Supply Chain Management: Strategy,

Planning, and Operation

Seventh Edition

Chapter 9
Sales and Operations
Planning in a Supply Chain

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Learning Objectives
9.1 Manage supply and demand to improve synchronization in a
supply chain in the face of predictable variability.
9.2 Use sales and operations planning to maximize profitability
when faced with predictable variability in a supply chain.

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Responding to Predictable Variability in a
Supply Chain
• Predictable variability is change in demand that can be
forecasted
• Can cause increased costs and decreased responsiveness in the
supply chain
• Two broad options

1. Manage supply using capacity, inventory, subcontracting,

and backlogs
2. Manage demand using short-term price discounts and
promotions

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Managing Supply (1 of 2)
• Managing capacity
– Time flexibility from workforce
– Use of seasonal workforce
– Use of dual facilities – specialized and flexible
– Use of subcontracting
– Designing product flexibility into production processes

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Managing Supply (2 of 2)
• Managing inventory
– Using common components across multiple products
– Build inventory of high-demand or predictable-demand
products

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Inventory/Capacity Trade-Off
• Leveling capacity forces inventory to build up in anticipation
of seasonal variation in demand
• Carrying low levels of inventory requires capacity to vary with
seasonal variation in demand or enough capacity to cover peak
demand during season

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Managing Demand (1 of 4)
• With promotion, three factors lead to increased demand

1. Market growth
2. Stealing share
3. Forward buying
• Factors influencing timing of a promotion
– Impact of promotion on demand
– Cost of holding inventory
– Cost of changing the level of capacity
– Product margins

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Managing Demand (2 of 4)
Table 9-1 Summary of Impact on Promotion Timing

Factor Impact on Timing of Promotion/ Forward Buy

High forward buying Favors promotion during low-demand periods

High ability steal market share Favors promotion during peak-demand periods

High ability to increase overall market Favors promotion during peak-demand periods

High margin Favors promotion during peak-demand periods

Low margin Favors promotion during low-demand periods

High manufacturer holding costs Favors promotion during low-demand periods

High costs of changing capacity Favors promotion during low-demand periods

High retailer holding costs Decreases forward buying by retailer

High promotion elasticity of consumer Decreases forward buying by retailer

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Summary of Learning Objective 1
Companies can maximize profits by managing supply and demand to
improve synchronization in a supply chain in the face of predictable
variability. Supply can be managed using capacity or inventory.
Companies can reduce the capacity required through the use of
workforce flexibility, subcontracting, dual facilities, and product
flexibility. Companies can reduce the inventory required by
emphasizing common parts and building and holding products with
predictable demand ahead of time. Demand can be managed using
pricing and promotion decisions because the timing of promotions has
a tremendous impact on demand. Therefore, using pricing to shape
demand in concert with supply planning can help improve supply chain
profits.

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Sales and Operations Planning at Red
Tomato
Table 9-2 Costs for Red Tomato and Green Thumb

Item Cost
Material cost $10/unit
Inventory holding cost $2/unit/month
Marginal cost of stockout/backlog $5/unit/month
Hiring and training costs $300/worker
Layoff cost $500/worker
Labor hours required 4/unit
Regular time cost $4/hour
Overtime cost $6/hour
Cost of subcontracting $30/unit

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Managing Demand (3 of 4)

Figure 9-1 Base Case Aggregate Plan for Red Tomato and Green
Thumb
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Managing Demand (4 of 4)
Total cost over planning horizon = $422,660
Revenue over planning horizon = $640,000
Profit over planning horizon = $217,340

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When to Promote
• Is it more effective to promote during the peak period of off-
peak?
• Analyze the impact of a promotion on demand and the
resulting optimal aggregate plan

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Promotion in January (1 of 2)

Figure 9-2 Optimal Aggregate Plan When Discounting Price in January

to $39
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Promotion in January (2 of 2)
Total cost over planning horizon = $422,080
Revenue over planning horizon = $643,400
Profit over planning horizon = $221,320

• Lower seasonal inventory

• A somewhat lower total cost
• A higher total profit

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Promotion in April (1 of 2)

Figure 9-3 Optimal Aggregate Plan When Discounting Price in April to

$39
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Promotion in April (2 of 2)
Total cost over planning horizon = $438,920
Revenue over planning horizon = $650,140
Profit over planning horizon = $211,220

• Higher seasonal inventory

• A somewhat higher total cost
• A slightly smaller total profit

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Discount Leads to Large Increase in
Consumption (1 of 4)
• Promotion in January

Figure 9-4 Optimal Aggregate Plan When Discounting Price in January

to $39 with Large Increase in Demand

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Discount Leads to Large Increase in
Consumption (2 of 4)
Total cost over planning horizon = $456,880
Revenue over planning horizon = $699,560
Profit over planning horizon = $242,680

• Higher total profit than base case

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Discount Leads to Large Increase in
Consumption (3 of 4)
• Promotion in April

Figure 9-5 Optimal Aggregate Plan When Discounting Price in April to

$39 with Large Increase in Demand

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Discount Leads to Large Increase in
Consumption (4 of 4)
Total cost over planning horizon = $536,200
Revenue over planning horizon = $783,520
Profit over planning horizon = $247,320

• Much higher level of seasonal inventory

• Uses more stockouts and subcontracting
• Revenues increase
• Overall profits higher

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Supply Chain Performance
Table 9-3 Supply Chain Performance Under Different Scenarios

Percentag
Percentage e of
Regular Promotion Promotion of Increase Forward Average
Price Price Period in Demand Buy Profit Inventory
$40 $40 NA NA NA $217,340 875
$40 $39 January 10% 20% $221,320 515
$40 $39 April 10% 20% $211,220 932
$40 $39 January 100% 20% $242,680 232
$40 $39 April 100% 20% $247,320 1,492
$31 $31 NA NA NA $73,340 875
$31 $30 January 100% 20% $84,280 232
$31 $30 April 100% 20% $69,120 1,492

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Conclusions on Promotion (1 of 3)
1. Average inventory increases if a promotion is run during the
peak period and decreases if the promotion is run during the
off-peak period
2. Promoting during a peak-demand month may decrease overall
profitability if there is a small increase in consumption and a
significant fraction of the demand increase results from a
forward buy

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Conclusions on Promotion (2 of 3)
3. As the consumption increase from discounting grows and
forward buying becomes a smaller fraction of the demand
increase from a promotion, it is more profitable to promote
during the peak period
4. As the product margin declines, promoting during the peak-
demand period becomes less profitable

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Conclusions on Promotion (3 of 3)
• When faced with seasonal demand, use combination of pricing
and production and inventory to improve profitability
• Entire supply chain must work toward one goal of maximizing
profitability
• High-level support within an organization is necessary
• Early warning alerts should be built into the S&OP process

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Summary of Learning Objective 2
To handle predictable variability in a profit-maximizing manner,
supply chains must coordinate the management of both supply
and demand. This requires coordinated planning across all stages
of the supply chain to select pricing and promotion plans and
aggregate plans that maximize supply chain profit. Sales and
operations planning allows a supply chain to coordinate the
planning of pricing and promotions along with the planning of
production to maximize profits. To achieve coordination in
practice, it is important that the S&OP process be owned by a
senior leader within the supply chain.

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Copyright

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