Supply Chain Management: Strategy,
Planning, and Operation
Seventh Edition, Global Edition
Chapter 9
Sales and Operations
Planning in a Supply Chain
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Learning Objectives
9.1 Manage supply and demand to improve synchronization in a
supply chain in the face of predictable variability.
9.2 Use sales and operations planning to maximize profitability
when faced with predictable variability in a supply chain.
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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 (1 of 2)
• Managing capacity
– Time flexibility from workforce
– Use of seasonal workforce
– Use of dual facilities – specialized and flexible
– Use of subcontracting
– Designing product flexibility into production processes
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Managing Supply (2 of 2)
• 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 (1 of 4)
• 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 (2 of 4)
Table 9-1 Summary of Impact on Promotion Timing
Factor Impact on Timing of Promotion/ 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
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Sales and Operations Planning at Red
Tomato
Table 9-2 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
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Managing Demand (3 of 4)
Figure 9-1 Base Case Aggregate Plan for Red Tomato and Green
Thumb
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Managing Demand (4 of 4)
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 (1 of 2)
Figure 9-2 Optimal Aggregate Plan When Discounting Price in January
to $39
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Promotion in January (2 of 2)
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 (1 of 2)
Figure 9-3 Optimal Aggregate Plan When Discounting Price in April to
$39
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Promotion in April (2 of 2)
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 (1 of 4)
• Promotion in January
Figure 9-4 Optimal Aggregate Plan When Discounting Price in January
to $39 with Large Increase in Demand
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Discount Leads to Large Increase in
Consumption (2 of 4)
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 (3 of 4)
• Promotion in April
Figure 9-5 Optimal Aggregate Plan When Discounting Price in April to
$39 with Large Increase in Demand
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Discount Leads to Large Increase in
Consumption (4 of 4)
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
Table 9-3 Supply Chain Performance Under Different Scenarios
Percentag
Percentage e of
Regular Promotion Promotion of Increase Forward Average
Price Price Period in Demand Buy Profit Inventory
$40 $40 NA NA NA $217,340 875
$40 $39 January 10% 20% $221,320 515
$40 $39 April 10% 20% $211,220 932
$40 $39 January 100% 20% $242,680 232
$40 $39 April 100% 20% $247,320 1,492
$31 $31 NA NA NA $73,340 875
$31 $30 January 100% 20% $84,280 232
$31 $30 April 100% 20% $69,120 1,492
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Conclusions on Promotion (1 of 3)
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 (2 of 3)
3. As the 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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Conclusions on Promotion (3 of 3)
• When faced with seasonal demand, use combination of pricing
and production and inventory to improve profitability
• Entire supply chain must work toward one goal of maximizing
profitability
• High-level support within an organization is necessary
• Early warning alerts should be built into the S&OP process
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