At this level, the Sales and Operations planning ignore the product details or customization (color, style, customer customization, options,…).
From the Sales forecasts on product families, desired stock levels and manufacturing constraints, the S&OP is established, then it checks if the plant capacity can balance the demand coming from the forecasts and stock level targets defined by the supply chain in order to optimize the customer service. One can use a simplified material requirements planning (MRP) with simplified Bills Of Materials to generate the S&OP.
Various supply chain strategies are discussed: planning levels, push-pull strategy (make-to-stock or make-to-order) to achieve to a commitment.
Future capacity issues are then tackled, such as:
- Hire (or fire) workers
- Overtime work or week-end work, extra shifts,…
- Stocking plan on low demand periods to meet future peak demands
- Subcontracting some jobs or rent extra machines or equipment
Main S&OP strategies
Manufacturing orders are launched only when orders come in. This implies to have a flexible capacity in term of men, machines and equipments when highly variable demand.
The goal is to optimize the efficiency by full capacity production in order to smooth any variability. Production is uncoupled to the customer demand, inventory are then made in low consumption and are used in high demand.
Defining the strategy
Usually nothing is black or white; the best fit model combined both Make-To-Order and Make-To-Stock. Especially some families are under make-to-stock while others could be under make-to-order depending on manufacturing leadtime and customer pattern.
First, make-to-order is generally used when customer leadtime is over the manufacturing leadtime or if the finished products details (option, color,…) is not known in advance.
The make-to-order strategy can start from design (make-to-design) or lastly from assembling (assemble-to-order). Thus pulling the manufacturing flow lowers the stock levels, and is frequently used in high variability-low volume demand.
On the other hand, the make-to-stock strategy anticipates the future customer demands. This is generally the case when the customer leadtime is shorter than the manufacturing leadtime.
This is frequently the case with seasonal demands.
Supply chain combined strategy
Generally standards components are produced-to-stock or “pushed”, then are assembled-to-order or “pulled” to make the finished products.
This allows moving upstream the border “push-pull” in order to differentiate the products at the last moment:
Let’s take a simple example to illustrate our concepts:
For its summer collection, a swimsuit company supply chain established its sales forecast in an 8 months horizon. The initial stock level is 50, and the goal is to be at 20 at the end of the summer.
The company wants to utilize their manufacturing capacity as much as possible; and the demonstrated full capacity for the line is 120 per period.
Let’s build the first S&OP:
Monthly production plan = (Ending stock + sales – initial stock) = (20+960-50)/8 = 116 products
Ok now we notice that there is a stockout on month 5,6 and 7 so we need to adapt the production plan.
Let’s try to be at full capacity:
This is better but not enough! Especially the ending stock is too high so there is a loss of 30 units that might be scraped as unsold. Moreover, being at full demonstrated capacity during 8 consecutive months is not sustainable…
Need to increase capacity
Now the decision on hiring temp workers has been agreed, the company will rent an additional equipment to make it. About 10% more capacity is then available for 3 months! Also we shall bear in mind that the ending stock should be at 20, meaning we should partially close the plant on the last period or send workers on vacations.
Let’s make a third attempt:
Results are much better!
Now discussions need to continue for instance on the ending stock at period 6, shall we plan an additional safety stock? Is it a high risk? Could we lower the period-8 stock level? Etc…
The S&OP is a process itself that run every month, with meetings and decisions taken like in this simple example. The goal is to achieve a commitment between all functions: Sales, Marketing, Manufacturing and Accounting that is realistic and affordable.