly time increments

Long-range planning
 Process planning
 Design of the mfg. and service process

Specific technologies and procedures
 Supply network planning
 Design of the logistics activities
Location of warehouses, types of transportation
 Outsourcing production, parts and component suppliers

 Strategic capacity planning
 Size and scope of production systems
Intermediate-range planning
Short-range planning
Aggregate Operations Plan
Production Planning Environment
Production Planning Strategies
1. Chase strategy

Match the production rate to the order rate

Hiring & laying off employees as the order rate varies
2. Stable workforce –variable work hours

Varying the number of hours worked

Through flexible work schedules or overtime
3. Level strategy

Working at a constant output rate

Shortages and surpluses are absorbed by
 Inventory levels, order backlogs, and lost sales
Production Planning Strategies
 Subcontracting
 In addition to three strategies,

Subcontract some portion of production
Relevant Costs
 Basic production costs
 Fixed & variable costs (e.g., direct & indirect labor costs,
regular & overtime compensation)
 Costs associated with changes in the production rate
 Hiring, training, laying off costs
 Inventory holding costs
 Storing, insurance, taxes, spoilage, obsolescence
 Backordering costs
 Expediting, loss of customer goodwill, loss of sales revenues
Relevant Costs
 Budgets
 To receive funding, submit annual, or quarterly budget request
 Aggregate plan
Key to the success of the budgeting process
 Provides justification for the requested budget amount

A Cut-and-Try Example
A Cut-and-Try Example
 Production Requirements
A Cut-and-Try Example
 Plan 1: Exact production; Vary workforce
 Plan 2: Constant workforce; Vary inventory and
stockout
 Plan 3: Constant low workforce; Subcontract
 Plan 4: Constant workforce; Overtime
A Cut-and-Try Example
A Cut-and-Try Example
A Cut-and-Try Example
A Cut-and-Try Example
A Cut-and-Try Example
 Comparison
A Cut-and-Try Example
Yield Management
 Yield management
 Process of allocating the right type of capacity to the right type
of customer at the right price and time to maximize revenue or
yield.
 Hotels, airlines, rental car agencies, cruise lines
Yield Management
 YM is most effective when
 Demand can be segmented by customer
 Fixed costs are high and variable costs are low
 Inventory is perishable
 Product can be sold in advance
 Demand is highly variable

http://www.managingchange.com/dynamic/yieldmgt.htm
Summary
 Sales and Operations Planning
 Aggregate Operations Plan
 Production planning strategies
Chase strategy
 Stable workforce –variable work hour
 Level strategy
 Subcontracting

 Yield Management
End of Chapter 11