Policy setting as the ultimate tool to optimize the SAP supply chain

In my personal opinion policy setting is at the heart of managing a supply chain. A policy is a set of basic data options that drive a strategy previously defined. PD (plan on demand; the MRP type on the first MRP screen in the material master) is not a policy, but with a range of coverage profile, an availability check that checks with replenishment lead time and a lot sizing indicator FX it becomes one. And that policy supports the strategy to replenish deterministically, maintain a dynamic safety stock which adjusts itself to changing demand, brings in the same fixed quantity every time it is ordered and if there is not enough stock, the availability check will quote availability right after the end of the replenishment lead time.

This policy might be assigned to purchased parts that are classified as 'high value, medium variability, short lead times and small in volume or size. Now there is a common understanding on how materials ought to be set up. An understanding that can be agreed to by management of sales, production and procurement; an understanding that can be communicated to every materials planner in your organization. You have defined a strategy and everybody knows what to do. Even the system, because the system is now executing to that strategy using the policy that was set. And since the world is changing, we must check periodically if the policy is still adequate for the given situation and circumstances. 

This is why you should do 4 dimensional planning, where besides the parameters WHEN, HOW MUCH and WHAT PLACE, you have to add the dimension CIRCUMSTANCE. what is the situation at the time when I need 200 kg in Houston? do I have enough capacity? what's my availability situation? what season is it? what's the likely customer behavior at that time? what constraints do we have in the warehouse? in production?

now the questions arises: how can the material planners stay on top of a workload like this? For a planner who has to manage hundreds or even thousands of items, this becomes indeed a problem. And it is the reason why most planners can't adjust the right policy to the right situation at the right time. The Add-On tool MRP Monitor by SAP Consulting provides a solution. Not only does it give you all the functionality to perform an extensive analysis, bit it also allows you to store a policy - with all its basic data settings - which you can update automatically in the material master for a group of materials )e.g. the AXL segment)

Yes, it is not that easy and actually quite demanding to understand all implications of all these policies and then set them to the right situation... and adjust when the situation asks for it. But what Ernest Rutherford said about Physics is equally true for the SAP supply chain: "All of physics is either impossible or trivial.  It is impossible until you understand it and then it becomes trivial"

Isn't it time to use some Practical S(AP)cience?

"Management is in transition from an art, based only on experience, to a profession, based on an underlying structure of principles and science", wrote Jay W. Forrester in 1961 in his groundbreaking book Industrial Dynamics."... "any worthwhile human endeavor emerges first as an art. We succeed before we understand why" he continues. Then..."the development of the underlying sciences was motivated by the need to understand better the foundation on which the art rested."

Isn't it time to improve the art of SAP supply chain optimization with some science and underlying Laws and Principles to get a foundation and common understanding that we all can reference to? Most optimizers and advisers still just use their experience only and guide the user with intuition (that comes from various degrees of experience and runs the gamut from great to miserable judgement).

Other disciplines like Engineering or practicing Law would not nearly be as advanced would they still rest on the same descriptive transmittal of experience. And advancement in the art of SAP supply chain optimization we need! Wouldn't you agree? "...but without an underlying science, advancement of an art eventually reaches a plateau", Forrester claimed in 1961 and I believe his insights still hold water. He also states: "...companies believe their problems are unique. Because of the lack of a suitable fundamental point of view we fail to see how industrial experiences all deal with the same material, financial  and human factors - all representing variations on the same underlying system." And... "to unify the separate facets of management, selected experiences have been recorded as 'cases' to provide a vehicle to discuss management as an interrelated system. This has been the best method available for integrating management knowledge, although it has been far from adequate."

This still holds true in 2012. Far too often people discredit ideas because they think the solution does not apply in their environment.

Forrester talked about management as a discipline that needed a scientific basis and reference framework. I am talking about managing the SAP supply chain and my perceived opinion to bring some practical science to the table that helps us to better evaluate and fine tune the supply chain and how it is run by SAP settings and functionality. Such a base of practical science would permit experiences to be translated into a common frame of reference from which they could be transferred from the past to the present or from one place to another.

Forrester has succeded in his vision to develop a science for the discipline of management. The topic has been evolving from Forrester through Donella Meadows with 'Thinking In Systems' and more recently John Sterman with his book: 'Business Dynamics: Systems Thinking and Modeling for a Complex World' (both from the MIT Sloan Faculty where Forrester also lectured). Also worth mentioning: 'The Fifth Discipline: The Art and Practice of the Learning Organization' (Senge 1990) is a book by Peter Senge (also a senior lecturer at MIT). His premise is that the fifth discipline, system thinking, combines the other four (personal mastery, mental models, building a shared vision and team learning) to manage and transform companies into learning organizations. Besides Systems and Business Dynamics Thinking (supported by causal loop and stock & flow diagrams) another science has been developed: 'Factory Physics' by Wallace Hopp and Mark Spearman is a book on scientific management of manufacturing dynamics. But the Principles, Laws and Corollaries explained in Factory Physics can easily be applied to the entire supply chain. Wallace Hopp has also written a paper - 'Supply Chain Science' - that translates the Factory Physics principles to a more broad application throughout the entire supply chain.

So its time to use these valuable insights to build a practical science framework for the art of SAP supply chain optimization. Systems Thinking will allow us to pinpoint inefficiencies, foresee the effects of a specific policy and supports good decision making (MTS or MTO? reduce inventory or increase availability? when to order and how much?). Through Systems Thinking the bullwhip effect can be avoided and we're enabled to see the forest again, in spite of all the trees. Factory Physics then strives to apply practical science to help with the definition of various policies. Using Little's Law, Kingman's equation (or VUT formula) and the Variability of Lead Time Demand, we can optimize the combination of buffer usage (time, inventory, capacity), fight variability and optimize our inventory levels for lowest stock with utmost service level performance. We now know where to place WIP buffers to execute the Theory of Constraints for better flow and we can reduce waste, for a lean supply chain, and increase flexibility, for an agile supply chain. A KPI framework can be developed which is based on meaningful and effective measures. This should move us much closer to SAP supply chain excellence than intuition and experience alone.

Everywhere I look, I see the more SAP-experienced person (usually consultants who get around many SAP installations) help the user with a new transaction here and a better lot sizing indicator there. Some consultancies develop methodologies for SAP supply chain optimization and come up with isolated goals (like an inventory reduction or a service level increase or more automation in purchasing). This is all good and experienced advisers are needed to help making the supply chain better. But it is only a small step to the ultimate goal of supply chain excellence. How many optimization projects fail to produce the promised results? We have reached that plateau. Lets improve on the 'art' with the application of practical science and engage in optimization projects that have a solid basis for measurable, positive results as we deal with the complexity of a modern supply chain using an integrated, holistic and factual approach.

John Sterman's Business Dynamics is an excellent reference for the building of models. Business Dynamics By Sterman, John (Google Affiliate Ad)

Air travel in modern times...

I never flew in the 60s or 70s, but I hear it was a fun thing to do and had a lot of glamour and excitement to it. When I started going on trips that required air travel in the 80s, it was still something I really looked forward to and enjoyed greatly, while I was in the air. In the early 90s I joined the frequent flyer clubs and from then on it was one of my favorite things to do, getting preferred treatment all the way and collecting miles for free trips and upgrades into First Class. The business of supply chain optimization around the world was fun and exciting and not stressful at all.

Fast forward to yesterday: I'm glad its over! Even though I was flying Business First, I did not enjoy yesterdays flight from FRA to EWR. I even dread these things now. I really don't want to get into details - since I know that everybody knows what I am talking about - but flying is not enjoyable or exciting or glamorous anymore.Period.

Just the night before, I saw on TV how the airline industry is supposed to get revived by the Dreamliner, an airplane that Jeff Smisek from United calls the "worlds leading airplane". He talks about the fantastic colors and lighting inside the cabin, the windows darken and lighten by a push of a button and in the bathroom a single button lowers the lid and flushes the toilet at the same time. Wonderful! But the seats are no different! One of the commentators: "you still have only 17 inches to your ass to fly 17 hours to Tokyo, crammed with people left and right to you". Who cares about the lighting when the only thing you have to do on an airplane is staying in your seat? And no one even cares about that... when they configure the seating charts on the new planes.

I am at a point where the only thing that I want to do on an airplane is to sleep. Melatonin is my weapon of choice and if an airplane manufacturer would ask me what to do to build better planes, I would ask for anything that puts me out: release some gas into the cabin that knocks everybody out after 2 minutes, hand out narcotics (legally o course) or lull me into sleep with music... anything that makes me not to experience the flight at all. Isn't that sad? That the product these airlines sell us is so bad that no one wants to experience it? Shouldn't they ask themselves: "why is everybody complaining and what can we do to have happier customers?" But customer satisfaction is very obviously not a thing that they care too much about.

Just this year Continental was taken over by United. I flew regularly on Continental since 1992 and I really don't know if it is United but this year specifically, I have experienced a sharp rise in unacceptable and inconvenient incidents on my trips. Like I said: Its not like it used to be.

On the United program they now give us frequent flyers a contingency of upgrades. Unfortunately they expire at the end of the year but, even worse, they don't just let you upgrade. It's all dependent on whether they can still make money selling the seats. Just now I tried to use one of my global upgrades, but received a message 'no seats available in front cabin'. So out of the 6 global upgrades I had "at my disposal", I have 3 left over which expire on 12/31. And that even though I flew 14 international legs in 2012. So what's the purpose?

You also receive 4 upgrades which you can use within the continental US. Every frequent flyer - whether they fly 25,000 miles a year or 150,000 - will get domestic upgrades. For a flyer like me, who travels between 100,000 and 130,000 miles a year, this means 4 flights in business class and about 35 in coach. Back in the good old "Continental" days, I got upgraded on 95% of my flights. And please don't get me wrong. I don't want to disrespect less frequent travelers, but I wouldn't mind sitting in coach on 2 or 3 round trips a year. However, if you sit on a plane twice a week and you have to work right off the flight, it is a very tiring experience.

enough complaints: I am home now and won't have to travel for 10 days. Yeeha! I am really excited and happy...

...and by the way: George Clooney wouldn't stand a chance accumulating 10 million miles.

Inventory projections are an important part of any KPI framework... The LIS is NOT!

I hear many of you asking for future inventory projections, so you can plan supply to variable demand and end up with optimized stock levels, exceptional service levels and good availability.

I believe that this is a very valid request and inventory projections must be part of any KPI framework. But mostly I hear advisers talking about current and past inventory. In some cases a reduction is proposed, so that future inventory is less than it is now (some of these consultancies even want a percentage of the reduction). So what if you need more? Inventory optimization is about striking a balance between availability and surplus (dead stock) and should be checked against future requirements. To just look at dead stock today, does not help you to make decisions about your replenishment, planned consumption, availability and stock level in the future.

Before I go about how to plan for future, optimized stock level, I would like to talk about how NOT to go about them.

You probably heard them... They might have knocked on your door... They might have even made some money wasting your time? I am talking about the LISers. Those people unaware of SAPs new developments (and every adviser should be obliged to be up-to-date on SAP developments) , unaware of BI, BOBJ, Add-On tools or enhancements to measure, monitor and evaluate the SAP supply chain... other than by means of the LIS (the Logistics Information System)

They get excited by a red line on black background or a dual classification that takes about ten minutes to call up and leaves absolutely no room for customization (and looks like crap). They promote using info structures which have no flexibility, are extremely cumbersome to fill and any query on them runs forever. They tell you that SAP does not provide support anymore because the LIS 'just works' (yeah right). But most insanely,they teach you all the tricks on how to get around and spend hours working in the LIS. Who cares?! And who wants to get around in the LIS?

So stop talking about the LIS. SAP doesn't talk about it anymore. And neither does anyone else. If this is your only play, you will not make it through the first quarter.

Future inventories are designed by using a KPI framework in a planning environment. Past consumption is important but so are future projections. Only if you put the two together you can make an assessment whether you need less or more. Availability and agility is as important nowadays as is less waste (in overproduction or excess inventory). But what was true yesterday might not be true today. The LISers look back! and back only... everybody else should use the past to build a better future... where the future should be anticipated with a vision, anticipation and foresight (none of which an LISer possesses).

Marc Hoppe and his team from SAP Consulting have developed an Inventory Cockpit that helps with exactly that. On basis of a customized Material Document Aggregation, which the LIS does not have a chance to do, the Inventory Cockpit provides a multitude of KPIs and measures to determine future inventory levels - amongst many other things.

The final assembly line as the link between Sales and Production

One of my favorite customers makes appliances and components for the consumer products industry.

Today we went live with a new concept linking forecast and customer orders with a production scheduling strategy. The key phrase is "smoothing irregular demand".

Our customer's production plant receives orders from each of the networks DC's as well as direct customer orders. The DCs, of course, take the customer orders and that demand can be quite irregular. Up until now the supply chain acted quite random and planners, schedulers and sales reps had a hard time at work.

This, as I believe, was due to the "order related and oriented" process dominating fulfillment, distribution and production. A sales order from the DC was forwarded to the production plant in the same quantity and then translated individually throughout the BoM. A yellow slip followed the order from the raw material through final assembly to packaging, distribution to the DC and finally the delivery to the customer.

In other words: the sales rep entered an order and the supply chain sprung into action - or should I say: "slipped into desparation and chaos"?

So what do you do? First, we asked the planners in the DC to maintain a forecast (strategy 40 for a VSF that gets consumed by sales orders). All these forecasts caused - through stock transport orders - a cumulated demand in the production facility. After that we let the system generate a repetitive order which covers the total demand and then we split the order through a heijunka strategy into EPEI (every product every day). The resulting schedule was leveled onto the final assembly line, carefully ensuring a maximum 75% utilization. Then the direct customer orders had room to be scheduled directly on the line (strategy 81 ensures the direct creation and scheduling of a repetitive order right out of the sales order).

We chose to do this on the final assembly line because it has ample capacity and very short cycle times. It can also be reset in a haertbeat. But most important it ensures the highest degree of customization.

The next challenge was component availability for final assembly. Here we choose SAPs eKanban. With it you have a full container for X items (regular and high demand) and Event-driven or one-time Kanban for Z items. Using this strategy you can be assured to pull high sellers quickly from the line and quote the customer a true lead time for slow movers.

Back to the DC. Since a forecast VSF was maintained, the DC will now receive regular shipments - on time! - to maintain an inventory. This inventory should be available at the beginning of the period and will be consumed by customer orders throughout the period. Therefore forecast accuracy and inventory responsibility remains in the DC and should be controlled with safety stocks (I recommend a coverage profile for dynamic SS).

The resulting demand in the production facility arrives in a regular fashion and gets further smoothed by Heijunka.

Of course there is a lot of setup required - correct lead times, effective lot sizing, right strategy and the appropriate MRP type and replenishment policy - but absolutely nothing that can't be done with standard SAP. Not one Z setting was used along the way..,

Increased Profitability requires dealing with conflicting goals...

Have you ever wondered why your 'continuous improvement' program feels like you are moving in circles? This might be because you have to deal with conflicting goals. Only if one identifies a clear direction and strategy, an increase in profitability is possible. So lets see what helps to increase profitability.

On one hand costs need to be reduced and on the other we need to increase income, revenue or sales. To reduce cost, company's usually strive to reduce working capital (work in process, stocks, resources), save on the cost of procurement or production and optimize their planning processes so that they can execute more efficiently. In order to get the expected result one requires low inventories in raw, semi and finished goods, high utilization of resources and less variability in demand and supply.

The other side of the coin is the desired increase in sales which can be achieved by fast response to customers wishes, on time delivery, very high quality with less waste and scrap and the offering of a wide variety of options and customized features in the finished product. Logically this requires ample supply of all variants of the finished good, ample capacity on the production lines so rush orders can be attended to quickly and it results in a lot of variability.

 

These goals conflict and often companies become bipolar in their efforts of continuous improvement... should we reduce inventory or increase availability?, cut down on our offering of product options or offer more?, fully load our production lines or run them at a fraction of their ability?

The key is to find the perfect balance. Practical science like Factory Physics (based on the book by Mark Spearman and Wallace Hopp) provides a great framework to find that balance. In Factory Physics tools like the flow optimizer or efficiency curve in conjunction with the application of Little's Law, the VUT equation (which relates the three buffers Inventory, Capacity and Time) and the determination of the Variance in Lead Time Demand help a great deal to optimize Capacity, WIP, Inventory and Cash Flow and to determine the policies that support the strategy your company pursues.

It is those policies that we can use in the SAP supply chain. I have written quite a bit about policy setting in previous blogs, and if you read some of it, you know how important I consider them in the pursuit of the optimized SAP supply chain.

It would by far extend the scope of a blog article to describe the details on how to use Factory Physics to derive sensible policies which support strategy, but it is certainly worthwhile to look further into it... in case you were ever confused about what to do to get better results!

building SAP supply chain KPI's that work and support decision making

In my opinion, good KPIs help you make good decisions. And the decisions you make, can be the setting of a replenishment or planning policy. I've talked about policies in previous blogs and am of the opinion that these are at the center of an effective and automated SAP supply chain. Policies determine the order frequency and lot size of replenishments and, if properly assigned, guarantee a great service level whilst avoiding stockouts.

Therefore it is imperative to have a solid set of KPIs available for your decision making. Here are three very important ones:

DpA - dead stock value as a percentage of average stock. Dead stock is that portion of the inventory that does not get used over a defined period of time. By itself it doesn't mean much. However, if you relate it to your average inventory value, it becomes a good indicator to show that when 75% of your average inventory remains in dead stock, you're not consuming as much as you are bringing in. Dead stock as a percentage of average inventory should not be more than 25-30% and is ideal at around 15%. So when you find yourself above that threshhold, it is time to look for a different replenishment policy - one that works better for that item and helps bringing the inventory down.

FR - fill rate. The fill rate indicates the percentage of sellable product that was delivered to the customer immediately from available inventory. As per that definition, one should not measure the fill rate for MTO or ATO or FTO products since those should never be in free available inventory that can be shipped to the customer (they are made or finished to ORDER). Therefore it is important to segregate the MTS products from the rest and measure only MTS with the KPI "fill rate". Of course the availability check should be set up accordingly. An MTS availability checking rule, in its purest sense, should simply check for available inventory (including safety stock) and if it does not find any, it should not confirm the sales order. Of course in some businesses you may want to look if there is anything in transit or on the production lines and confirm to the expected receipt date. However, for purposes of the fill rate measure, these delayed deliveries degrade the KPI. Only deliveries made immediately and directly out of available inventory account for a good fill rate. This is how you report on how good your planning and forecasting was for Make To Stock products.

FR - Flexibility Rating. Many people call this measure 'Service Level'. I want to call it differently because it rates how flexible a company services their customer's wishes. Make To Order, Assemble To Order or Finish To Order processes strive to react flexibly to fulfill a customer's request. In that case you do not plan an inventory of a certain, specific product ahead of time (with a forecast), but you wait until the customer tells you exactly what they want - and only then you start your production or assembly lines. Therefore one should measure the time it takes to fulfill the request and how well that quoted time is adhered to. To get a good KPI here, you should set an estimated lead time (the total replenishment lead time in MRP3) and the availability checking rule should check with that lead time to quote a delivery date to the customer. The KPI should then  not only show how well we deliver to that quoted lead time, but also give extra points for early delivery.

As you look at these KPIs, you should be able to make conclusions about what policy might work to your advantage (to further automate but also improve on the KPI).

...and since it is a bit of a challenge to get these KPIs out of standard SAP, I want to point out a solution that I am endorsing very much, since I believe it will help you a great deal to construct your own set of KPIs that really work for you: It's a product from Global Software called the Spreadsheet Server and works as an extension to Excel. It's greatest feature is that no extract needs to be generated (as soon as you extract data out of SAP, the data is outdated), but the queries, which you define in Excel, pull the data directly out of the SAP table and leave it there.

...but I let Global Software explain how it works:

"Spreadsheet Server, Powered by the QueryExchange™ works as an intuitive Microsoft® add-in providing live reporting and analysis from SAP into Excel. This empowers end users with the ability to use familiar Excel features and functions to create dynamic dashboard views from SAP. These views can be accessed, automated and presented with our formula driven methodology, including summary balances and detailed drill-downs. The cloud-based QueryExchange™ component of Spreadsheet Server enables user organizations to select and tailor pre-built queries to meet their specific needs. Utilized in the QueryExchange™, the SmartPak™ feature is a way to group pre-configured queries together. Searching by selecting a SmartPak™ gives users a quick and reliable way to access a group of dedicated pre-defined queries. In addition, Spreadsheet Server has the ability to dynamically access the following modules: FI, CO, PCA, SD, MM, PP, QM, PM, HR, PS, New GL, and Special Purpose Ledgers. Spreadsheet Server enhances the SAP financial and operational user experience all while leveraging the significant investments made by the customer in Microsoft Excel."

the traveling supply chain optimizer on two wheels

Since I travel for a living, I thought I might as well have some fun with it. Therefore I got myself a HD Road King Classic and set off on a trip around the country. Just yesterday I concluded the journey in Fort Lauderdale, FL, where Sophie will spend the winter. 6000 miles, starting from Sauk Rapids, MN, she did not have one hiccup and there wasn't a single problem, however, a lot of sights, stories and major fun.

oh... and not a single drop of rain along the entire way, but a cold front in Texas that was chilling to the bone.  As I am getting to it, I will write about the individual segments that I was riding - whenever I had the time - and show some photos that I shot.

Here she is. Fully packed, somewhere along the road.