Chapter 14

Sales and Capacity Planning

Russell and Taylor

Operations and Supply Chain Management,
9th 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
 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
 Remember Capacity Concepts
• Rate of output that can be achieved by a system
(units of output per unit of time)
• peak/maximum
• sustained/design
• Evaluation of resource inputs to a process
• labor, equipment, etc.
• Sets up competitive boundaries of a firm
• Long-term planning key to shorter-term
decisions
 Planning Summary
• Goal: matching resource capabilities to demand
forecasts
• Estimate future capacity requirements
• Identify gaps by comparing requirements with
available capacity
• Develop alternative plans for filling gaps
• Evaluate each alternative, both quantitatively
and qualitatively, and make a final choice
 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
Sales and Operations Planning Process
Monthly S&OP Process
 Stop & Think

Do any of your companies use an S&OP

process similar to this? What is the
(intended) outcome?

10-9
 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
 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
 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
Level Production
Chase Demand
 Strategy Implications
• Chase strategy requires pool of qualified/trainable
workers, has obvious motivational impacts
• Stable work force provides workforce continuity
• Level strategy has potential for fluctuating inventory
levels, order backlogs, lost sales; employees benefit
at cost of potentially decreased customer service,
increased inventory costs
• Subcontracting can cause loss of control over
schedule and quality
 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
 Stop & Think

As a consumer, where do you notice these

demand management strategies?

10-17
 Quantitative Techniques For
Aggregate Planning

• Pure Strategies
• Mixed Strategies
• Others (we won’t cover)
• Linear Programming
• Transportation Method
• Other Quantitative Techniques
 Relevant Costs
• Basic production costs
• Fixed and variable costs (direct and indirect labor, overtime
compensation)
• Costs associated with changes in the production rate
• Hiring, training, laying off
• Inventory holding costs
• Capital tied up in inventory, storing, insurance, taxes, spoilage,
obsolescence
• Backlogging costs
• Difficult to measure---costs of expediting, loss of customer
goodwill, loss of sales revenue
 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
 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

 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
 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

 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
Level Production with Excel

Cost of level production

= inventory costs +
production costs

Input by user Inventory at

=400,000/4 end of summer
 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
 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
 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
Yield Management
 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/night P(n < x)  C + C =
u o
Overflow = $70/night
Co = $70
Cu = $100 - $25 = $75
 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

Hierarchical Nature of Planning
 Disaggregation

• Breaking an aggregate plan into more detailed

plans
• Create Master Production Schedule for Material
Requirements Planning
 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

• CPFR can be thought of as S&OP with supply

chain partners (rather than internally)