Operations Management / Supply Chain Management

Module 11.03 Key Concept: Sales and Operations Planning in Services and Some General Conclusions

Sales and Operations Planning can be applied to Service Businesses in the same was as for Product producing businesses.  There are some general differences that must be considered.  For example, most services use combination strategies and mixed plans and controlling the cost of labor is critical.  Accurate scheduling of labor-hours is required to assure quick response to customer demand.  An on-call labor resource may be used to cover unexpected demand.  Flexibility of individual worker skills and flexibility in rate of output or hours of work are quite important to success.

The text presents five different types of service businesses as examples:

  • Restaurants: concerned with smoothing the production process and determining the optimal workforce size
  • Hospitals: concerned with responding to patient demand
  • National Chains of Small Service Firms: planning done at national level and at local level
  • Miscellaneous Services: concerned with planning human resource requirements and managing demand
  • Airline industry: presents an extremely complex planning problem.  Planning involves number of flights, number of passengers, air and ground personnel, allocation of seats to fare classes.  Resources are spread through the entire system

Revenue simulation models can be used to help with the Demand and Supply planning in service based companies.  The basic premise is that resources should be allocated to customers at prices that will maximize revenue. There are also several important assumptions: Service or product can be sold in advance of consumption.  Demand fluctuates and capacity is relatively fixed.  Demand can be segmented.  Variable costs are low and fixed costs are high.

The following approaches are useful in selected industries:

  • Airlines, hotels, rental cars, etc.: Tend to have predictable duration of service and use variable pricing to control availability and revenue
  • Movies, stadiums, performing arts centers: Tend to have predicable duration and fixed prices but use seating locations and times to manage revenue
  • Restaurants, golf courses, ISPs: Generally have unpredictable duration of customer use and fixed prices, may use “off-peak” rates to shift demand and manage revenue
  • Health care businesses, etc.: Tend to have unpredictable duration of service and variable pricing, often attempt to control duration of service

 

Some Concluding Thoughts:

Sales & Operations Planning requires complete involvement of upper management.  Top Management absolutely must lead the S&OP process.  It’s OK to have someone help with facilitation but Top Management must not abdicate responsibility.  In their roles, Leadership must:

  • Commit to the S&OP process
  • Establish the S&OP framework
  • Put the right team together
  • Set meetings
  • Participate in the process
  • Modify performance measures and reward structures to align with the plan
  • Force resolution of trade-offs between functions
  • Lead the cultural change

The primary obligation for all functions involved is to “hit the plan”.  A cross-functional team approach is important.  The Executive champion/sponsor keeps top management focused on the process, clears major obstacles, and enables acquisition of required resources.  The S&OP process owner provides leadership for the S&OP process and facilitates implementation.  The Demand Planning Team provides demand data and represents forecasting, marketing, and sales functions.  The Supply Planning Team provides supply system information and represents manufacturing and purchasing functions.  The Integrated Reconciliation (Pre-S&OP) Team manages cross-functional development of S&OP plans.  The Executive SOP team is comprised of upper management representatives of each functional area and agrees / finalize all aspects of the Plan.

Sales & Operations Planning should occur on a recurring, monthly basis unless business structure requires otherwise.  Re-planning must occur when conditions indicate the need.

Sales and Operating steps were described earlier but are summarized here.  Process steps include: updating the sales forecast; reviewing the impact of operations plan changes and ensuring that capacity and materials can support required changes; identifying alternatives where problems exist; formulating recommendations for top management and communicating the information to top management.

The plan must be expressed in terms that are meaningful to non-manufacturing executives.  The operations portion of the plan must be stated in terms that Manufacturing Planning and Control functions can use.  This means aggregation of units by product line, dollar value, etc.  Information can be conveyed in several ways: charts (monthly forecast, cumulative production, alternative plans); tabular displays (easily captured and communicated using spreadsheets).

To ensure credibility of results, the match between the real world and the model should be as close as possible.  Relatively homogeneous product lines (or portions of lines) allows for a closer match between model and reality.  Before the potential of advance techniques can be realized, the firm must invest in training, enhance data, improve basic Operations Planning and Control practices, and determine clear objectives. Management must realize that significant efforts in model formulation, understanding, testing, and explanation are important to successful applications.  Advanced techniques must be built on a foundation of good basic practices. Spreadsheet-based models offer executives a better choice.