Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

5.2.2 Sales and Operations Planning and Resource Requirements Planning

Intended learning outcomes: Present the concepts of sales plan, production plan, procurement plan, inventory policy, inventory plan, and aggregate plan. Explain sales and operations planning as an iterative master planning process. Disclose an example of iterative planning by comparing three production plans, with zero, two or four changes in production rhythm per year.

The sales and operations planning process (see definition in Section 5.1.2) is an approach for the tactical planning of a company or a supply chain.

Tactical planning is the process of developing a set of tactical plans, e.g., the sales plan, the inventory plan, or the production plan (see [APIC16]).

A sales plan is a time-phased statement of expected customer orders anticipated to be received (incoming sales, not outgoing shipments) for each major product family or item.

A sales plan is more than a forecast. It represents sales and marketing management’s commitment to achieve this level of customer orders and can be dependent on forecast. It is expressed in units or in gross income, on an aggregate level.

A production plan is the agreed-upon plan that comes from the overall level of manufacturing output planned to be produced ([APIC16]). Production planning is the process of developing the production plan.

The production plan is usually stated as a monthly rate for each product family. Various units of measure can be used to express the plan: units, tonnage, standard hours, number of workers, and so on.

Similarly, a procurement plan for salable products is the agreed-upon plan for product families or products to be purchased, that are intended to be sold directly, that is, without being used by the company itself or built as components into products.

Generally, a sales plan does not reflect a steady demand. However, the capacities (workers and production infrastructure) tend to be available at a steady rate. Therefore, if the demand pattern cannot be changed — by offering complementary products or price incentives or simply changing the due dates, for example — there are in principle two possible manufacturing strategies[note 511] (or a combination of them) to manage supply:

  • (Quantitatively) flexible capacity in order to match the demand fluctuations.
  • Store products to meet peak demand, while continuing production at a steady rate.

Choosing the first option incurs so-called costs of changing production rhythm, or production rate change costs. These may include the costs of overtime and undertime, more facilities and equipment, part-time personnel, hiring and releasing employees, sub­contract­ing, or agreements to use infrastructure cooperatively. See the discussion in Section 14.2.3.

The second choice incurs — as already discussed in Section 1.1.6 — carrying costs, in particular costs of financing or capital costs, storage infrastructure costs, and depreciation risk. For details, see Section 11.4.1.

An inventory policy is a statement of a company’s objectives and approach to the management of inventories ([APIC16]).

An inventory policy expresses, for example, the extent to which either one or both of the above options will be followed. The policy can include a decision to reduce or increase inventory in general.

An inventory plan determines the desired levels of stored items, mostly end products, according to the company’s inventory policy.

The production plan can thus be obtained from the sales plan via the desired inventory plan. Or turned around, a desired production plan implies a corresponding inventory plan. By changing the inventory policy iteratively, a different production plan as well as the corresponding inventory plan (or vice versa) can be obtained.

Once the production plan is established, the process of resource requirements planning (RRP) begins. Resource requirements are calculated for each product family in the production plan through simple explosion of product structures (bills of material) for components requirements (dependent demand) and routing sheets for capacity requirements. To do this, the process uses bills of resources or product load profiles (see Figure

If gross requirement for each purchased item calculated in this way is weighted by purchase price, the result is a good approximation that can serve as the procurement budget. Other resource requirements can be estimated analogously. For the planning horizon covered by the production plan, there now result:

  • Components requirements, procurement plan for components and materials, and the corresponding procurement or materials budget
  • Capacity requirements and the capacity budget (direct and overhead costs)
  • Budget for overhead costs (overhead budget)

In the case of rough-cut planning, sales and operations planning produces an aggregate plan based mainly on aggregated information (rough-cut business objects such as product families, rough-cut product structures, aggregate forecast and demand [that is, forecast and demand on product families]) rather than on detailed product information.

It is in the case of rough-cut planning in particular that long-term planning lends itself well to the simulation and the what-if analysis of several variants of the production plan.[note 512] For this, company management (or a team caring about supply chain coordination) comes together for a half-day meeting, for example, in order to simulate the various possible patterns of demand and to examine their repercussions with regard to the realization of production and procurement in the supply chain. As some components or operations have not been considered, the budgets can by multiplied by historical figures to obtain expected budgets. In a similar process, sensitivity analysis can take into consideration the effect of demand variation and thus control the whole process with regard to feasibility. Management will then choose and release one of the variants calculated in the above manner and initiate the necessary measures to fulfill the production plan in a timely fashion. For capacity, blanket orders can be given to external production, and orders can be made for the purchase of machinery and buildings or the acquisition of personnel. To procure goods or capacity, blanket orders can be placed with suppliers, or existing supply agreements can be modified.

Figure shows a typical algorithm used within sales and operations planning to determine the production plan and the procurement plan for salable products. It accords with the con­cept of integrated resource management: All resources are planned simultaneously.

Fig.        Iterative master planning: integrated resource management.

As mentioned above, this technique usually handles rough-cut business objects of the type discussed in Section 1.2.5, so that various iterations can be calculated rapidly. Resource requirements planning of this kind (rolling planning) must be repeated regularly (for example, monthly), and must include the whole planning horizon.

Figures through illustrate iterative planning of this kind. Using forecasted sales figures, the objective is to produce an optimal production plan. To estimate the consequences of different manufacturing strategies for total production, different variants are calculated. Thus, only steps 2 and 3 of the steps shown in Figure are iterated.

Fig.       Plan 1: production plan at a constant level.

Fig.        Plan 2: production plan with four changes in production rhythm per year.

Many products, such as toys or lawnmowers, have a seasonal demand pattern like the one shown in the example. Should planners choose regular production, which will create inventory, or should production be a function of the demand, which will incur the costs of changing production rhythm? These costs go beyond micro costs, such as machine setup costs. Macro costs will be incurred, such as the costs of making changes to personnel or machinery. In the example, planners should calculate the following three production plans:

  1. Maintain the production rhythm throughout the whole year.
  2. Change production rhythm frequently — in this case, four times a year.
  3. Attempt to find an optimal compromise between plans 1 and 2.

The planners can now compare the three variants with respect to budget, assuming the following cost rates:

  • Number of hours required to manufacture one unit: 100
  • Cost per hour: $100
  • Carrying cost: 20% of inventory value
  • Cost of changing production rhythm: $800,000 (at least once a year, according to the new sales plan)

Fig.       Plan 3: production plan with two changes in production rhythm per year.

Figure shows that the third solution results in the lowest total costs.

Fig.        Comparison of the three production plans.

The following simulation shows the production planning of one good depending on the demand evoking during a year.
Objective of the planning is to minimize inventory costs and cost of change(s) in the montly production.
Inventory costs are calculated by taking a percentage of the worth of the units laying in the warehouse. Cost of change(s) is the product of number of changes and cost per change.

To get a clue how production planning works, push the buttons in the top left corner.

Course section 5.2: Subsections and their intended learning outcomes

  • 5.2 Master Planning — Long-Term Planning

    Intended learning outcomes: Describe demand management, sales and operations planning as well as resource requirements planning. Explain master scheduling and rough-cut capacity planning. Disclose supplier scheduling: blanket order processing, release, and coordination.

  • 5.2.1 Demand Management: Bid and Customer Blanket Order Processing and Demand Forecasting

    Intended learning outcomes:: Describe demand management, customer bid, order success probability and customer blanket order. Present some aspects of demand forecasting.

  • 5.2.2 Sales and Operations Planning and Resource Requirements Planning

    Intended learning outcomes: Present the concepts of sales plan, production plan, procurement plan, inventory policy, inventory plan, and aggregate plan. Explain sales and operations planning as an iterative master planning process. Disclose an example of iterative planning by comparing three production plans, with zero, two or four changes in production rhythm per year.

  • 5.2.3 Master Scheduling and Rough-Cut Capacity Planning

    Intended learning outcomes: Produce an overview on master scheduling and planning time fence. Present in detail the master production schedule (MPS) as a disaggregated version of the production plan. Explain the tasks for establishing a master production schedule. Describe the process of rough-cut capacity planning (RCCP).