Cranfield Currency Company (CCC)

S&OP Case Study:
Part 1

This case was prepared by Richard Renshaw and Heather Skipworth, Cranfield School of Management, Cranfield University, Cranfield, Bedford,
MK43 0AL, England

© Cranfield School of Management

All rights reserved.

    Background

This case study, although simplified, has been derived from a real world industrial situation. The names of the personnel have been changed and confidential information modified or removed.

The Cranfield Currency Company (CCC) was established in the 1830s originally printing playing cards. It moved on to printing postage stamps in the 1850s and bank notes in the 1860s. This involvement led it into the technology required for currency handling. This required security but also an emphasis on currency validation and anti-counterfeiting detection. As a result part of the business developed various types of cash machine but also acquired overseas interests in the same area of business.

The families of machine are:
• Standard Dispenser made in the USA
• Recycling Dispenser made in the UK
• Counting Machine made in France

Standard Dispensers are manufactured in a plant in the USA. It is a machine which needs to be filled with currency to be dispensed. When it is empty it is refilled via a mechanism in an attached safe. Money that is taken in through this machine is stored in the attached safe but can’t be used for on-going dispensing transactions.

Although the Standard dispenser is very reliable it is thought that the market is shifting towards recycling dispensers, as a result the manufacturing in the USA was consolidated onto a single site from the previous 2 sites with a reduction in costs. Recycling dispensers are manufactured in the UK. These are able to take in currency through on-going deposit transactions and use the same notes to dispense. This is a key point for the company strategy since the recycling dispenser product category is the biggest contributor to revenue, as shown in table 1. Indeed sales and marketing plan to launch sales promotions for this product range, particularly in markets where growth is stagnant or slow.

The reliability of recycling technology on this machine is under scrutiny. Both the standard and recycling dispensers have a very high level of currency validation and are typically used inside bank branches to dispense cash.

Table 1: Summary of last year’s sales for each product type

Counting machines, manufactured in France, are sold to businesses that need to be able to count cash in large quantities quickly e.g. retailers. The level of currency validation varies according to the sophistication of the counter but is lower than a dispenser. The marketing companies like these machines, they are low cost and there are lots of retail opportunities that they are trying to develop. This is a new market that takes them away from their traditional banking background. It is thought that retailers plan less than banks, therefore to win contracts you need to have the inventory available in the market place. A bonus system has been put in place for the sales representatives to develop and grow this business area rapidly.

CCC have 5 main markets for their cash handling technology:
• UK
• France
• Germany
• USA
• China

The markets vary in size with UK and USA being the largest, as shown in figure 1. China is relatively small but recently seems to be growing.

CCC have had a challenging time coordinating supply and demand between its 5 markets and 3 plants, each of which supply all 5 markets, as shown in table 2. This case is simplified so that each machine is only made in one factory and is sold for the same price irrespective of the market.

A new CEO has been appointed, Harold Lloyd, he believes that previous coordination efforts have been comical and sadly have not helped the company. Harold had once been Production Director for the UK business before the acquisitions and left the company to get more senior experience elsewhere.
On his return Harold read a lot about S&OP and has looked around for some help with implementation. It is still early days but he has high expectations.

Figure 1: Last year’s sales have been broken down into sales by market.

To coordinate the S&OP process he has moved Benny Hill into a new role as S&OP Manager. Benny has managed to get the process going with some new reports and interest in the various events from his peers across the different functions. Benny is not happy with the reports but thinks they are heading in the right direction. He has very little detail of the previous year. However he has got aggregate numbers as shown in table 2.


Table 2: Last year’s unit volume sales broken down into sales by product and market.

Harold the CEO is very eager to learn about the growth prospects for each market and has asked Benny to ensure that the markets focus on this. He is aware of the traditional markets in UK, USA, Germany and France but the sales in China only started up last year.
The first S&OP cycle is underway, starting with the forecast review.


Sales Forecast Review – Period 1 (P1)

At the start of period 1 each of the markets has generated a forecast for the coming year. Benny has generated some reports to enable him to get an idea of what is going on in the markets summarised in table 3.

Table 3: Sales forecasts for period 1 by product and month across the five markets

Questions focussed on sales forecast review

The forecast spreadsheet for P1 is available on Blackboard:

1) What challenges and opportunities are evident from the sales forecasts for the country/product markets?
a. What growth do we see for each market and product family
b. Reflect on the CEO’s priorities – is this good sales performance?
2) What forecast review tools should Benny be putting in place with the markets considering the analysis you did for Q1 and CEO’s priorities?
Be prepared to feedback to the class.
Supply Review Period 1 (P1) focussing on the UK plant

Each of the plants has received their forecast and produced a master production schedule to enable them to consider capacity. Let’s consider the UK plant in period 1 and more closely examine the plans in table 4.

Table 4: UK plant P1 sales forecast and production plan for recycling dispensers across all 5 markets

Note: Inventory is calculated on the basis of the product plan. To be precise starting with the opening balance of inventory, the planned production for P1 is added and the forecast sales subtracted giving the inventory for P1.

The sales for recycling dispensers are forecast to peak in period 7 (P7) due to marketing’s plan to run promotions in Germany, US and France, where sales are forecast to be stagnant. The UK plant produces a capacity plan by determining the number of “production days in month” and the “capacity per day” giving the available “capacity per month”. The available capacity drops in P7 and slightly in P8 due to a schedule 2 week factory shutdown.
Production plan to produce 320 machines per month (increasing to 370 per month by year end to satisfy the forecast increasing demand) and have determined a “rate per day”, which will be needed to achieve this. However Benny has noticed that P7 seems to be particularly problematic.

Questions focussed on supply review

1) Explain why is P7 problematic?
2) What are all the possible options to solve this problem? Are they feasible?
3) On the basis of your analysis recommend the best solution?
Be prepared to feedback to the class

You don’t need to answer the highlighted questions as its given for the students to work in groups during the session.
Part 2

Sales Forecast Review Period 2 (P2)

So now we move into period 2 and each of the markets has generated an updated forecast for the coming year as shown in table 6 together with the actual sales for period 1.

Table 6: Sales forecasts for period 2 by product and month across the five markets

The sales and marketing team in the UK are very concerned that a major UK bank has cut some numbers from it branch refurbishment programme. The representatives in the field are indicating that the bank may cancel one of its refurbishment programmes completely, which covers many city centre branches in the UK and to some extent France. These branches tend to utilise standard dispensers of varying size. However the UK sales and marketing team hear many field based rumours which often turn out to be incorrect or their impact is exaggerated.

Supply Review Period 2 (P2) focussing on the US plant

This time let’s consider the US plant (making standard dispensers) and lets start by looking back to period 1 (P1) and more closely examine the plans for P1 in table 7.

Table 7: US plant P1 sales forecast and production plan for standard dispensers across all 5 markets

The Plant Manager, Bud Abbott, realises that there are capacity challenges after the merger of the two USA manufacturing plants. Bud is concerned about product availability of the Standard Dispenser beyond P6. They produce at capacity but the forecast indicates an overall peak in demand during P7. Their ability to service the market will deteriorate rapidly after this. Therefore they are considering the bold step of increasing their available production capacity. Note they have no factory shutdown during the year, when they could increase their capacity, so they have to think about the possible disruption of increasing capacity and still producing. This is thought to be relatively risk free, because it involves adding a new machine, and not changing any existing production machines at the USA factory. However it still concerns Bud that there is potential for disruption, but he understands that this will give them the option of increasing production from P9 onwards. The added capacity is reflected in their plan, produced at the start of P2 (shown in table 8), which they are looking at, but it should be noted that the production plan remains the same.


Table 8: US plant P2 sales forecast and production plan for standard dispensers across all 5 markets

Bud and his team can see that the forecast demand has dropped a little, but they are still scheduled to produce at capacity until P8. Some of the key components for the standard dispenser have a 6 month lead time and are imported from the UK. They have to make a decision now in P2 whether to increase capacity and production from P9 onwards or not.

Questions focussed on forecast and supply review

The forecast spreadsheet for P2 is available on Canvas

1) In P2, how would you assess the forecast accuracy/error in P1, now you have actual sales for P1?
2) In what way has the standard dispenser sales forecast changed for the year, from P1 to P2? What impact does this have on the USA plant?
3) What discussions should Benny be encouraging Bud (USA Plant Manager) to have with the UK marketing team about forecasts and his USA team about production capacity?
4) How could the sales forecast be improved to aid planning of long leadtime components?
5) Recommend what the USA team should do with their capacity and production plan

You don’t need to answer the highlighted questions as its given for the students to work in groups during the session.

Part 3

Benny’s concerns in P3

Benny has looked at how the reviews of demand and supply are happening and is not very happy with the level of analysis. Benny has decided to introduce a new simple tool that he learned about while visiting Cranfield University and wants to see how it can help the team he is supporting. Benny is also starting to put together an S&OP pack so all the information can be annotated and evaluated together.

Benny is concerned about the counters situation, as he has had a number of complaints from the market. They complain that availability is poor and they never get the inventory that they need. The markets say that retailers often order batches of counters at short notice and this is unpredictable. A typical quote from sales representatives is, “it is just very annoying that the counters plant is just so unresponsive and seems to go out of its way to hold back the inventory that is desperately needed”.

The Chinese marketing company launched counters in the Shanghai area last year, this now shows considerable growth. The Chinese marketing company feel they have validated the market opportunity and are now planning to roll the product out in Beijing and other areas

Market Performance Tool

The market performance tool shown in table 10 (at the end of this case) was created to add a little analysis to forecast and market performance in response to Benny’s concerns. It enables comparison of annualised sales volumes and in particular provides:

• Previous year’s sales volume
• Annual sales volume projection for current year calculated by taking sales Year To Date (YTD) plus balance of the forecast
• Annual sales calculated in previous month
• Current year’s budget

The tool calculates annual sales volume variances compared with the budget and the previous month forecast, specifically:

• This year’s total (projection) compared to budget
• The projection at the end of the previous month compared to budget

The tool also calculates run rates (volume per week):

• Run rate for year to date (YTD)
• Projected run rate to year end (based on the current sales forecast to year end)
• Budgeted run rate

Sales Forecast Review for Counters Period 3 (P3)

The graph shown in Figure 2 shows the aggregate sales volumes for counters in all five markets for:

• Last Year (LY) sales
• Current year sales as forecast in P1
• Current year sales as forecast in P2
• Current year sales as forecast in P3

Figure 2: Chart showing the annual sales volumes for counters in all five markets in terms of last year and the forecasts made in P1, P2 and P3.

Table 11 shows the forecast result for each counter product in each market calculated during P3. The percentage variance is calculated by dividing forecast (on 1 month horizon) by the actual sales. A percentage greater than 100% indicates over-forecasting. A percentage less than 100% indicates under-forecasting.


Table 11: Forecast percentage variance for each counter product in each market calculated in P3

Questions focussed on forecast review

1) What conclusions can you draw about the counter sales in China? (see all forecast analysis)
2) What is happening to counter sales and the associated forecasts in the other country markets?
3) What intervention should Benny (S&OP Manager) be thinking about with regards to improving counter sales forecasts? (Tip: see Table 11: Forecast accuracy)
4) For the Market Performance Tool how could colour coding better used to inform decisions around capacity availability (weekly run rates) and whether sales activity will meet budget?  
Supply Review Period 3 (P3) focussing on the France plant

Now let’s consider the French plant (making the counters) and lets start by looking back to period 1 (P1) and more closely examine the plans for P1 in table 12.

Table 12: French plant P1 sales forecast and production plan for counters across all 5 markets

In P1 the French manufacturing plant projects counters availability problems from P8 onwards, in part due to the planned shutdown in P8 reducing available production days to 5. However, there is available capacity to increase production from P4 onwards to avoid the stock outs

Considering the French plant back in period 2 (P2) we can see the P2 plans in table 13.


Table 13: French plant P2 sales forecast and production plan for counters across all 5 markets

In P2 the French plant has increased its production up to available capacity for all periods, but still shows a projected availability problem from P8 onwards.

Finally let’s consider the French plants production plans now in P3, as shown in table 14.

Table 14: French plant P3 sales forecast and production plan for counters across all 5 markets

In P3 the sales forecasts for counters are even higher than in P2, however the French plant manager, Marcel Marceau, is reluctant to increase capacity and the production plan currently remains unchanged from P2. This results in an even worse projected availability problem from P8 onwards, however Marcel is concerned about increasing capacity because the markets forecast accuracy is poor. Further, the projected massive growth in Chinese sales volumes have been forecast before and actual sales have fallen far short of forecasts. Marcel’s lack of faith in the sales forecasts is summed up in his statement, “we feel it makes more sense to constrain production so that we are not left with massive inventory at the plant at the end of the year”.

Questions focussed on supply review for counters

1) What impact does the counter forecast growth for the Chinese Market have on product availability and what should Benny (S&OP Manager) be doing to improve the situation? Consider first 2 pre-requisites:
a. Understanding S&OP
b. Commitment of People.
2) What options should Marcel (counters factory manager) be considering to reduce inventory shortfall and why?

You don’t need to answer the highlighted questions as its given for the students to work in groups during the session.

Table 10: Market performance tool in period 3

Market Performance Tool Description

Benny has designed the market performance tool so annualised volumes can be compared. This enables improved visibility of growth and how it may have changed and also the feasibility of achieving it.

Annualised volumes
The first 5 columns are intended to show annualised volumes to enable them to be compared
Column Title Definition Calculation
1 Previous Year The actual unit volume of the product sold in the previous year
2 Annual sales calculated in previous month The sales year to date plus forecast for the balance of the year all calculated in the previous month
Note: This is similar to column 5 but is calculated in the previous month.
3 This year YTD Sales This is the actual sales year to date (YTD) up to the end of the previous month
4 This Year Balance of FORECAST The forecast through to the end of the year.
Note: the current month will be in the forecast since the actuals are not known yet
5 This Year Sales plus Forecast TOTAL This gives a forecast of annual volume for the current year. Sales year to date (column 3) plus balance of the forecast (column 4) e.g. in P3, 2 months of actuals plus 10 months of forecast. 3 + 4
6 This Year Budget This is the budgeted annual volume for the product. It is the volume that was used to help determine the company budgets
Variances
Columns 7,8,9,10 calculate variances which show how much this year’s forecast of annual volume (TOTAL) compares to budget and the previous month’s forecast
Column Title Definition Calculation
7 TOTAL minus Budget (TMB) This compares the sales plus forecast TOTAL (column 5) with the budget in unit volume (column 6), an indication of whether the budget will be met. A negative number indicates that sales are less than the budget. 5 – 6
8 TMB% This is Total minus budget as a percentage of the budget. The red indicates that TMB%>/= +/-15%
(5-6)/6 *100
9 TOTAL minus Previous Month (TMP) This compares This year’s sales plus forecast total (column 5) with the same figure in the previous period (column 2). It is an indication of how much the forecast has changed over the last period 5 – 2
10 TMP% This is total minus previous month as a percentage of sales plus forecast for the current month. The red indicates that TMB%> +/-5% (5-2)/5 *100

Growth & Run Rates
Run rates are calculated to show volume rates per week. This can indicate how feasible the plan is by comparing the run rates year to date and for rest of year with the budget
Column Title Definition Calculation
11 Forecast vs Previous Year Actual This compares this year sales plus forecast (column 5) with the actual sales for the previous year (column 1). This is an indication of forecasted growth i.e. percentage growth on last year’s actual volumes. Green indicates growth, while red indicates shrinkage (5-1)/1100 12 Budget vs Previous Year Actuals This compares this year’s budget with the actual sales for the previous year. This is an indication of the budgeted growth on last year’s volumes (6-1)/1100
13 Weekly Rate of Sales YTD This is the average rate of sales per week year to date i.e. sales YTD divided by number of weeks YTD
14 Weekly Rate of Sales to Year End This is the average rate of sales per week indicated by the balance of the forecast to year end i.e. the forecast volume divided by the remaining quantity of weeks in the year
15 Budgeted Rate of Sales This is the average rate of sales per week indicated by the budget i.e. the annual budgeted volume divided by 52

S&OP Cranfield Currency Company case assessment

Critiquethe CCC S&OP process against the pre-requisites for S&OP and explain the implications of the weaknessesfor the S&OP process. Consider each of the following 5 pre-requisites as described in the lecture and defined by Ling and Goddard (1988):

•Commitment and People (20%)
•Defining Product Families (20%)
•Planning Horizon Length (20%)
•Time Fences (Demand and Supply) (20%)
•Supporting Tools (20%)

Note: consider the CCC S&OP process as it is by period 3 but you can use examples from the other two periods. The first pre-requisite “Understanding S&OP” is not to be covered.

Word count including Appendices, but excluding title page and reference list: 1000 maximum (+10% tolerance) so effectively 1,100 words maximum.

Assignment Tips

• Familiarise yourself with the Qualitative Assessment Criteria, which can be found under Assessment and Feedback on Blackboard
• Ensure its an individual report
• Structure the assignment using the questions as headings –no overall introduction or conclusion is required
• Use the percentage allocation for each question as an indication of the appropriate word count per question
• Demonstrate a clear understanding of the concepts
• Provide valid arguments, supported by evidence from the case and the literature
• Use appropriate referencing
• No waffle or restatements of either theory or case material with no clear purpose

4

  1. Camer Pharmaceuticals is testing a new product in the market1. The demand for the new product is estimated to be Normally distributed with a mean 2,000,000 and standard deviation 250,000. The demand is estimated to grow at a rate of 4% per year. The R&D costs are estimated to be between $500 millions of dollars and $800 millions of dollars with a most likely value of $700 millions of dollars. Clinical trial costs are estimated to be between $135 millions of dollars and $160 millions of dollars with a most likely value of $150 millions of dollars. There are competitors in the market, and Camer Pharmaceuticals estimates that their market share in the first year will be any number between 6% and 10%, with each number being equally likely. The company estimates that their market share will grow by 20% each year. A monthly prescription is estimated to generate a revenue of $240. The variable costs are estimated to be $30. Develop a simulation model that calculates the net present value (NPV) of this project over 3 years assuming a discount rate of 10%. Run the simulation for 1000 iterations and answer the following questions.

a. What is the number of iterations needed if we want to estimate the NPV within $4,000,000?
b. Interpret the sensitivity chart.

1This problem is a variation of a problem originally developed by J. R. Evans.

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