All too often I see companies using strategy 40 for the finished product and then the forecast ends up as a VSF in every FERT's MD04 and the demand for all lower level BoM items comes from the finished goods. I find this a rather ineffective, cumbersome and downright costly way of planning... especially in the Process Industries where there's a V shaped BoM structure (much more finished product's variety than there are raw materials).
We all know that the forecast is always wrong. So if you forecast 10 liter bottles separately from 5 liter bottles that contain the same liquid, you are exponentially compounding that error when you hand it through to the bulk level.
How about forecasting and pre-manufacturing the liquid (bulk) to inventory and filling it into the bottle as the customer is asking for it?
I am aware that this sounds too easy and isn't practical everywhere. At least you can think about it and take another point of view. Who knows... It might make a big positive difference and may be worth a try
Tuesday, November 5, 2013
Friday, October 25, 2013
Options to buffer variability in your SAP software. Picking the right combination of buffers helps with service levels and optimized inventories.
Factory Physics by Spearman and Hopp describes how three buffers develop when variability exists: Inventory, Time and Capacity. The art of effective materials planning lies in designing the optimum mix of these three buffers and setting policy accordingly. This blog post talks to the buffering options you have in SAP.
First there is the inventory buffer. It's usually called the safety stock. In SAP you can simply set an estimated amount of inventory that you want to keep aside for when you need more than expected. MRP ignores that stock but the Availability Check can use it in times of over consumption. You can estimate and set the amount in the field Safety Stock on MRP2, but you can also use the forecast module to calculate and update it periodically. As the automatic calculation considers past consumption patterns, long or short lead times and the service level you desire, this is a great way to adjust the safety holdings to an ever changing situation. Then there is the dynamic safety stock driven by the Range Of Coverage profile - also maintained on the MRP2 screen. You can customize various coverage profiles and set a minimum, a target and a maximum coverage in days. The system will then calculate the future, average, daily demand and multiply that figure with the target coverage set in the Range of Coverge profile. The result is a dynamic safety stock that goes up and down with how your average, future, daily demand goes up and down. The RoC profile has the added advantage that yu can set a maximum (dynamic) stock level, which keeps your inventory below a celing should your forecast exceed the actual demand.
As for the time buffer you have some options too. Safety Time on MRP2 allows you to move the requirement, for planning purposes, back in time. As an example: if you set 2 days of safety time and you have a requirement to be fulfilled on September 28, MRP will plan to get that stuff on September 26. But the biggest impact on your time buffer has the decision on MTO versus MTS (driven by the strategy group on MRP3 primarily). Simply speaking: if your customers want to pick the product up right away, you have to plan it using a Make To Stock strategy, so that there is product readily available, produced to a forecast (full use of the inventory buffer). However, if your customers accept a lead time (if they don't and it's not economical for you to produce to a forecast then you shouldn't offer that product in the first place or change your business process so that it feasibly supports MTS production), one can employ a Make To Order strategy. Now the question is: "how long of a lead time does the customer accept?" Once you have the answer you can move the Inventory / Order interface (discussed in previous blog posts of mine) to adjust the lead time to the customer. The I/O interface is that point in your value stream where upstream of it you make to stock and downstream of it the customer "pulls" in a Make to Order fashion. The further downstream the I/O interface is, the shorter the time buffer and you set it in the field "Total replenishment Lead Time" in the MRP3 screen, right next to the field "Availability Check" (and that proximity is certainly not a coincidence).
The capacity buffer enables you to counter variability (line down, forecast error, supplier delivery delayed, rush orders etc.) with additional working hours or machine availability. The most effective use of the capacity buffer is given when you do not schedule your production lines to 100% (I have seen many times that lines are scheduled to be utilized 120%). Leaving free available capacity in the schedule, enables MTO orders to drop in and enables a relative short fulfillment of unplanned order quantities.
The best combination of the three buffers also fulfills the demand for a lean and agile supply chain. The MTS part therin provides the lean part in that it reduces waste whereas MTO gives you a lot of agility.
First there is the inventory buffer. It's usually called the safety stock. In SAP you can simply set an estimated amount of inventory that you want to keep aside for when you need more than expected. MRP ignores that stock but the Availability Check can use it in times of over consumption. You can estimate and set the amount in the field Safety Stock on MRP2, but you can also use the forecast module to calculate and update it periodically. As the automatic calculation considers past consumption patterns, long or short lead times and the service level you desire, this is a great way to adjust the safety holdings to an ever changing situation. Then there is the dynamic safety stock driven by the Range Of Coverage profile - also maintained on the MRP2 screen. You can customize various coverage profiles and set a minimum, a target and a maximum coverage in days. The system will then calculate the future, average, daily demand and multiply that figure with the target coverage set in the Range of Coverge profile. The result is a dynamic safety stock that goes up and down with how your average, future, daily demand goes up and down. The RoC profile has the added advantage that yu can set a maximum (dynamic) stock level, which keeps your inventory below a celing should your forecast exceed the actual demand.
As for the time buffer you have some options too. Safety Time on MRP2 allows you to move the requirement, for planning purposes, back in time. As an example: if you set 2 days of safety time and you have a requirement to be fulfilled on September 28, MRP will plan to get that stuff on September 26. But the biggest impact on your time buffer has the decision on MTO versus MTS (driven by the strategy group on MRP3 primarily). Simply speaking: if your customers want to pick the product up right away, you have to plan it using a Make To Stock strategy, so that there is product readily available, produced to a forecast (full use of the inventory buffer). However, if your customers accept a lead time (if they don't and it's not economical for you to produce to a forecast then you shouldn't offer that product in the first place or change your business process so that it feasibly supports MTS production), one can employ a Make To Order strategy. Now the question is: "how long of a lead time does the customer accept?" Once you have the answer you can move the Inventory / Order interface (discussed in previous blog posts of mine) to adjust the lead time to the customer. The I/O interface is that point in your value stream where upstream of it you make to stock and downstream of it the customer "pulls" in a Make to Order fashion. The further downstream the I/O interface is, the shorter the time buffer and you set it in the field "Total replenishment Lead Time" in the MRP3 screen, right next to the field "Availability Check" (and that proximity is certainly not a coincidence).
The capacity buffer enables you to counter variability (line down, forecast error, supplier delivery delayed, rush orders etc.) with additional working hours or machine availability. The most effective use of the capacity buffer is given when you do not schedule your production lines to 100% (I have seen many times that lines are scheduled to be utilized 120%). Leaving free available capacity in the schedule, enables MTO orders to drop in and enables a relative short fulfillment of unplanned order quantities.
The best combination of the three buffers also fulfills the demand for a lean and agile supply chain. The MTS part therin provides the lean part in that it reduces waste whereas MTO gives you a lot of agility.
Tuesday, October 22, 2013
Capacity Planning! Or Scheduling? ::: Leveling? Maybe Sequencing?
Once your company has purchased SAP software, you have these great tools available which allow you to put a production program together in a very automated way. You could also check your long term plan for feasibility or play through some planning scenarios and 'what if's'.
The problem, however, is.... You can't use any of it! Because it never was configured and nobody ever showed you how to do or use it. During the implementation it was simply not in the cards to do Capacity... (anything). It might have been that it was considered a stage 2 project, the implementation consultant didn't really know how it works, it was considered non-essential for the business or someone said: "we have ample capacity and therefore don't need to worry about it".
Whatever the case may be, without planning, sequencing, leveling and scheduling orders and capacity, you're going to end up with half a process. To my great astonishment capacity planning is rarely used. As we all know the MRP run generates supply orders without any consideration of available capacity. It also does not care about a sequence or a leveled, noise-less schedule. It simply says:"I see demand and here are the orders that fulfill that demand", all stacked up on top of each other to the latest possible delivery date.
This is in no way a production schedule... no matter how much available capacity you have. You need to take the MRP run's result and plan, sequence, level and schedule the orders before you can effectively produce product in the right quantity at the right time.
So how can you do that in SAP? Four easy steps:
1. capacity planning: use basic data like lot sizing procedure, takt time and lead time scheduling to have the MRP run come up with an approximate plan. Check on you work center settings and shift schedule to make sure correct lead times are calculated.
2. capacity sequencing: use any one of the transactions CM21, CM25, LAS2 or MF50 (depending on whether you're process, discrete or repetitive) to employ a sequencing strategy like heijunka, first in - first out, priority, setup optimization or manual.
3. capacity leveling: ensure that the available capacity on the line is not exceeded. On a mixed model line or on a mixed strategy line (MTS and MTO) it is not good practice to schedule to 100% (or even above). Leave some room for variability.
4. capacity scheduling: now it's time to fix the schedule. But not before you check if the components are available. Very often orders are released to the line and then there are missing parts. This causes exorbitant lead times and blocking of capacity and material for other orders. Transaction MDVP is an excellent tool to check availability collectively (but do make sure you have the right rules in place). Then you can use COR8 to collectively convert plasnned orders into a feasible schedule that can be handed down to the shop floor. athere is still whiggle room but at least you have a plan now.
And most importantly: you now have something that you can measure against. Isn't that the most frustrating part about not employing Capacity Planning? The fact that you never know what actually should happen? and you never know that you have either done a good job or not?
what I don't understand is that we all put dentist appointments into our calendar, prioritize our social schedule, make sure we do not put more than 24 hours into a day and stick to promises we made before ... but only rarely do we do Capacity Planning, Sequencing, Leveling and Scheduling with SAP!
...and it's so much easier with SAP!
The problem, however, is.... You can't use any of it! Because it never was configured and nobody ever showed you how to do or use it. During the implementation it was simply not in the cards to do Capacity... (anything). It might have been that it was considered a stage 2 project, the implementation consultant didn't really know how it works, it was considered non-essential for the business or someone said: "we have ample capacity and therefore don't need to worry about it".
Whatever the case may be, without planning, sequencing, leveling and scheduling orders and capacity, you're going to end up with half a process. To my great astonishment capacity planning is rarely used. As we all know the MRP run generates supply orders without any consideration of available capacity. It also does not care about a sequence or a leveled, noise-less schedule. It simply says:"I see demand and here are the orders that fulfill that demand", all stacked up on top of each other to the latest possible delivery date.
This is in no way a production schedule... no matter how much available capacity you have. You need to take the MRP run's result and plan, sequence, level and schedule the orders before you can effectively produce product in the right quantity at the right time.
So how can you do that in SAP? Four easy steps:
1. capacity planning: use basic data like lot sizing procedure, takt time and lead time scheduling to have the MRP run come up with an approximate plan. Check on you work center settings and shift schedule to make sure correct lead times are calculated.
2. capacity sequencing: use any one of the transactions CM21, CM25, LAS2 or MF50 (depending on whether you're process, discrete or repetitive) to employ a sequencing strategy like heijunka, first in - first out, priority, setup optimization or manual.
3. capacity leveling: ensure that the available capacity on the line is not exceeded. On a mixed model line or on a mixed strategy line (MTS and MTO) it is not good practice to schedule to 100% (or even above). Leave some room for variability.
4. capacity scheduling: now it's time to fix the schedule. But not before you check if the components are available. Very often orders are released to the line and then there are missing parts. This causes exorbitant lead times and blocking of capacity and material for other orders. Transaction MDVP is an excellent tool to check availability collectively (but do make sure you have the right rules in place). Then you can use COR8 to collectively convert plasnned orders into a feasible schedule that can be handed down to the shop floor. athere is still whiggle room but at least you have a plan now.
And most importantly: you now have something that you can measure against. Isn't that the most frustrating part about not employing Capacity Planning? The fact that you never know what actually should happen? and you never know that you have either done a good job or not?
what I don't understand is that we all put dentist appointments into our calendar, prioritize our social schedule, make sure we do not put more than 24 hours into a day and stick to promises we made before ... but only rarely do we do Capacity Planning, Sequencing, Leveling and Scheduling with SAP!
...and it's so much easier with SAP!
Sunday, October 20, 2013
What the strategy group on MRP3 (and Policy Setting) can do for a leveled production schedule with agility.
Last week I got engaged with a client to work on a model, so they can perform effective materials planning. The client did great preparations in defining guidelines for policy setting in an ABC / XYZ matrix. This kind of thinking drives SAP software to support the achievement of targets and goals: Periodic policy setting based on changing situations is imperative, so that it automates ongoing balancing between service levels and optimized inventories.
One part of the solution was dealing with production scheduling. The question at hand: how do we level the production program MTS (X and Y items) and let MTO (Z items) orders flow in ?
The answer: use different policies to drive automation for different situations. Below you can see the grid we came up with.
The idea behind setting policies in the various classes is to determine an ideal mix of production quantities. This in turn drives great service levels and minimum inventory holdings, even though variability causes a deviation of actual order quantities and dates from the forecast...
For all X items we assume a high forecast accuracy (90 to 95%), and therefore a Make To Stock strategy is applied in order to manufacture finished product to a forecast into inventory. Because of the high degree of predictability, we can assume that any forecast error can be covered with safety stock. That is why we want to use strategy 10 which creates an LSF requirements type. LSF requirements do not consume itself against customer orders and therefore additional, actual demand must be covered by safety stock. This should be in order, since the forecast error is minimal for X items.
as for safety stocks our policies suggest to use a dynamic safety with a coverage profile. This is because the dynamic safety stock goes up and down with future, forecasted demand and would therefore adjust itself up and down for important A items. For less important B items we would use an automatically calculated static safety stock, whereas we would use a static safety stock manually for the least valuable C items.
For Y items there is slightly more variability and the forecast does not necessarily provide as much comfort as it does for X items. That is why our policy calls for strategy 40 and the associated requirements type VSF. A VSF is consumed by incoming customer orders and therefore - if actual customer orders exceed the forecast - additional demand is directly transferred into the production program. In this case we do not need a safety stock, since we satisfy demand over and above the forecast, directly from production.
A fixed lot size is used, so that the MRP run generates supply in fixed quantities, which a scheduling system can level, sequence and distribute within available capacity on the line. The production program for XA products is generated weekly wheras for XB and XC products the program is created bi-weekly and monthly respectively. This is due to the fact that A items need more attention and need to be checked more frequently, due to their nature of being of high consumption value.
Z items are set up to be Made to Order. However, there is a forecast placed on the finished good, so that it is possible to procure raw materials and reserve capacity on the lines. This is achieved using strategy 52, which generates a VSE requirements with statistical planned orders which reserve capacity and allow the transfer of requirements to raw materials. Z items do not have safety stocks and a production program is not necessary, since actual orders flow into the free capacity spots that were reserved.
In this sense it is possible to generate a level production plan considering all products running on the 'mixed model lines'. Class A materials build the basis with a weekly, undisturbed schedule of fixed order quantities that build inventory to the forecast plus a safety stock. Class B materials are then stacked on top, using about 30% of the capacity (for an approximate total of A and B items of 80%). Orders exceeding the forecast will be placed into the bi-weekly production program and reduce the remaining available capacity for C products.
This kind of thinking is nothing new, but unfortunately it's not applied very often. In many cases, people think that MRP should generate the production program directly. That is not how it works in an MRP type planning system. MRP will generate supply based on your basic data setup, but under no consideration of available capacity on the lines. MRP also does not create a sequence of orders and it does not fix the schedule. Because of that, you should introduce that extra step in between the MRP run and handing over a schedule to production: Sequencing, Leveling and Scheduling !
One part of the solution was dealing with production scheduling. The question at hand: how do we level the production program MTS (X and Y items) and let MTO (Z items) orders flow in ?
The answer: use different policies to drive automation for different situations. Below you can see the grid we came up with.
The idea behind setting policies in the various classes is to determine an ideal mix of production quantities. This in turn drives great service levels and minimum inventory holdings, even though variability causes a deviation of actual order quantities and dates from the forecast...
For all X items we assume a high forecast accuracy (90 to 95%), and therefore a Make To Stock strategy is applied in order to manufacture finished product to a forecast into inventory. Because of the high degree of predictability, we can assume that any forecast error can be covered with safety stock. That is why we want to use strategy 10 which creates an LSF requirements type. LSF requirements do not consume itself against customer orders and therefore additional, actual demand must be covered by safety stock. This should be in order, since the forecast error is minimal for X items.
as for safety stocks our policies suggest to use a dynamic safety with a coverage profile. This is because the dynamic safety stock goes up and down with future, forecasted demand and would therefore adjust itself up and down for important A items. For less important B items we would use an automatically calculated static safety stock, whereas we would use a static safety stock manually for the least valuable C items.
For Y items there is slightly more variability and the forecast does not necessarily provide as much comfort as it does for X items. That is why our policy calls for strategy 40 and the associated requirements type VSF. A VSF is consumed by incoming customer orders and therefore - if actual customer orders exceed the forecast - additional demand is directly transferred into the production program. In this case we do not need a safety stock, since we satisfy demand over and above the forecast, directly from production.
A fixed lot size is used, so that the MRP run generates supply in fixed quantities, which a scheduling system can level, sequence and distribute within available capacity on the line. The production program for XA products is generated weekly wheras for XB and XC products the program is created bi-weekly and monthly respectively. This is due to the fact that A items need more attention and need to be checked more frequently, due to their nature of being of high consumption value.
Z items are set up to be Made to Order. However, there is a forecast placed on the finished good, so that it is possible to procure raw materials and reserve capacity on the lines. This is achieved using strategy 52, which generates a VSE requirements with statistical planned orders which reserve capacity and allow the transfer of requirements to raw materials. Z items do not have safety stocks and a production program is not necessary, since actual orders flow into the free capacity spots that were reserved.
In this sense it is possible to generate a level production plan considering all products running on the 'mixed model lines'. Class A materials build the basis with a weekly, undisturbed schedule of fixed order quantities that build inventory to the forecast plus a safety stock. Class B materials are then stacked on top, using about 30% of the capacity (for an approximate total of A and B items of 80%). Orders exceeding the forecast will be placed into the bi-weekly production program and reduce the remaining available capacity for C products.
This kind of thinking is nothing new, but unfortunately it's not applied very often. In many cases, people think that MRP should generate the production program directly. That is not how it works in an MRP type planning system. MRP will generate supply based on your basic data setup, but under no consideration of available capacity on the lines. MRP also does not create a sequence of orders and it does not fix the schedule. Because of that, you should introduce that extra step in between the MRP run and handing over a schedule to production: Sequencing, Leveling and Scheduling !
Monday, September 16, 2013
ASUG Fall Focus 2013 in Philadelphia - Capacity Planning and Effective Materials Planning
Please visit my sessions "Capacity Planning with SAP-ERP" and "Effective Materials Planning for the Integrated SAP Supply Chain" during ASUG Fall Focus in Philadelphia
http://www.asug.com/events/detail/ASUG-Fall-Focus-2013
Capacity Planning (session code 0407) is on Friday September 27th at 8:30am and Effective Materials Planning (session code 0111) also on Friday at 2:15pm
would be great to see you there!
http://www.asug.com/events/detail/ASUG-Fall-Focus-2013
Capacity Planning (session code 0407) is on Friday September 27th at 8:30am and Effective Materials Planning (session code 0111) also on Friday at 2:15pm
would be great to see you there!
Thursday, September 12, 2013
takt-based scheduling and sequencing of a flow line with Kanban withdrawals !
does this blog header sound like something out of an Asimov book? Have you ever considered doing it on SAP? oh yes... it's standard functionality, adheres to lean principles and comes right out of the box.
Let's first talk about what I actually mean by that headline: If you make product that can be put in a catalog and you sell these on a regular basis, you will have to make these products on a regular basis. If you make these products on a regular basis, you need a production line and workers who can make these products on a regular basis to standard work instructions. And if you make these products on a regular basis, to the same standards, you can compare the production of one period to another. And if you want to do just this, I suggest you measure your performance with rates per period (of course, if you want to, you can also create discrete orders for the production of various lots and then compare one production order to the other - but only a job shop would do that, right... or not?).
Now, that kind of thing is called 'Serienfertigung' in SAP (I refuse to use the english SAP translation since I get most of you upset with that term and you will stop reading on). And in that kind of thing your orders request rates per period and you will be able to establish a takt to which the line is fed. If the demand is high, the takt is short and the line is fast. Think of this as like a conveyor belt which is running at a certain speed. If you are a manufacturer of Rum, you could takt a bottling line and if your demand is high you release a bottle in very short takts, but if the demand goes down you release the bottles at longer distances and therefore you slow down the rate (I know, you don't make Rum! But don't you think that your standard products couldn't be controlled by a rate per period either?)
So why would we want to do such a thing? First, if you control rates, you can control the utilization of the line without producing to the waste of overproduction. Through the takt time you control the speed of the line and you make sure that you manufacture to demand.
Second, your schedulers save a ton of transactional work. No more conversion of planned orders into Production orders. In Repetitive Manufacturing (oh my, I said it out loud!) MRP generates executable Run Schedules and if you are using Sequencing, schedules them right away within available capacity. You then perform a collective availability check and next weeks schedule is set.
But it comes even better: The plan is the plan, but the execution is by demand only! Remember, that I talked about autonomous versus central planning in one of my blog posts? Sometimes you need to leave the workers down on the line with the decision what to make and what not. They are down there, seeing a lot more than the planner in the central office in Cleveland.
That's why we use the plan to reserve capacity and order raw material, but the signal to execute and produce the order is coming when a demand exists. The way you make this work with standard SAP is to use MF50 with Sequencing to fix the plan for next week (to reserve capacity and make raw material available). But you also have a Kanban control cycle for every material that runs on this line. If you use the replenishment strategy "Planned Orders with MRP", then the signal 'Kanban empty' will not generate a new order but simply attach itself to one of the orders in the plan. If your workers have the ]Supply View Kanban Board' (PK12N) next to the line, they can execute right to demand and will have capacity and material available for those orders.
I know this sounds simple and like it makes a lot of sense... so... why do you still have production orders?
Is it because your Controller says that they must report cost this way? If that is the case, then ask them why they created additional Zreports to take the order related cost and normalize it to a 'material per period' cost.
Repetitive with its cost collectors does exactly that - in standard SAP without any additional programming.
Let's first talk about what I actually mean by that headline: If you make product that can be put in a catalog and you sell these on a regular basis, you will have to make these products on a regular basis. If you make these products on a regular basis, you need a production line and workers who can make these products on a regular basis to standard work instructions. And if you make these products on a regular basis, to the same standards, you can compare the production of one period to another. And if you want to do just this, I suggest you measure your performance with rates per period (of course, if you want to, you can also create discrete orders for the production of various lots and then compare one production order to the other - but only a job shop would do that, right... or not?).
Now, that kind of thing is called 'Serienfertigung' in SAP (I refuse to use the english SAP translation since I get most of you upset with that term and you will stop reading on). And in that kind of thing your orders request rates per period and you will be able to establish a takt to which the line is fed. If the demand is high, the takt is short and the line is fast. Think of this as like a conveyor belt which is running at a certain speed. If you are a manufacturer of Rum, you could takt a bottling line and if your demand is high you release a bottle in very short takts, but if the demand goes down you release the bottles at longer distances and therefore you slow down the rate (I know, you don't make Rum! But don't you think that your standard products couldn't be controlled by a rate per period either?)
So why would we want to do such a thing? First, if you control rates, you can control the utilization of the line without producing to the waste of overproduction. Through the takt time you control the speed of the line and you make sure that you manufacture to demand.
Second, your schedulers save a ton of transactional work. No more conversion of planned orders into Production orders. In Repetitive Manufacturing (oh my, I said it out loud!) MRP generates executable Run Schedules and if you are using Sequencing, schedules them right away within available capacity. You then perform a collective availability check and next weeks schedule is set.
But it comes even better: The plan is the plan, but the execution is by demand only! Remember, that I talked about autonomous versus central planning in one of my blog posts? Sometimes you need to leave the workers down on the line with the decision what to make and what not. They are down there, seeing a lot more than the planner in the central office in Cleveland.
That's why we use the plan to reserve capacity and order raw material, but the signal to execute and produce the order is coming when a demand exists. The way you make this work with standard SAP is to use MF50 with Sequencing to fix the plan for next week (to reserve capacity and make raw material available). But you also have a Kanban control cycle for every material that runs on this line. If you use the replenishment strategy "Planned Orders with MRP", then the signal 'Kanban empty' will not generate a new order but simply attach itself to one of the orders in the plan. If your workers have the ]Supply View Kanban Board' (PK12N) next to the line, they can execute right to demand and will have capacity and material available for those orders.
I know this sounds simple and like it makes a lot of sense... so... why do you still have production orders?
Is it because your Controller says that they must report cost this way? If that is the case, then ask them why they created additional Zreports to take the order related cost and normalize it to a 'material per period' cost.
Repetitive with its cost collectors does exactly that - in standard SAP without any additional programming.
Sunday, September 8, 2013
Inventory Optimization is not a Project...
...... it's a process!
Projects have a beginning and an end, Inventory Optimization does not. When I talk about effective materials planning (in case you attend the ASUG Fall Focus in Philadelphia this year, I will speak on that subject on Friday, September 27), I point out four parts:
Projects have a beginning and an end, Inventory Optimization does not. When I talk about effective materials planning (in case you attend the ASUG Fall Focus in Philadelphia this year, I will speak on that subject on Friday, September 27), I point out four parts:
1. Portfolio Management and 'house cleaning' of basic data and
supply elements
2. Policy setting after Segmentation and Classification of your
materials portfolio
3. Exception Monitoring
4. Inventory Optimization
The last part - Inventory Optimization - is the ongoing effort to
provide maximum availability with minimum stock holdings for any given demand
situation. And since the demand situation changes all the time, the policies
that were driving that balance when you went live with the SAP system back in
the days, may not hold water anymore.
What’s keeping your inventories optimized is the adjustment of
basic data – lot size procedures, safety stock settings, forecast parameters,
lead times and more – to the situation the individual item is under. Do we have
consistent consumption and are able to forecast the demand? Does the item contribute
a lot of value to our business or not? Does it have a short lead time? These
and other questions will have to be answered before you can set the optimal
parameters that drive automation and inventory optimization.
But if you answer the questions only once and don’t adjust the
parameters as the answers to these questions change over time, your parameters
will not support that automation or optimized inventory levels any more. The
MRP run will generate supply proposals which do not conform to the paradigm of
good service with minimum stock.
What usually happens during an SAP implementation is that because
of the limitations in budget and time to Go-Live, only the most basic
parameters are being set so that you can start using SAP. Typically this is MRP
type PD (maybe a manual reorder level procedure VB), lot size procedures EX and
a few periodic ones like WB and a static safety stock that’s guesswork. The
planned delivery time is a big unknown and will be set generously, so that you
will usually receive the item way ahead of its requirements date.
Then, after you have been using SAP for your materials planning
for a while, the ‘Inventory Optimizers’ come in and sell you a 6 months project
to get your basic data straight. This is a noble effort and yes, your planners
need to understand all the parameters and how to set policy. But if you go
through the tedious task to analyze and set up each individual part, your MRP Controllers
will learn a great deal about all the fields in the material master record, but
they will also divorce their spouses and move into the office.
And once all the materials are finally set up with the right
policy, the situation changes – what was consistent consumption is no more, the
material is procured from a different supplier and therefore a different replenishment
lea time, the item becomes a slow mover because it’s replaced by another part
etc. – you will have to start from the beginning. By that time the Inventory
Optimizers are long gone. But don’t worry… they will come back in two years and
sell you a new project.
So what should you do? Implement Effective Materials Planning with
portfolio management, automated policy setting on a periodic basis, continuous
exception monitoring within the framework of the Exception Minded Business and
Inventory Optimization will be the byproduct of an automated process that will
become second nature to your MRP Controller.
Automation is key here, and so is ‘managing by exception’. If you
have to look at each item every day and set up each item manually, you will not
be able to keep control over your inventory and service levels.
Demand and Supply Profiles
In any supply chain, we are using a planning hierarchy to transfer planned demand and balance supply with requirements on its various levels. A good understanding about what's happening at each level is essential to strike an effective balance of service and inventory levels.
Policy setting is at the heart of this task and the planner has to carefully evaluate when to perform a capacity check, requirements netting and the generation of supply elements.
This video strives to provide a basic model for demand and supply planning using profiles that are available in standard SAP ERP
http://www.youtube.com/watch?v=s58KLTYwrF0&feature=c4-overview&list=UUcNy4oxKL3pwqDNSbN3tvCg
Policy setting is at the heart of this task and the planner has to carefully evaluate when to perform a capacity check, requirements netting and the generation of supply elements.
This video strives to provide a basic model for demand and supply planning using profiles that are available in standard SAP ERP
http://www.youtube.com/watch?v=s58KLTYwrF0&feature=c4-overview&list=UUcNy4oxKL3pwqDNSbN3tvCg
Sunday, September 1, 2013
measuring service levels in SAP
To measure service with SAP software is not a simple task. Mostly because there really isn't a standard report, but also because there are so many factors that play a role in the calculation of a service rating and if these are not all lined up correctly and used properly... then it is nearly impossible to correctly determine if the service was ok or not.
One of the most important decisions to take is the MTO versus MTS one. If an item is designated to be replenish by MTS, the customer order (or stock transport order) has to check for stock and incoming receipts, whereas in an MTO scenario the availability check uses the Total Replenishment Lead Time to determine the confirmed date for delivery. If you don't classify your products by MTO or MTS on a regular basis, you simply can't set a reasonable confirmation date against which you would measure your service. And that will result in an incorrect report.
Another important feature is whether or not you fix dates and quantities in the delivery proposal. I've dealt elaborately with this issue in my video on YouTube SAP Availability Checking Options and you can see there what happens when you leave the the fixing indicator unchecked and what happens when you do not (broken down into four possibilities for MTO and four for MTS). The video also explains functionality around confirming delivery dates and that leads me to talk about what we should actually measure against...
SAP has created an Add-On tool called the "Service Level Monitor" which measures three KPIs:
- Delivery Service which measures whether or not the requested quantity was delivered in ful on the customer's requested delivery date
- Delivery Ability which measures if the requested quantity was confirmed on the customer's requested delivery date
- Delivery Reliability which measures against the confirmed date and shows what proportions was delivered in full to that date.
These measures work for both MTO and MTS since they go after the confirmed dates. The Delivery Ability then measures how good we produced to a forecast and therefore works well for MTS products. In a way you can also derive a measure for forecast accuracy on that KPI.
It should become obvious now that if the MTS versus MTO decision hasn't been done properly or if the availability check result is not saved correctly, the resulting KPI's and measures are not very meaningful. It is therefore imperative to fix the process first, before you start measuring the result.
SAP offers Add-On tools that can help you with a number of things that aren't available in the standard suite. The MRP Monitor helps you calssify your products for a a segmentation by consumption variability, replenishment lead time and more... so that you can periodically check whether your product should be setup for MTS or MTO. It also helps you set that policy in an automated way...
One of the most important decisions to take is the MTO versus MTS one. If an item is designated to be replenish by MTS, the customer order (or stock transport order) has to check for stock and incoming receipts, whereas in an MTO scenario the availability check uses the Total Replenishment Lead Time to determine the confirmed date for delivery. If you don't classify your products by MTO or MTS on a regular basis, you simply can't set a reasonable confirmation date against which you would measure your service. And that will result in an incorrect report.
Another important feature is whether or not you fix dates and quantities in the delivery proposal. I've dealt elaborately with this issue in my video on YouTube SAP Availability Checking Options and you can see there what happens when you leave the the fixing indicator unchecked and what happens when you do not (broken down into four possibilities for MTO and four for MTS). The video also explains functionality around confirming delivery dates and that leads me to talk about what we should actually measure against...
SAP has created an Add-On tool called the "Service Level Monitor" which measures three KPIs:
- Delivery Service which measures whether or not the requested quantity was delivered in ful on the customer's requested delivery date
- Delivery Ability which measures if the requested quantity was confirmed on the customer's requested delivery date
- Delivery Reliability which measures against the confirmed date and shows what proportions was delivered in full to that date.
These measures work for both MTO and MTS since they go after the confirmed dates. The Delivery Ability then measures how good we produced to a forecast and therefore works well for MTS products. In a way you can also derive a measure for forecast accuracy on that KPI.
It should become obvious now that if the MTS versus MTO decision hasn't been done properly or if the availability check result is not saved correctly, the resulting KPI's and measures are not very meaningful. It is therefore imperative to fix the process first, before you start measuring the result.
SAP offers Add-On tools that can help you with a number of things that aren't available in the standard suite. The MRP Monitor helps you calssify your products for a a segmentation by consumption variability, replenishment lead time and more... so that you can periodically check whether your product should be setup for MTS or MTO. It also helps you set that policy in an automated way...
Once all factors are lined up you can use the Service Level Monitor to evaluate your orders by the three KPIs we discussed before:
feel free to contact me to discuss more....
Tuesday, June 25, 2013
Intelligent Policy Setting
In his newest white paper, Ed Pound from "Factory Physics" makes a number of excellent points, which I would like to discuss in this blog post. Factory Physics is a book written by Spearman and Hopp and has 'cult status' when it comes to making sense of supply chain behavior. As we SAP supply chain people all know (but too often ignore), it is imperative to make those customization and implementation decisions without a sound understanding of key principles and implications resulting from policy setting and the subsequent behavior of our supply chain (inventories go up - or down, missing - or ample - capacity, service levels).
Ed Pound talks about moving production from China back to Mexico, because the wages aren't that different anymore, and because of shorter lead times one can reduce inventories (or range of cover) and therefore save cost to be more competitive. But he does not just leave it at that. What I really like about his white paper, is that he not only points out the opportunity to use more effective policy, but also mentions that policy setting is not enough... you also have to execute it! And here is where many fail... sadly so!
Looking at Ed's whitepaper we can see that just by shortening their supply chain, the company that moves from China to Mexico can increase their service levels, while holding the same inventory.
But look at the opportunity to reduce inventory!
As Ed Pound puts it: "The company would be much better off where ever they buy parts by making sure they use the policies currently in their ERP system. As shown by the red diamond (Predicted China) and the blue diamond (Predicted Mexico), the current system policies provide much better performance than is currently being achieved (brown diamond). This is a very common problem and points to the fact that most companies don’t have good control over the use of the ERP systems they already have in place."
I - and probably you too - couldn't agree more. Can you imagine if, not only would you have good control over using the policy that is in your SAP system - but also had a way to determine the perfect policy... even when the situation is changing!
power to the intelligent policy maker!
Ed Pound and Factory Physics have an incredibly useful website and the white paper I am talking about here can be found at
http://www.factoryphysics.com/documents/Shorter%20Supply%20Chains%20How%20Much%20Better.pdf
I strongly suggest to sign up with "Factory Physics" and like to thank Ed Pound for his allowance to use his white papers and other intellectual property.
Ed Pound talks about moving production from China back to Mexico, because the wages aren't that different anymore, and because of shorter lead times one can reduce inventories (or range of cover) and therefore save cost to be more competitive. But he does not just leave it at that. What I really like about his white paper, is that he not only points out the opportunity to use more effective policy, but also mentions that policy setting is not enough... you also have to execute it! And here is where many fail... sadly so!
Looking at Ed's whitepaper we can see that just by shortening their supply chain, the company that moves from China to Mexico can increase their service levels, while holding the same inventory.
As Ed Pound puts it: "The company would be much better off where ever they buy parts by making sure they use the policies currently in their ERP system. As shown by the red diamond (Predicted China) and the blue diamond (Predicted Mexico), the current system policies provide much better performance than is currently being achieved (brown diamond). This is a very common problem and points to the fact that most companies don’t have good control over the use of the ERP systems they already have in place."
I - and probably you too - couldn't agree more. Can you imagine if, not only would you have good control over using the policy that is in your SAP system - but also had a way to determine the perfect policy... even when the situation is changing!
power to the intelligent policy maker!
Ed Pound and Factory Physics have an incredibly useful website and the white paper I am talking about here can be found at
http://www.factoryphysics.com/documents/Shorter%20Supply%20Chains%20How%20Much%20Better.pdf
I strongly suggest to sign up with "Factory Physics" and like to thank Ed Pound for his allowance to use his white papers and other intellectual property.
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