Inventory Optimization - A New Approach to Operational Inventory Planning

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In today’s ultracompetitive business environment, companies can ill afford supply chain inefficiencies. But if planners are using outdated inventory management models, it can be challenging to run a tight ship.

To boost efficiency, run leaner, and drive down supply costs, many organizations are exploring inventory optimization. This technique improves inventory targets to address the realities of today’s complex, ever-evolving global supply chains.

This paper examines how the stochastic multistage, multi-inventory model supports inventory optimization. It also looks at how the SAP® Enterprise Inventory Optimization application by SmartOps uses the model to help supply planners execute more effectively. The software enables a collaborative approach that extends beyond organizational boundaries while helping planners predict demand patterns more accurately. And an option that provides analytics for the application delivers executive-level insights and reporting using a focused dashboard.

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Inventory Optimization - A New Approach to Operational Inventory Planning

  1. 1. SAP Thought Leadership PaperSupply Chain ManagementInventory OptimizationA New Approach to Operational Inventory Planning
  2. 2. Table of Contents4 Executive Summary5 Inventory Management Has Changed The Science The Business Requirements The Application
  3. 3. Inventory targets at one location affect, andare affected by, targets at different locations.But if those targets are out of sync withyour business needs, excess safety stockat multiple locations can result in costlyinventory inefficiencies across the supplychain. To minimize the need for excess stock,SAP offers a stochastic multistage modelthat solves multiple mathematical equationssimultaneously to reveal optimal inventorytargets.
  4. 4. On the Road to OptimizationExecutive SummaryIn today’s ultracompetitive business This paper examines how the stochas-environment, companies can ill afford tic multistage, multi-inventory modelsupply chain inefficiencies. But if plan- supports inventory optimization. Itners are using outdated inventory also looks at how the SAP® Enterprisemanagement models, it can be challeng- Inventory Optimization application bying to run a tight ship. SmartOps uses the model to help supply To boost efficiency, run leaner, and planners execute more effectively. Thedrive down supply costs, many organiza- software enables a collaborative approachtions are exploring inventory optimiza- that extends beyond organizationaltion. This technique improves inventory boundaries while helping planners predicttargets to address the realities of today’s demand patterns more accurately. Andcomplex, ever-evolving global supply an option that provides analytics forchains. the application delivers executive-level insights and reporting using a focused dashboard. No planner knows everything, and the models that planners work with should reflect this reality.4 SAP Thought Leadership Paper– Inventory Optimization
  5. 5. The Multistage ModelInventory Management Has ChangedTraditional approaches to inventory plan- The Science Dynamic, Not Staticning are based largely on rules of thumb. To accommodate constantly changingPlanners develop a set of heuristics The science behind inventory optimiza- demand, inventory planners often cobblefor determining safety stock levels, and tion involves stochastic (probabilistic) together sets of unconnected staticthese rules get handed down. Some multistage, multi-inventory modeling in models to ensure proper levels of safetyorganizations also use rudimentary which a sophisticated algorithm is used stock. In contrast, the multistage modelanalysis, in which items are weighted to assess vast amounts of historic and is dynamic and can accommodate shift-on an A-B-C scale with the priority of real-time information while accounting ing demand so that peaks and troughskeeping A-level items in stock. The as- for multiple variabilities and interdepen- are balanced out over time. The dynamicsumptions made for this sort of analysis, dencies. By enabling the analysis of a character of the model also allows orga-however, are typically revisited rarely. staggering number of variables, con- nizations to model seasonality, promo-In fast-changing environments, this straints, and what-if scenarios, this tions, and end-of-quarter spikes. It ac-approach can lead to out-of-stock situa- model empowers planners to manage commodates the fact that uncertaintytions and supply chain inefficiencies. the complexity of today’s supply chains. is greater when a company looks farther The complexities and uncertainties in This approach differs from traditional ahead in time – something traditionaltoday’s constantly evolving global supply inventory management models that approaches cannot do.chains demand a dynamic new approach. depend on deterministic, discrete-timeThe inventory optimization approach inventory theory in the following ways. Data Driven, Not Assumption Basedaugments existing enterprise resource The multistage model recognizes thatplanning (ERP) and advanced planning Molecular, Not Atomic organizations work only with finite histor-and scheduling systems, helping plan- Traditional inventory management views ical data. Traditional models, on the otherners improve operational inventory the supply chain according to a single- hand, start with an idealized assumptiontargets with item-location-period granu- stage, single-item model. This model that planners possess complete knowl-larity for finished goods, intermediate sees each stock item and each stage or edge of demand distribution. No planneritems, or raw materials and components. stock location as isolated entities with knows everything, and the models thatThe result is better visibility into demand, few, if any, meaningful dependencies. planners use should reflect this reality.enabling planners to modify inventory The multistage model, in contrast,and reduce carrying costs without im- views the supply chain in terms of mole- Variable, Not Unvaryingpacting customer service levels or sacri- cules made up of atoms. This reflects Traditional models lack the mechanismsficing product availability. This approach the reality of today’s multistage supply to dynamically capture changing valuesempowers organizations to improve chains that include suppliers, numerous or correct for errors over time. The multi-performance and more effectively meet manufacturing stages, subcontractors, stage model, by contrast, is flexiblethe terms of service-level agreements. vendor-managed inventory, central enough to continuously incorporate the warehouses, and multiple distribution results of ongoing data analysis. This centers. analysis helps identify forecast errors and biases so that planners can correct values and modify assumptions.SAP Thought Leadership Paper– Inventory Optimization 5
  6. 6. The Business Requirements Data Input Connectivity ment processes. Planners should have Better outputs require better inputs. the ability to play out what-if scenariosThe purpose of the multistage model is Thus, an inventory optimization applica- and study the ramifications of proposedto help planners in real-world supply tion should include data connectivity actions. Tools that support the visualiza-planning scenarios. Any application that modules that can work with a wide range tion of alternative strategies and theseeks to leverage the multistage model of data sources to transform and load comparison of planned and actual sce-must meet the following requirements. raw data easily and automatically. These narios help businesses predict possible modules should also accommodate the outcomes. In this way, they can identifyEnterprise Readiness supply chain network structure itself, effective actions to improve supply chainMany inventory optimization applica- which is often the most challenging efficiency.tions fail to address the fact that supply aspect of data connectivity.planning is a collaborative activity that Executive Visibilityextends beyond enterprise boundaries. Built-in Intelligence Information is of no value if it is not read-They are neither scalable nor capable of The ability to access data is important. ily accessible to the people who need it.automating planning processes. What’s But planners also need to work with that At-a-glance update mechanisms suchneeded is an application that leverages data. An inventory optimization applica- as executive dashboards are vital forthe multistage model at an enterprise tion, then, must support robust analysis helping planners and senior managerslevel. Requirements include visibility to help planners understand issues in- to focus on and evaluate supply chainacross multiple ERP applications and volving forecast bias and accuracy, sup- performance in regard to establishedplanning systems, along with support plier uncertainty, schedule adherence, targets.for global inventory planning. This and more.allows planners to understand inventory The Applicationliabilities, maintain service levels, and op- Approval Workflowerate according to supplier- and vendor- Planners need to review updated inputs The SAP Enterprise Inventory Optimiza-managed inventory business models. (such as forecasts), perform due dili- tion application addresses these require- gence, and approve any modified targets ments, helping organizations strike theFlexibility in order to avoid problems downstream. right balance between service levels andAn inventory optimization application An inventory optimization application inventory investment. The applicationneeds to be flexible enough to accom- should accommodate this requirement can be used on a stand-alone basis, ifmodate industries as varied as consum- with automated workflow and alerts that desired, or as an integrated part of theer products, chemicals, manufacturing, allow planners to manage by exception. SAP ERP application or the SAP Advancedand high tech. It requires reporting tools Planning & Optimization component.that can help validate, analyze, and im- Continuous Improvement In either case, it enables planners toprove industry-specific supply chain Supply chains are in constant flux. This is dynamically determine optimal demand-information regarding demand, supply, why inventory optimization applications driven, time-phased inventory targets forand production elements. need to support continuous improve- every item at every location throughout the supply chain.6 SAP Thought Leadership Paper– Inventory Optimization
  7. 7. Learn MoreSAP also provides an option for analytics •• Accurately track and streamline inven-that helps planners monitor demand, tory positions throughout the order- To learn more about how SAP Enterpriseinventory, and supply data against pre- to-cash value chain, using advanced Inventory Optimization can help yourscribed targets. The option uses SAP algorithms that eliminate waste and organization compete more effectively,BusinessObjects™ business intelligence help the organization run leanly contact your SAP representative today or visit us online atsolutions with preconfigured data analy- •• Access real-time, at-a-glance updates www.sap.com/lines-of-business/scmsis functionality to populate executive on supply chain performance, identify- /inventory-optimization.dashboards and performance reports. ing trends and deviations from pre- defined targets and refining inventoryThe Right Inventory strategy accordinglySpecifically, planners can: •• Use flexible data filtering to pinpoint•• Coordinate capacity, inventory, demand, issues at a granular level, allowing re- lead time, and product availability vari- medial measures to be implemented ables to gauge how much inventory to meet key performance targets should be carried by item, location, •• Visualize “what-if” scenarios, compare and time period historical trends, and analyze the im-•• Leverage a multistage modeling pact of alternative supply chain approach to calculate the relationships strategies among inventories, service levels, capacity, and costs across all stocking In the end, these functionalities enable locations and stages – and across your planners to optimize inventory different types of supply chains within levels throughout the organization, organizations and beyond enterprise helping you improve customer service boundaries to support supplier- and levels while minimizing working capital vendor-managed inventory requirements. This makes you more•• Set and manage targets such as safety efficient and far more competitive. stocks more frequently at a more gran- ular level, supporting lean processesSAP Thought Leadership Paper– Inventory Optimization 7
  8. 8. www.sap.com/contactsapCMP4499 (12/08) ©2012 SAP AG. All rights reserved.SAP R/3, SAP NetWeaver, Duet, PartnerEdge, ByDesign, ,SAP BusinessObjects Explorer, StreamWork, SAP HANA, andother SAP products and services mentioned herein as well astheir respective logos are trademarks or registered trademarksof SAP AG in Germany and other countries.Business Objects and the Business Objects logo, BusinessObjects,Crystal Reports, Crystal Decisions, Web Intelligence, Xcelsius, and otherBusiness Objects products and services mentioned herein as well as theirrespective logos are trademarks or registered trademarks of BusinessObjects Software Ltd. Business Objects is an SAP company.Sybase and Adaptive Server, iAnywhere, Sybase 365, SQL Anywhere, andother Sybase products and services mentioned herein as well as theirrespective logos are trademarks or registered trademarks of Sybase Inc.Sybase is an SAP company.Crossgate, m@gic EDDY, B2B 360°, and B2B 360° Services are registeredtrademarks of Crossgate AG in Germany and other countries. Crossgateis an SAP company.All other product and service names mentioned are the trademarks oftheir respective companies. Data contained in this document servesinformational purposes only. National product specifications may vary.These materials are subject to change without notice. These materialsare provided by SAP AG and its affiliated companies (“SAP Group”)for informational purposes only, without representation or warranty ofany kind, and SAP Group shall not be liable for errors or omissions withrespect to the materials. The only warranties for SAP Group products andservices are those that are set forth in the express warranty statementsaccompanying such products and services, if any. Nothing herein shouldbe construed as constituting an additional warranty.

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