Article by Andrey Kudriavzev, SAP SCM Solution Architect
Integrated Business Planning for Inventory is one of the key components of SAP’s Digital Business Planning tool – SAP Integrated Business Planning. Historically, Inventory Optimization, together with Demand Sensing was (and is) a part of a solution from a company named SmartOps, which was acquired by SAP in 2013. SmartOps was a leading provider of Inventory and Service-Level Optimization Software solutions.
SAP IBP for Inventory uses optimization algorithms with focus on inventory management principles to calculate several important Enterprise Inventory Components. One of the most important among them is Recommended Safety Stock, which then can and should be used as one of the main input parameters for the next Supply Chain Planning steps within SAP Planning Solutions (IBP,APO, S/4 HANA) in order to be able to create the optimal procurement, production or distribution plans.
Built-in innovative algorithms, which are used by SAP IBP for Inventory to optimally position inventory across different nodes of the Enterprise Supply Chain.
Solution calculates optimal inventory levels for each Location-Product, taking into the account overall situation in customer’s supply chain including various logistics and production constraints from a Supply perspective.
If we are talking about Supply constraints, we should mention production and transportation lead times, information about batch sizes and production specifications across all supply chain and multiple sources of supply. Also, the algorithm takes into the account such inputs as transportation and production variabilities. As a result, final calculations take into the account all mentioned constraints and build optimal safety stock buffers across whole supply chain network.
From a Demand perspective, the system takes into the account such important parameters as coefficient of variation of forecasting error, demand pattern (intermittent, regular, seasonal) , over and under forecasting demand, and outliers and spikes in customer demand. Inventory optimization tool also considers as inputs such an important parameters as Target Customer Service Levels and Planning Frequency.
As a result, SAP IBP for Inventory optimizes the Inventory Targets to meet the defined Customer Service Levels at the lowest inventory costs.
One of the important points about Inventory Optimization is the fact, that typically inventory is not reduced for every product. For some Location Products and time periods higher inventory values can be proposed by the system to maintain desired Customer Service Levels. So, it is always ‘Fix-the-Mix’.
Besides the Recommended Safety Stock, SAP IBP for Inventory calculates several other important inventory outputs:
- On-Hand Stock, which can be compared against current Inventory Levels.
- Recommended Safety days for the companies who prefer to define their inventory targets not in days but rather in units.
- Cycle Stock, which represents inventory which is required to cover demand between planning cycles.
- Pipeline Stock, which gives and understanding on how much Inventory needed to cover demands during replenishment lead times.
Also it is quite important to understand that the main difference between classical safety stock calculation approach and the one which is used in IBP for Inventory. Inventory optimization is not analyzing all input parameter location-by-location, but calculating inventory output parameters for the entire supply chain from Customer Facing Distribution Center -> Plant in single optimization run. This is similar to the approach that is used by the Supply Optimizer in IBP for Response and Supply and APO Supply Network Planning.
Once all calculations are done and validated by inventory/supply planners, inventory optimization outputs can be used as an input for a company’s Supply Chain Planning processes: Either for Materials Requirements Planning or for Supply Chain Planning. Planning System algorithms will generate more precise and cost efficient results, which will allow a company to keep inventories at a reasonable lower level while keeping the desired service levels for customer demands.
inventorylogix an innovative approach to confirm value of SAP IBP for Inventory as Inventory optimization tool.
As previously mentioned, SAP IBP for Inventory uses innovative and complex algorithms to calculate the optimal inventory level as inputs for a company’s overall supply chain planning processes and that’s why it’s important to have a possibility to:
- Understand the concepts of Inventory Optimization in SAP IBP: input parameters, which influence the calculation results as well as outputs, which are generated by the system and how to use them in further planning processes.
- Validate Inventory Optimization baseline results based on your own supply chain network and input parameters, transactional data and constraints.
- Have the possibility to check various scenarios against baseline calculation i.e. how improvements in forecasting accuracy or change in service level will influence your inventory position.
- Confirm that Inventory Optimization is the right tool that will help your company to reduce your inventories and free up working capital investments while keeping the desired service levels for your customers.
inventorylogix is a service which has the following goals:
- Calculate optimal inventory levels for a given customer service level using Inventory Optimization algorithms.
- Determine the deviation between customer’s current inventory levels and the systems calculated inventory recommendations.
- Estimate inventory level dependencies from changes to customer current target service levels and forecasting accuracy leveraging. One of SAP Integrated Business Planning main benefits is ‘what-if’ analysis and simulations.
As a result of inventorylogix service you will get following deliverables:
- Recommended Safety Stock and Optimal Inventory Report * – results calculation for agreed organizational and product scope for given target customer service levels and forecasting accuracy:
- Per each Location-Product combination.
- Per each Product Group.
- Inventory Levels Structure Report *: Target and Average Inventory Positions, Target and Average On-Hand Inventory Levels, Cycle Stocks and Pipeline Stocks.
- Safety Stock Drivers Report *: What has the most influence on the Recommended Safety Stock calculated by the system?
- Difference Report *: Deviation between customer’s inventory levels and the systems recommended On-hand stock by each location product combination, deviation between customer’s current Safety Stocks and system calculated Recommended Safety Stock levels.
- What-if analysis Report – Changes in Customer Service Levels.
- What-if analysis Report – Changes in Forecasting Accuracy.
* Comment: all reports will be compiled into the Final Presentation which will be shared with the Customer.
service has following delivery sequence and usually takes from 5 to 6 weeks:
- Kick-Off Meeting – initial meeting to introduce inventorylogix in more detail and agree on the Service Scope: Supply Chain Network and set of Products/SKU’s for analysis.
- Inventory Optimization Workshop – during this workshop the Customer will get an overview about Inventory Optimization (input and output data, key inventory components and parameters which have an influence on calculation results) and training on how to fill in the Data Gathering Templates, which then will be used for calculations and analysis purposes.
- Data Collection – during this process step the Customer collects required data and fills provided templates. During this process step we can have ad-hoc calls to give more details on what data should be captured for analysis.
- Data Load – on this step we load the collected data into SAP Integrated Business Planning, and get back to the Customer if some of the data appears to be incorrect or incomplete.
- Data Analysis and Calculations – in this step of the process we analyze the loaded data, and perform all required calculations in the system: calculate forecasting accuracy measurements, recommended inventory levels and other important parameters.
- Reports Preparation – once all calculations are completed, we compile all required reports into the single presentation about your Inventory Reduction potential.
- Results Presentation – as the final step we present the final results and answer all possible questions about results and next steps.
Main benefits of the inventorylogix service :
inventorylogix service provides following benefits to Customers:
- Ability to get detailed overview about Inventory Optimization processes and best practices within SAP Integrated Business Planning.
- Set of detailed reports on optimal inventory levels, key inventory components and deviations with current inventory levels by location, product group, and SKU/Product.
- What-if Analysis reports for different scenarios – such as changes in target service levels, forecasting accuracy, transportation and production variabilities and information on how these changes will influence inventory levels.
- Ability to check efficiency of Inventory Optimization solution on own set of master and transactional data and confirm it’s benefits prior to solution implementation.
- Pre-defined Planning Area, Data Views, Analytics and Dashboards can be used as an accelerator for future Inventory Optimization Project as they are following Inventory Optimization Best Practices from various successful Inventory Optimization Projects.
Have a look at demandlogix.