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3. Sales & Operations Plan

By Anonymous - Posted on 25 December 2011

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.

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