3. Sales & Operations Plan

APICS defines S&OP as the "function of setting the overall level of manufacturing output (production plan) and other activities to best satisfy the current planned levels of sales (sales plan and/or forecasts), while meeting general business objectives of profitability, productivity, competitive customer lead times, etc., as expressed in the overall business plan.

One of its primary purposes is to establish production rates that will achieve management’s objective of maintaining, raising, or lowering inventories or backlogs, while usually attempting to keep the workforce relatively stable.
It must extend through a planning horizon sufficient to plan the labor, equipment, facilities, material, and finances required to accomplish the production plan. As this plan affects many company functions, it is normally prepared with information from marketing, manufacturing, engineering, finance, materials, etc."

Key points of sales & operation planning are
1. SOP is a process for continually revising the SBP and coordinating plans of the various departments.

2. SOP is a cross-functional business plan that involves sales and marketing, product development, operations and senior management. While operations represent supply, marketing represents demand. 

3. SOP is a dynamic process, updated on a regular basis, usually monthly. The process starts with the sales and marketing departments. The updated marketing is then communicate to manufacturing, engineering and finance which adjust their plans. If these departments find they cannot accommodate the new marketing plan, then the marketing plan must be adjusted.

4. The SOP is the forum in which the production plan is developed.
5. SOP specifies – Sales, Production, Inventory & Backlog.
6. 4 key terms defined by SOP are – Demand, Supply, Volume & Mix.

There are two approaches that are used in sales and operations planning; top-down planning and bottom-up planning.
Top-Down Planning
Top-down planning is the simplest approach to sales and operations planning. In this approach, there is a single sales forecast that drives the planning process. The forecast is derived from a combination of products and services that require similar resources, for example, a number of manufactured finished products. Using top-down planning, the management can create tactical plans based on the overall forecast and divide the resources across the finished foods in the plan.
Bottom-Up Planning
This approach is used by companies that do not have a stable manufacturing schedule and the number and type of finished goods can change from month to month. In this scenario the sales forecast is not helpful for resource planning. The management need to calculate the resources for each of the products and then amalgamate the resources to get an overall picture of resource requirements.

Product Volume
The level of product volume establishes the big picture of demand placed on a supply operation. Product volume is generally expressed in rates of demand at the product group level. It is generally difficult for a supply operation to change the supply rate from period to period. Supply operations prefer level loading in terms of product volume.

Product Mix
As per the 11th ed of APICS dictionary “The proportion of individual products that make up the total production or sales volume”. It is measure of the different types of the product that can be supplied within a particular product group. Mix variation is typically a problem for supply operations that have inflexible processes. Any operation with significant capital investment in high speed machinery that requires long production runs to justify the high cost of setting up the equipment requires a product mix. E.g. steel mills & paper making operations.

Product mix determines the specific amounts of each product type to be produced to meet the needs of the overall plan. Variation in the product mix can be handled with relative ease by reducing set up time & the
adoption of small work cells.

Product Groups & Families:

“A group of products whose similarity in manufacturing procedures, marketing characteristics, or specifications enables them to be aggregated for planning, marketing, or, occasionally, costing”.

SOP occurs at the product group level. The product grouping must represent the way in which the product is presented to the market. Ideally there should be no more than 6 to 12 product groupings per separate business unit. The exception to the grouping rules may be new products.

Companies frequently choose to place new products in a separate family. This provides maximum exposure for new products while allowing the manufacturing process to be refined, equipment requirements to be met, new equipment to be purchased & planning to become more concrete.

Product / Service Hierarchy:
A product hierarchy ensures that a correct top down or bottom up approach is take to group demand at each subsequent level.

Forecasts are more accurate the higher up the product hierarchy & they should be driven down from the top. Actual demand is collected at the detailed level & hence should be consolidated from the bottom up.

Input Outpts SOP

Input to SOP:

Out Puts from SOP Process:

Simulation:

Simulation is an integral part of developing a realistic analytical model. Simulation enables the planning team to create a model with different types of cost relationships. Computation & evaluation of costs are possible. Costs that may change at specific points in the production process can also be played out using simulation. It can approximate reality more closely than any other analytical methods in many situations.
Running a simulation model does not guarantee an optimum solution but it does allow team members to come close to an optimum solution & it promises a realistic view of production options.

Measuring Sales & Operations plan


Reviewing key performance indicators is an important part of any working S&OP process. Experience suggests a set of standardized measurements (sometimes called key performance indicators-KPI’s or vital signs) that should be published during the process, and reviewed at the meetings that make up the process. Some performance indicators will be reviewed in the early steps of the S&OP process, but not at the executive meeting. The critical metrics will be reviewed in the executive meeting.

Vital signs reviewed during the S&OP process:
Measure whether the needs of customers are being met (on-time and in-full).
Measure whether the financial objectives of the business as defined by the business plan are being met.
Identify problems and then assist in prioritizing problems so they can be solved.
Provide a scorecard for monitoring improvement.

The sales & operations plan is validated by resource planning process. Resource planning is concerned with identifying the load placed on all potentially constraining resources over the medium to long term time frame. This load is compared to the existing capacity capabilities & a judgment is made as to whether those capabilities are going to be sufficient for this future anticipated load. The process is iterative in nature & may be repeated many times before the sales & operations plan is finalized

Reviewing Historical performance:
The sales and operations planning system should include capabilities to capture and report the following:
1. Customer service performance by family and overall
Customer delivery performance (on-time and in-full – OTIF) to request date
Customer delivery performance (on-time and in-full) to promised date

2. Performance to budget (dollars) by family and overall
Latest sales plan vs. budget dollars
Profit projections for year
Inventory versus budget dollars

3. Performance to plan (units) by family
Actual shipments versus plan typically expressed as percentage attainment.
Actual sales versus forecast (some measurement of accuracy or variability) typically expressed as attainment, percentage error, or mean absolute percentage
error.
Actual supply versus supply plan expressed as percentage attainment, or percent variability from plan.
Actual inventory versus inventory plan (make-to-stock products) expressed as a percentage.
Actual backlog versus backlog plan (make-to-order products) expressed as a percentage.

The way these are actually reported will vary from company to company. In nearly every company, the “performance to plan” metrics will be reviewed as part of the family by family review, so summarizing them to a scorecard is somewhat redundant. For example, Below figure shows common performance
to plan metrics displayed as part of the S&OP display itself. Metrics on this make-to-stock example show actual sales to budget, actual sales to plan, actual production to plan, and actual inventory to plan expressed as a percentage of the budget or plan for the period.



Identify the causes for variation from the plan:
Determine the root cause of any variance to the plan. The investigation should determine if the cause is
likely to continue or if it can be rectified within a short time frame. If the cause can’t be rectified then the
future plan will have to be adjusted for the projected trend from the historical performance.

Target Inventories & backlog:
Review of current & future targets for inventory &/or backlog levels.
These targets should be reviewed in terms of actual performance & revised where necessary by the management team.

Consistency to previous Sales & Operations Plan:
Determine of the new plans are consistent with the previous sales & operations plan.
The output of the SOP process is an agreed upon plan for operations called the production plan.

Measuring Sales Performance:
Sales can be measured on the basis of the following factors:

Market Share is a measure of total market penetration.

Customer Share is measure of how many potential customers are attracted to a brand. It is a measure
of the recognition of the brand in the market place & the predisposition of the customer to buy the
brand when presented with a choice pf competing brands.

Customer Retention is a measure of the loyalty of customers to the provider of products & services.
Customer acquisition is a rate at which the new customers are signed up.

Product Acceptance is a measure of the way in which a market reacts to a particular product or
service. The higher the degree of acceptance the more likely the product or service will be continued
demand in the future.

Service Contracts are used to provide additional support to the customer after the sale.’
Customer Satisfaction is a measure of the overall perception f a customer with the supplier of a
product or service.

Customer Complaints is a measure of the dissatisfaction of the customer with a supplier of a product
or service.

Product returns is another measure of customer dissatisfaction.

Warranty claims are another measure of customer dissatisfaction

Monthly SOP Process

A Sales and Operations Planning process normally includes a series of meetings, finishing with a board level meeting at which, key long term decisions are taken, and the current progress against the Business Plan is reviewed.  The review has to cover at least 15 months.

The inputs to the SOP are forecast values and/or requirements from customer order management, sales information system, and controlling.

The main purpose of SOP is to establish production rates that will achieve management’s objective of maintaining, raising, or lowering inventories or backlogs, in order to keep the workforce relatively stable. This plan helps in planning the labor, equipment, facilities, material, and finances required to accomplish the production plan. This plan can be formed with information from marketing, manufacturing, engineering, finance, materials and so on.

Sales and operations planning can also be described as, "a set of decision-making processes to balance demand and supply, to integrate financial planning and operational planning, and to link high level strategic plans with day-to-day operations”.

SOP is the result of monthly planning activities and is usually based on an Annual Operations Plan (AOP). Therefore, the SOP is a main factor to gradually accomplish the AOP targets, by linking monthly sales and marketing planning directly to the operations side of a business. 

Run Sales Forecast Reports
Occurs in IT department shortly after the end of the month. It consists of:
Updating the files with data from the month just ended, actual sales, inventories, production, backlog etc.
Generating information for sales & marketing representatives to use in developing the new demand forecast.
Disseminating the information to the appropriate people.

The Demand Planning Phase
Sales & marketing staff review the information received from step 1, analyse & discuss it & then generate the new management forecast over the planning horizon. The forecast must include all existing products & any product life cycle phase changes that are planned for in time frame covered by the planning horizon.

The Supply Planning Phase
Representatives from the operations review the output from step 2, the revised demand forecasts over the planning horizon. All existing operations plans are reviewed to see which ones need to be changed from the previous plan. The o/p from the revised supply planning phase are operations plans that must be validated against the availability of existing supply resources using resource planning. 

The pre Sales & Operations Plan Meeting
The objectives of this phase are:

Several people from demand planning, a representative from product development, a representative from finance, several people from operations & the SOP process owner are involved in this phase. Family by family review of the demand & supply plans are done & adjustments were made where necessary & appropriate. This review should focus on actual vs. planned performance in demand & supply & the impact regarding to inventory or backlog plans.
The output from the presales & operations plan meeting includes:

The Executive SOP Meeting
The objectives are:

The O/Ps from the executive SOP meeting are the meeting minutes. A summary of decisions taken, a summarised action plan with due dates & responsibilities & the authorized company game plan, the complete sales & operations plan for each product family.

The SOP process is an iterative closed loop process, starting with the development of a preliminary plan based on balancing supply & demand information. The out puts of the SOP process are:

The approved sales & operations plan provides the framework for the master scheduler to develop specific master schedules for items within each product group. The sales & operations plan limits the aggregate rate of production to the level stated for each product group for each planning period.

 

Resource planning

Once the preliminary production plan is established, it must be compared to the existing resources of the company. This step is called resource requirements planning or resource planning. 2 questions must be answered:

- Are the resources available to meet the PP?
- If not, how will the difference be reconciled?

The resource requirement planning concepts entails a long range planning function intended to keep in balance the ability to meet demand and reasonably level load on the company’s resources. RRP over the long horizon provides data to test the validity of production plan & MPS.

A tool often used is the resource bill. This shows the quantity of critical resources needed to make one average unit of the product group. For instance, suppose the labor normally available in a period is 1600 hours. The priority plan requires 1735 hurs, a difference of 135 hours or about 8.4%. Extra capacity must be find or thepriority plan must be adjusted.

A bill of resources (BOR) describes a list of resources, such as labor, needed to complete a saleable product. It is used in capacity planning to prioritize and schedule work in manufacturing resource planning (MRP II) and enterprise resource planning (ERP) by highlighting critical resources. Critical resources are resources that are in short supply or that have long lead times.

The bill of resources complements the bill of materials (BOM), which lists physical sub-components of a product. Like a bill of materials, BORs are hierarchical with the top level representing the finished product or sub-assembly.

Steps in Resource Requirement Planning

Defining the resources to be considered is a management function. Resources range from engineering personal to cash to capital equipment and plant square footage. For RRP, productive capacity is divided into individual capacity resources or groups. For example, the entire machine shop may be defined as a resource, and the impact of a given MPS then is measured in terms of total load on the shop.

RRP is intended for relatively large grouping because its purpose is not to determine the exact load on an individual resource but rather to evaluate the overall impact of a given MPS. RRP is done in a macro level using rough approximation of load, and precise fit is not sought. The important thing is to be able to develop the alternative loads quickly so that several different MPSs may be tried out.

Computing load profiles for individual product is based on the simple proposition that each product in the MPS generates measurable load and the same procedures that are used to arrive at a machine load report can be used to compute a product load profile. A given load profile consists, for instance, of the standard hours of fabrication required, by period, to produce one unit of product measured against whatever fabrication resources is selected.

 

 

SOP : Volume, Mix , Supply & Demand

SOP is not a scheduling tool! It is not an inventory replenishment tool! It is, however, a top level planning technique to provide overall rates of sales and production, and backlog and finished goods inventory positions. In a cellular or flow-line based operation, SOP provides the daily run rates for these product families.

SOP is the key business process that derives from the strategic plan, and from which scheduling, order promising, material, shop floor control, and many other processes derive

Where do you as a company fall into this chart? To run a business well, demand and supply must be in balance at both the volume and mix level. In reality this balance does not exist. Thus management must step up to understand this relationship. SOP is a set of tools to balance demand and supply. SOP operates at the volume level; it deals with rates of sales and production, and aggregate inventories and backlog.

Then how does the mix come into play? The Master Scheduler’s task is to balance demand and supply at the mix level. It’s concern with which individual products to run first, second, third and which customer orders will ship when.

These words are saying that SOP and Master Scheduling are not the same thing.
They’re different tools for different purposes.

Now we must come to the two more fundamentals of the SOP process and that is demand and supply. How are they represented in the SOP process? Demand is represented by the Sales Forecast. Capacity Planning represents Supply. These tie in with mix and volume to give us the four components of SOP. Their relationship looks like the following chart:

Thus SOP is a monthly formal balancing of supply and demand through a six to twelve month planning horizon by aggregate product families. It generally includes incoming orders (bookings), backlog, shipments, forecast, finished goods inventory production and capacity projections is a monthly time buckets. It is conducted in a very prescribed format by the top management team. This is a critical point: Top Management. Any company, which embraces this process, must engage the general manager and direct reports. Otherwise, there will be a disconnect between there wishes and the information on the formal SOP document.

In below figure there is a list of a dozen factors that can help lead to operating an S&OP process that maintains exceptional supply chain operational performance over time.
 

The Balancing Act
The challenge in the SOP process is to balance supply & demand.

SOP is a business process that helps companies keep demand & supply in balance. It does by focusing
on aggregate volumes product families & groups so that mix issues individual products & customer orders
can be handled more readily. It occurs on monthly cycle & displays information in both product units &
financial numbers. The key points of effective sales & planning operations are as below:
It is a business process.
Designed to keep demand & supply in balance.
Performed at the aggregate level of product families or groups.
Focuses on product volume not product mix.
Occurs on monthly cycle.
Displays information in both product units & financial nos

 

SOP for MTS & MTO

For a MTS product group the difference bet’n a supply & demand results in a change of inventory. For a MTS product group the difference bet’n supply demand results in change in backlog.

Developing the MTS Sales & Operations Plan Report:

MTO plan will have a backlog plan instead of inventory plan.
Sales Plan: Based on a combination of qualitative & quantitative forecasts. The cumulative is the running total difference from the beginning of the periods of historical comparison. This no. is useful in determining if there is a consistent trend associated with the forecast. A bias or consistent error will be apparent if the cumulative difference is +ve in most or all periods, or –ve in most or all periods.

Operations Plan:
In MTO SOP process generates Production Plan & MTS it also generates inventory plan. The 1st row displays the production plan. This is the projection of the anticipated supply volume by month for the product group. The 2nd row of operations plan displays the actual supply quantities that have been received for the product group within a particular month. This line shows actual receipts from production or from suppliers during the month. This row is used to compare with the production plan row. The difference line is difference bet’n production plan line & the actual supply line. The cumulative difference is the running total of the difference from the beginning of the historical comparison.

Inventory Plan:
The 1st row displays the plan; the projection of anticipated inventory level by month for the product group over the planning horizon. It is calculated in units & can be converted to financial terms to show the level of inventory investment. The 2bd row shows the actual inventory position for the product group at the end of a particular month. The difference line is the difference bet’n inventory plan line & the actual inventory line. There is no calculation of cumulative difference for inventory plan.

Setting Inventory Target Levels:
In a MTS management can set target inventory levels by product group in the sales & operations plan. These targets can reflect management objectives as max. or min. levels of inventory investment, planned inventory turn rates & days of coverage. It is the primary mechanism that management can use to predict levels of future inventory investments, inventory turns & days of supply.

Sales Plan:
Based on a combination of qualitative & quantitative forecasts. The cumulative is the running total difference from the beginning of the periods of historical comparison. This no. is useful in determining if there is a consistent trend associated with the forecast. A bias or consistent error will be apparent if the cumulative difference is +ve in most or all periods, or –ve in most or all
periods.

Operations Plan:
In MTO SOP process generates Production Plan & also generates backlog plan. The 1st row displays the production plan. This is the projection of the anticipated supply volume by month for the product group. The 2nd row of operations plan displays the actual supply quantities that have been received for the product group within a particular month. This line shows actual receipts from production or from suppliers during the month. This row is used to compare with the production plan row. The difference line is difference bet’n production plan line & the actual supply line. The cumulative difference is the running total of the difference from the beginning of the historical comparison. This no. is useful in determining if there is a bias or consistent –ve or +ve trend associated with the operations plan.

Backlog Plan:
The 1st row shows the anticipated backlog level by month for the product group over the planning horizon. It is a calculated field based on the sales plan, the supply plan & the opening backlog position. It is calculated in units & can be converted to financial terms to show the amount of order backlog. The 2nd row displays the actual backlog position for the product group at the end of the particular month. If the difference is shown as zero then it indicates that the sales & production are working together & the result is the balanced sales & operations plan. There is no cumulative difference for backlog plan.

Backlog VS. Back Order
Backlog is “all the customer orders received but not yet shipped. Sometimes referred to as open orders or the order board”. This includes all orders scheduled for future shipment. A high level of order backlog can imply that the product is in short supply, lead time can become lengthy * customers must wait for their products. The higher the level of backlog or the more vulnerable a company may be a competitor’s delivering products with lower lead time & hence to losing potential customer sales. Backlog include backorders. A backlog has a future delivery date.

Backorder is “an unfilled customer order or commitment. A backorder is an immediate (or past due) demand against an item whose inventory is insufficient to satisfy the demand”. This may indicate that the supplier has missed a customer requested delivery date. There are many other reasons for a back order. Regardless of the reason all backorders have become past due demands & there is an impact on the customer service & company reputation. From a planning point of view all backorders must be rescheduled in order to ensure that due dates are kept in the planning system. Backorders do not include all backlog.

Setting Backlog Target Levels
Management can set target backlog levels by product group in the sales & operations plans such as: max
backlog, min. backlog, planned order times, max customer waiting time. There are several strategies for
planning supply in response to varying demand such as level loading, chase & combination (or
compromise) strategies.