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1 Introduction :

Sourcing do often ends up with a situation where in the planned supplies will run either for a shortage or for an over run. This often leads to a short fall of the allocated budgets. In any industry inventories plays a major role for the current assets and will become dead capital once they are procured if not properly flown to the customer in the final form .At the same time under run of the inventories cause severe sale problems, leading to the loss of business.

A match for the flow of sale and in house inventory will always improve the over all budget plan, there by increase in the ROI.

Most often Maximization policies fail due to unforeseen issues, causing planning cycle to get distorted and a disruption in the flow of the process of industrial manufacturing cycle.

The inventory flow can be optimized by incorporating proper monitoring process and by incorporating the necessary tools so as to see that at any point of time neither too much capital is invested Nor shortfalls.

SAP offers such tools in its pack, and in the forth going paragraphs these tools are discussed briefly.

2. The Process:

The inventory optimization can be done on the basis of the effective implementation of the below tools coupled with proper master data maintenance

Normally in Logistics master data includes

Material master data which will be maintained at MM01,

Vendor Master Data at XK01,

Source list and Info Record and if necessary Quota Arrangement at ME01, and ME11 and MEQ1 respectively etc FROM Purchasing side and

Customer Master at XD01, Customer Contracts at VA41, Sales conditions at VK31 towards Sales etc and

Bill of materials (BOMS) at CS01, Work Centers CR01, Routings at CA01, MRP details towards Production,

Inspection Plan QP01, Material specisifications at QS61 etc towards Quality management

Once the master data is properly set the SAP system will be ready for utilization of various manufacturing process for use and the systematic application of the module processing of the tools will bring a systematic and scientific flow of processes which will provide a statistical analysis and decision process, leading to correctness in managerial decisions .

Below discussed tools will be extremely useful in attaining the goals.

Demand Planning

Materials Requirement planning

Safety stocks

Lot sizes


Inventory Analysis:

2 A. Demand Planning :

Demand Planning is in turn finding out the demand for the sale .This can be done by using data available historically and by forecasting the requirements for a time span .The result of the demand planning can be utilized for Productional and Financial resources. If the variance between the forcast of sales and the actual customer demand is too big can cause stock outs.If the demand planning is is more than the actual customer requirement ,surplus inventoris can result .And hence accuracy of the demand plan lead to theefficiency of the stock management .

And hence the function of the Demand Management or Planning is to determine requirement quantities and delivery dates for finished products assemblies. Customer requirements are created in sales order management. To create a demand program, Demand Management uses planned independent requirements and customer requirements.In order to define the Demand Planning , we need to plan for Planning strategies which represent the methods for production planning or manufacturing or for procuring the product .The planning strategies in SAP like Make to Order or Make to stock Production or Planning with Final Assembly or Planning at Final Assemble level for the finished products are extreamly be useful for Demand Planning .

In Demand Management , one must need to think about the Planned Independent Requirements and Customer Requirement .

Planned Independent requirements are the results of the creation of planned quantities for a date or number of planned independent requirements for a schedule lines .In SAP these can be created at MD61.

Customer Requirements are  the sales orders in the system. A sales order is a contractual agreement between a sales organization and a sold-to party. A sales order contains information on the delivery of a quantity of materials (or service) for a certain date. Also these can be created manually at MD81.

2 B.Materials Requirement Planning:

MRP is one more important process in attaining the stock optimizing process .It focuses on the required materials for the planned and confirmed demand and plans for either internal or external procurement .The main fuction of this MRP is to gurantee the materials.availability .Diagramatically the process flow of MRP can be represent like this .


In order to find out the requirements and the procurement proposals various transaction codes can be used 

The following transaction codes are extremely useful for MRP.

Md01: For total planning

MD02: Multilevel Single-item planning

MD03: Single level single item planning

MD57: Planning table by MRP lists.

MD20: Create planning file entry

2 C.Safety Stock :

Safety Stock is one more concept in the stock optimizing cycle which will concentrate on the stock level to be kept as buffer so as to cover demand for the present as well as for future .Most often IM failes in the proper calculation of the safety stocks , there by increase in the Inventory or insufficient Inventory .The Lead Time will effect the safety stock .Normally the demand , lead time ,Invetory carriying costs and holding will be taken into consideration in finding out the safety stock .

In SAP , there is a concept of Minimum safety stock . The calcutaions for the safety stock is less than the minimum safety stock , system will consider the minimum safety stock maintained in the MRP 2 view of the material master .

2 D .Lot Sizes :

Lot Sizes play a good role in the optimizing the cycle.Lot sizes defined in the material master define optimized quantities for the procurement .In SAP , the provisions for Minimum Lot Size, Maximum Lot Size ,Rounding value are extreamly important for the procurement proposals . SAP will find the optimum lot size to propose for procurement during MRP .There are wide variety of Lot Sizes to get selected , for proper MRP run and for procurement proposals .

Lot Sizing Proposals include 1. Static Lot Sizing Proposals : In this the procurement quantity is calculated exclusively by means of the quantity specifications provided in the material master .These include Lot for lot order quantity ,Fixed lot size , Replenishment upto maximum stock level ,.

Lot Siizing Proposals Include 2. Period Lot Sizing procedures : In this the system groups several requirement which are there in a perticular period .like days ,Months etc.

Also the lot Sizing Proposals Include 3. Optimum Lot Sizing Proposals : In order to minimize the costs involved . system will find the shoratege quantity to represnt the minimum Order quantity ,and then adds successive shartage quantities to this lot size untill by means of the perticular cost Criterian , to estamiblish the optimum cost criteria .

There are many optimum lot sizing prosals are available like Part Period Balanacing ,Least Unit Cost procedure ,Dynamic Lot Sizing calculation ,Groff Reorder Point Calculation etc to get selected for the optimal lot size whichwill reduce the costs involved in procurement .

2 E .Production :

The logistics of production is a central functional area within the entire supply Chain. The largest portion of the value addition of a manufacturing company is generated within production logistics. All processes, such as procurement, and the process like distribution, are linked to production.

Products are produced and refined within Production. The value addition within production is what makes money. The essential goals of production are therefore short product lead times, low inventories, on-time deliveries, and a high degree of machine utilization and which has to lead to customer satisfaction.

Success factors that lead to a high degree of customer satisfaction are a long-term relationship with a customer through short delivery times and high delivery reliability. Short delivery times can be achieved by short product lead times, high delivery reliability, low scrap rates, and a high degree of capacity utilization. But, short product lead times and a high degree of capacity utilization are contradictory objectives.

The optimization of these goals is the focus of production planning and control. Production planning consists of all the essential planning tasks, such as the creation of

Master data, work scheduling, and the creation of a production program, as well as capacity leveling. Basically, production planning comprises all work that occurs prior to the actual production start. The production program determines the type and quantity of items to be produced. This applies to final products, semi finished products and subassemblies. The program is also used to define the most favorable production lots and procurement Quantities. The production dates (planned dates) and the order sequence are Defined in capacity scheduling.

2 F.Inventory Analysis:

With all the above tools the Generated inventories in the system needed to be classified and analyzed for their characteristics of mobility, consumption, cost etc. Proper analysis provides decisional data , which leads to a FEED BACK mechanism and  a corrective environment.

There are few tools available for the analysis.

ABC Analysis: The ABC analysis is an organizational procedure that can be used to classify large data quantities and values. The data can represent material or processes. In this method data is roughly divided into three classes A, B, and C.

Class A, Materials:The quantity portions of materials in Class A are usually approximately 5-10%,  in the total utilization while the value represents approximately 70-80%. These materials are the most important ones and have the biggest potential for optimization.

Class B , Materials:The quantity portion of materials in Class B is 15 -20%, and the value portion will be 15-20%.

Class C , Materials: Class C materials contains 70-80% of the total materials, and thus, C materials occur most Often. However, the value of 5-10% only is the smallest one. They mainly involve automatic processes in order to keep the costs as low as possible.

There are number of SAP Information System reports under Inventory Management provides environment for ABC analysis for its Graphical representation.

The broad classifications for such reports are

Material : MC.9,MC44,MC45 MC46 etc

Plant: MC.1, MC.2, MC.3, MC.4 etc

Storage Location: MC.5, MC.6, MC.7, MC.8 etc

MRP Controller: MC.D, MC.E, MC.F, MC.G etc


The profitability of any firm is a proportion of a perfectly monitored system of the input and the process and the output .Through out the cycle of the process before the final product reaches the customer, is the Cost of Inventory which plays the role as being a current asset .Of course inventory will become a devil, if not controlled through proper controlling mechanism, and is a necessary evil which has to be Optimized.

Though the other modules of industry involves, too in optimizing, the points which are discussed above play a vital role in doing so.Using the SAP provided core modules effectively coupled with proper master data and thus the analysis of produced data with a proper decisive environment will lead to a Optimized Inventory reducing the costs and a proper flow of materials through out the manufacturing cycle.

This is a brief representation of a very vast subject of Stocks or Inventory Optimization .Optimization is a continuous process in any industry .

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