Quantitative Techniques Used in Sales & Operations Planning

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  • 0:00 Sales & Operations Planning
  • 1:31 Level Production
  • 2:56 Chase Demand
  • 4:12 Mixed Strategy
  • 5:17 Lesson Summary
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Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

Companies want to integrate their sales and operations planning so that they can be more efficient. In this lesson, we'll examine three common quantitative techniques used in sales and operations planning: level production, chase demand, and mixed methods.

Sales & Operations Planning

Quinn owns a company that makes Christmas ornaments. They sell a lot of ornaments every year, but Quinn has noticed that they don't sell the same number of ornaments every quarter. They sell some in the first quarter of the year, very few in the second quarter, and then a lot more in the third and fourth quarters of the year. Quinn wonders if she should be considering her company's sales as she plans the operations of her company. That is, should she plan out her manufacturing, staffing, and other aspects of her company's operations based on sales projections for each quarter?

Sales and operations planning involves preparing a plan for sales and operations based on input from all aspects of the company. A big part of sales and operations planning involves matching sales and operations to each other. So, if Quinn's company sells a lot of ornaments in December, but not very many in April, she'll want to change her company's operations to reflect that.

There are many ways to approach sales and operations planning. One type of approach involves quantitative techniques, or methods based on analyzing and measuring numbers, as opposed to going with gut instinct, tradition, or another non-quantitative method. Quantitative techniques can be very precise and pay off big time. To help Quinn figure out how to use quantitative techniques for sales and operations planning, let's look at three of the major approaches: level production, chase demand and mixed methods.

Level Production

As we've seen, Quinn's business is not regular. That is, her sales vary from quarter to quarter. This year, her sales projections say that they'll probably sell about 80,000 ornaments in the first quarter of the year, 50,000 in the second quarter, 120,000 in the third quarter, and 150,000 in the fourth quarter.

How should Quinn plan her production? One way to approach this is the level production technique, which averages out sales projections and sets operations to the average. It is called the level production technique because the number of units produced each quarter is the same. That is, production stays level over time. For example, Quinn's company is projected to sell 400,000 ornaments this year, which averages out to 100,000 per quarter. With the level production technique, Quinn will produce 100,000 per quarter, regardless of whether they are projected to sell 50,000 or 150,000 ornaments that quarter.

But there's a cost to the level production technique. Remember that Quinn will be making 100,000 ornaments every quarter, but in the first two quarters she'll only sell 80,000 and 50,000 ornaments respectively. So she'll have to manage her inventory. That is, she'll have to store the extra ornaments her company makes in slow quarters. By June, Quinn will have 70,000 ornaments in storage. That can get expensive.

Chase Demand

Quinn doesn't really want to spend a lot of money to store the ornaments, so she's not sure about the level production technique. It seems like there should be a better way of doing things. The chase demand technique involves matching operations to sales each quarter. It is called the chase demand technique because production is chasing the demand of the customers. For example, if sales projections say that they will sell 80,000 ornaments in the first quarter, then they'll make 80,000 ornaments in the first quarter. Following the sales projections, her company will then make 50,000 ornaments in the second quarter, 120,000 ornaments in the third quarter, and 150,000 ornaments in the final quarter of the year.

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