Chapter 14

Sales and Capacity Planning

Russell and Taylor

Operations and Supply Chain Management,
8th Edition
 Lecture Outline
• The Sales and Operations Planning Process
• Strategies for Adjusting Capacity
• Strategies for Managing Demand
• Quantitative Techniques for Aggregate Planning
• Hierarchical Nature of Planning
• Aggregate Planning for Services

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-2
 Learning Objectives
• Appreciate the interface of marketing, finance, and
operations in S&OP planning
• Describe the monthly S&OP process and the importance of
reconciling differences
• Utilize various tools and techniques to adjust capacity and
manage demand
• Evaluate a demand scenario and select an appropriate
S&OP strategy
• Describe hierarchical planning and the process of
determining available-to-promise
• Determine overbooking, single orders, and fare class
strategies for revenue management in services

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-3
 Sales and Operations Planning
• Determines resource capacity to meet demand over
an intermediate time horizon
• Aggregate refers to sales and operations planning for
product lines or families
• Sales and Operations planning (S&OP) matches supply
and demand
• Objectives
• Establish a company wide plan for allocating resources
• Develop an economic strategy for meeting demand

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-4
 Sales and Operations Planning Process

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-5
 Monthly S&OP Planning Process

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-6
 Meeting Demand Strategies
• Adjusting capacity
• Resources to meet demand are acquired and
maintained over the time horizon of the plan
• Minor variations in demand are handled with overtime
or under-time
• Managing demand
• Proactive demand management

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-7
 Strategies for Adjusting Capacity
• Level production
• Producing at a constant rate and using inventory to
absorb fluctuations in demand
• Chase demand
• Hiring and firing workers to match demand
• Peak demand
• Maintaining resources for high-demand levels

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-8
 Strategies for Adjusting Capacity
• Overtime and under-time
• Increase or decrease working hours
• Subcontracting
• Let outside companies complete the work
• Part-time workers
• Hire part-time workers to complete the work
• Backordering
• Provide the service or product at a later time period

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-9
 Level Production

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-10
 Chase Demand

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-11
 Strategies for Managing Demand

• Shifting demand into other time periods

– Incentives
– Sales promotions
– Advertising campaigns
• Offering products or services with counter-cyclical
demand patterns
• Partnering with suppliers to reduce information
distortion along the supply chain

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-12
 Quantitative Techniques For AP
• Pure Strategies
• Mixed Strategies
• Linear Programming
• Transportation Method
• Other Quantitative Techniques

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-13
 Pure Strategies
QUARTER SALES FORECAST (LB)
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000

Hiring cost = $100 per worker

Firing cost = $500 per worker
Inventory carrying cost = $0.50 pound per quarter
Regular production cost per pound = $2.00
Production per employee = 1,000 pounds per quarter
Beginning work force = 100 workers

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-14
 Level Production Strategy
Level production

SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000

Cost of Level Production Strategy

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-15
 Level Production Strategy
Level production
(50,000 + 120,000 + 150,000 + 80,000)
= 100,000 pounds
4

SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY
Spring 80,000 100,000 20,000
Summer 50,000 100,000 70,000
Fall 120,000 100,000 50,000
Winter 150,000 100,000 0
400,000 140,000
Cost of Level Production Strategy
(400,000 X $2.00) + (140,00 X $.50) = $870,000

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-16
 Chase Demand Strategy
SALES PRODUCTION WORKERS WORKERS WORKERS
QUARTER FORECAST PLAN NEEDED HIRED FIRED
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000

Cost of Chase Demand Strategy

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-17
 Chase Demand Strategy
SALES PRODUCTION WORKERS WORKERS WORKERS
QUARTER FORECAST PLAN NEEDED HIRED FIRED
Spring 80,000 80,000 80 0 20
Summer 50,000 50,000 50 0 30
Fall 120,000 120,000 120 70 0
Winter 150,000 150,000 150 30 0
100 50
Cost of Chase Demand Strategy
(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-18
 Level Production with Excel

Cost of level production

= inventory costs +
production costs

Input by user Inventory at

=400,000/4 end of summer

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-19
 Chase Demand with Excel
No. of workers
hired in fall

Workforce requirements
calculated by system

Production input by user; Cost of chase

production =demand demand = hiring +
firing + production

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-20
 Mixed Strategy
• Combination of Level Production and Chase
Demand strategies
• Example policies
• no more than x% of workforce can be laid off in one
quarter
• inventory levels cannot exceed x dollars
• Some industries may shut down manufacturing
during the low demand season and schedule
employee vacations during that time

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-21
 General Linear Programming
(LP) Model

• LP gives an optimal solution, but demand and

costs must be linear
• Let
• Wt = workforce size for period t
• Pt =units produced in period t
• It =units in inventory at the end of period t
• Ft =number of workers fired for period t
• Ht = number of workers hired for period t

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-22
 LP MODEL
Minimize Z = $100 (H1 + H2 + H3 + H4)
+ $500 (F1 + F2 + F3 + F4)
+ $0.50 (I1 + I2 + I3 + I4)
+ $2 (P1 + P2 + P3 + P4)
Subject to
P1 - I1 = 80,000 (1)
Demand I1 + P2 - I2 = 50,000 (2)
constraints I2 + P3 - I3 = 120,000 (3)
I3 + P4 - I4 = 150,000 (4)
Production 1000 W1 = P1 (5)
constraints 1000 W2 = P2 (6)
1000 W3 = P3 (7)
1000 W4 = P4 (8)
100 + H1 - F1 = W1 (9)
Work force W1 + H2 - F2 = W2 (10)
constraints W2 + H3 - F3 = W3 (11)
© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-23
W3 + H4 - F4 = W4 (12)
 Setting up the Spreadsheet
Target cell;
cost of solution
goes here

Solver will put the

solution here

When model is complete, Solve

Cells where solution appears

Click here next
Demand Constraint

Production Constraint

Workforce Constraint

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-24
 Setting up the Spreadsheet

Click these boxes

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 The LP Solution
Cost of optimal solution

Solution is a mix
of inventory, hiring
and firing

Optimal production plan

Extra report
options

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-26
 Level Production for Quantum

Cost of level production

Excel
calculates
these

Input by user

Level = 12,000/12 = 1,000

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-27
 Chase Demand for Quantum
No. workers
hired in Feb. Cost of chase demand

Excel
calculates
these

Input by user

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-28
 LP Solution for Quantum

Optimal solution Constraint

equations
in these
cells

Solver found
this solution

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-29
 Transportation Method
EXPECTED REGULAR OVERTIME SUBCONTRACT
QUARTER DEMAND CAPACITY CAPACITY CAPACITY
1 900 1000 100 500
2 1500 1200 150 500
3 1600 1300 200 500
4 3000 1300 200 500

Regular production cost $20/unit

Overtime production cost $25/unit
Subcontracting cost $28/unit
Inventory holding cost $3/unit-period
Beginning inventory 300 units

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-30
 Burruss’ Production Plan

REGULAR SUB- ENDING

PERIOD DEMAND PRODUCTION OVERTIME CONTRACT INVENTORY

1 900 1000 100 0 500

2 1500 1200 150 250 600
3 1600 1300 200 500 1000
4 3000 1300 200 500 0
Total 7000 4800 650 1250 2100

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-31
Excel and
Transportation
Method
Period 2’s
ending
inventory

Regular production
for period 1

Cost of
solution

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-32
 Other Quantitative Techniques
• Linear decision rule (LDR)
• Search decision rule (SDR)
• Management coefficients model

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-33
 Hierarchical Nature of Planning

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-34
 Disaggregation
• Breaking an aggregate plan into more detailed
plans
• Create Master Production Schedule for Material
Requirements Planning

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-35
 Collaborative Planning
• Sharing information and synchronizing
production across supply chain
• Part of CPFR (collaborative planning,
forecasting, and replenishment)
• involves selecting products to be jointly managed,
creating a single forecast of customer demand, and
synchronizing production across supply chain

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-36
 Available-to-Promise (ATP)
• Quantity of items that can be promised to customer
• Difference between planned production and customer
orders already received
AT in period 1 = (On-hand quantity + MPS in period 1) –
(CO until the next period of planned production)
ATP in period n = (MPS in period n) –
(CO until the next period of planned production)

• Capable-to-promise
• quantity of items that can be produced and made available at
a later date

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-37
 ATP

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 ATP

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 ATP

ATP in April =
ATP in May =
ATP in June =

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 ATP

Take excess units from April

ATP in April = (10+100) – 70 = 40 = 30

ATP in May = 100 – 110 = -10 =0
ATP in June = 100 – 50 = 50

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-41
 Rule Based ATP

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-42
 Aggregate Planning for Services
• Most services cannot be inventoried
• Demand for services is difficult to predict
• Capacity is also difficult to predict
• Service capacity must be provided at the
appropriate place and time
• Labor is usually the most constraining resource
for services

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-43
 Yield Management

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-44
 Yield Management

NO-SHOWS PROBABILITY P(N < X)

0 .15 .00
1 .25 .15
2 .30 .40
3 .30 .70

Revenue = $100/night Optimal probability of no-shows

Cu
Maintenance = $25/nightP(n < x)  =
Overflow = $70/night Cu + Co
Co = $70
Cu = $100 - $25 = $75

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-45
 Yield Management

NO-SHOWS PROBABILITY P(N < X)

0 .15 .00
1 .25 .15
2 .30 .40 .517
3 .30 .70

Optimal probability of no-shows

Cu 75
P(n < x)  = = .517
Cu + C o 75 + 70

Hotel should be overbooked by two rooms

© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-46
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© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 14-47