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Inventory Balancing – Need of the hour

One of the primary goals for any supply chain is to improve customer service, which means high inventory availability. Maintaining high inventory is not possible in real time. Hence, planning and forecasting becomes extremely valuable to maintain optimum levels of inventory. But for Industries (service parts) with dynamic shifts in demand, maintaining optimum levels of inventory is not always feasible. There is always a chance of either a shortage or an overstock situation to occur.

Steps Involved in Inventory balancing

  1. The system will calculate the Excess/need based on certain formula & horizon which is mentioned in Inventory balancing parameter profile
  2. Then the system will carry out a cost benefit analysis based on the parameters & costs which are mentioned in the product master & inventory Balancing service profile
  3. Finally if the cost benefit analysis is successful, then the system will create a Stock transfer requisition

Prerequisites for Inventory balancing to work

In order for the IB service to work, there are four key data elements that must be maintained:

  • Bill of Distribution (BOD)

                                The BOD is a representation of an organization’s supply chain network – DCs are represented as either parent locations, intermediate parents or child locations.

BOD1.jpg           BOD2.jpg

  • Inventory Balancing Areas

An inventory balancing area consists of locations that can swap stock with one another. This way an individual location can belong to multiple areas.

BOD3.jpg

  • Inventory Balancing Profiles

        Inventory balancing profiles are assigned to each inventory balancing area. These profiles define the excess horizon, shortage horizon, percentage of excess/shortage to consider as well as the cost threshold.

Inventory Balancing Parameter profile.jpg

  • Transportation Lanes

The transportation lanes hold the parameters which are required for calculating stock transfer costs during cost benefit analysis.

TLanes.jpg

Inventory Balancing Logic

After the system calculate the excess & need, the inventory balancing function will match the highest excess with the highest need. It will do a cost benefit analysis. If the cost benefit analysis is positive, then the system will transfer the stock or else the system will match the highest excess with the next highest need.

IB logic.jpg

IB logic ex-1.jpg

If the cost benefit analysis fails between the locations B and F, then the system will try to create a stock transfer between Location B and G after doing a cost benefit analysis again. Thus the inventory balancing process continues in SPP.

Cost Benefit Analysis

The basic formula for the cost benefit analysis is

Benefit stock transfer costs > threshold value

The cost benefit threshold value is maintained in the service profile of inventory balancing. The system will calculate the benefit & also the cost and check with this threshold value.

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Stock Transportation Costs


STC = (Trans. Costs x ST Quantity) + (GI Costs x ST Quantity) + (GR Costs x ST Quantity)

Where STC is Stock transfer cost & ST is stock quantity

  • The transportation costs are maintained in the transportation lanes between the source location and destination location
  • The Goods issue & Goods Receipt costs are maintained in the product master of the product – GR/GI tab

GI & GR costs.jpg

Benefit

Benefit = Savings from reduced stock holding costs+ warehouse space savings (WSS)+ savings per prevented loss

  • The inventory balancing service calculates savings from reduced stock holding costs that can arise following inventory balancing if the inventory balancing service triggers a stock transfer. These savings from reduced stock holding costs are a part of the benefit that makes up the cost-benefit analysis. The values are maintained in Procurement and SPP DRP tab of product master

procurement costs.jpgholding cost.jpg

  • The WSS arise from the savings from the free-up of bins following a stock transfer of the inventory balancing quantity.

WSS = S x savings per free-up of a bin x number of free-ups of a bin

The respective values for calculating the warehouse space savings are maintained in the product master of the product.

WSS.jpg

Number of free-ups of a bin = inventory balancing quantity / average quantity of product per storage bin

WSS util.jpg

  • Savings per Prevented loss is the savings that can arise from the prevention by stock transfer during inventory balancing of a potential loss.

savings per prevented loss.jpg

This is  a factor with which the system multiplies the number of order items for which you are able to prevent a loss in order to determine the saving with regard to the prevented loss.


Thus the cost benefit analysis is performed in SAP APO SPP and eventually a stock transfer requisition is triggered. Thus the inventory balancing functionality works in service parts planning module in SAP.

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