Closing a 2,900-Unit Gap in the Quarterly S&OP Review
At the monthly S&OP review, the demand plan for the next three months is 11,000, 12,500, and 10,000 units of one product family. The plant's demonstrated regular capacity is 10,000 units per month on a single line. Qualified overtime can add up to 1,500 units per month at an 18% premium; standard cost is $40 per unit and labor content is 35% of standard cost. On-hand inventory is 2,600 units and the policy minimum is 2,000. A contract customer representing 30% of demand requires 98% line fill and will not accept allocation. Subcontracting is available at a $14 per unit premium but requires eight weeks' notice and carries a 30-day lead time. Sales warns that a competitor's month-3 price promotion could take up to 800 units of demand away from the month-3 plan.
1. Quantify the supply-demand gap for the horizon and test whether the overtime lever alone can close it while holding the inventory floor.
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Aggregate gap
Regular supply = 3 x 10,000 = 30,000 units. Usable opening inventory above the 2,000 floor = 600. Total available = 30,600. Demand = 11,000 + 12,500 + 10,000 = 33,500. Gap = 2,900 units.
Month-by-month test, holding ending inventory at or above 2,000
- Month 1: 2,600 + 10,000 + OT1 - 11,000 >= 2,000, so OT1 >= 400
- Month 2: 2,000 + 10,000 + OT2 - 12,500 >= 2,000, so OT2 >= 2,500, but the cap is 1,500
- Month 3: (2,000 + 10,000 + 1,500 - 12,500) = 1,000 start; 1,000 + 10,000 + OT3 - 10,000 >= 2,000, so OT3 >= 1,000
Overtime of 400 + 1,500 + 1,000 = 2,900 units closes the aggregate gap exactly, as it must. But month 2 ends at 1,000 units, which is 1,000 below the stated policy floor.
The conclusion is not that the plan is infeasible; it is that the inventory policy is what breaks, in month 2. That needs an explicit, approved exception, not a silent drift. If the 2,000 floor is genuinely non-negotiable, the 1,000 units must come from somewhere else (pre-build in month 1, or subcontract placed eight weeks earlier for month 3), and neither is free.
2. Compare overtime with subcontracting on economics and timing, and state the decision rule you would put to the meeting.
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Overtime cost. Labor content = 35% x $40 = $14.00 per unit. An 18% premium on labor = $2.52 per unit. For 2,900 units: 2,900 x $2.52 = $7,308. Note that only the premium portion is incremental; material and overhead are unaffected.
Subcontract cost. 2,900 x $14 = $40,600, about 5.5 times the overtime premium. More decisive than the cost is the timing: eight weeks' notice plus a 30-day lead time means subcontract volume cannot land inside month 1 or month 2 at all. It is structurally unavailable for the month where the gap actually bites.
Decision rule
- Commit overtime up to the qualified 1,500 units per month, and start with the earliest month, since overtime used later cannot repair an earlier shortfall.
- Do not subcontract to build inventory. Reserve it as contingent capacity against a specific month-3 risk only, and only if notice can still be given.
- Verify the overtime is real. 1,500 units is 15% of monthly capacity and usually implies a sixth working day; confirm the labor is available and the quality data hold on extended shifts before the number goes into the plan.
3. How does the possible 800-unit demand loss in month 3 change what you commit to, and how do you protect the contract customer?
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What changes. The 800-unit risk sits in month 3, the one month whose overtime requirement (1,000 units) exists purely to restore the inventory floor rather than to serve current demand. So the exposure is not a stockout; it is 800 units of unnecessary overtime premium and excess ending inventory if the competitor's promotion lands.
Commit firm overtime for months 1 and 2 only (400 + 1,500 = 1,900 units). Hold the month-3 tranche of 1,000 units as a call-off decision reviewed weekly. If the promotion takes the volume, cancel it: month 3 then closes at 1,000 + 10,000 - 9,200 = 1,800, only 200 under the floor and self-correcting in month 4. If the volume holds, release it in time to run.
Protecting the contract customer. The constraint binds in month 2, where supply is 11,500 against 12,500 of demand. Sequence the available output so the 30%-of-demand contract customer is filled first (98% line fill, no allocation), and place the shortfall on the discretionary order book, with advance notice and a delivery date. Do not spread the shortage proportionally; that breaches the contract to be fair to customers with no contractual claim.
S&OP message. The 12,500 month-2 number, not month 3, carries the forecast risk in this plan, and the plan's real constraint is an inventory policy that was never stress-tested against a peak month.