9 Sales and Operations Planning

Planning Supply and Demand in a Supply Chain

PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e
Copyright © 2016 Pearson Education, Inc. 9–1
 Learning Objectives

1. Manage supply to improve synchronization

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

Copyright © 2016 Pearson Education, Inc. 9–2

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
• Managing capacity
– Time flexibility from workforce
– Use of seasonal workforce
– Use of subcontracting
– Use of dual facilities – specialized and flexible
– Designing product flexibility into production processes
• 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
• 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
Impact on Timing of Promotion/
Factor 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

TABLE 9-1

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 Managing Demand
• 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

TABLE 9-2

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 Managing Demand

FIGURE 9-1

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 Managing Demand

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

FIGURE 9-2

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 Promotion in January
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

FIGURE 9-3

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 Promotion in April
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
• Promotion in January

FIGURE 9-4

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 Discount Leads to
Large Increase in Consumption

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
• Promotion in April

FIGURE 9-5

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 Discount Leads to
Large Increase in Consumption

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
Percentage Percentage
Regular Promotion Promotion of Increase of Forward Average
Price Price Period in Demand Buy Profit Inventory
$40 $40 NA NA 875
NA $217,340
$40 $39 10% 20% 515
January $221,320
$40 $39 10% 20%
April $211,220 932
$40 $39 100% 20%
January $242,680 232
$40 $39 100% 20% 1,492
April $247,320
$31 $31 NA NA
NA $73,340 875
$31 $30 100% 20%
January $84,280 232
TABLE 9-3
$31 $30 100% 20% 1,492
April $69,120
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 Conclusions on Promotion
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
3. As 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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 Implementing Sales and Operations
Planning in Practice

1. Coordinate planning across enterprises in the

supply chain
2. Take predictable variability into account when
making strategic decisions
3. Ensure that senior leadership owns the S&OP
process
4. Ensure that the S&OP process modifies plans as
the reality or forecasts change

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

Copyright © 2016 Pearson Education, Inc. 9 – 24