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

5.2.2 Sales and Operations Planning

Intended learning outcomes: Present the concepts of sales plan, production plan, procurement plan, inventory policy, and inventory plan.

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 [ASCM22]).

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 ([ASCM22]). 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:

  • 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 ([ASCM22]).

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.

Continuation in next subsection (5.2.2b).

Course section 5.2: Subsections and their intended learning outcomes