What is Integrated Business Planning for inventory?
Integrated Business Planning for inventory positions inventory at the best locations to absorb forecast error / demand variability, and supply uncertainty while satisfying customer service level targets. The inventory application optimizes inventory targets using a set of algorithms to meet these goals at the lowest inventory cost possible for all locations across an entire supply chain, then provides these inventory targets directly to supply planning at the lowest level of granularity, that is, item-location-time.
Unlike single-stage solutions or other “supposedly” multi-stage solutions that cannot handle bill of materials, in Integrated Business Planning for inventory, the end to end multi-echelon model optimizes the internal service level(s) of each upstream stage and calculates its impact on each downstream stage using stochastic mathematics. This co-operative risk sharing typically results in each stage holding the right amount of safety stock and avoids the duplicate safety buffer in single-stage solutions (each stage provides perfect service level to the next) or other “supposedly” multi-stage solutions that do not model internal service level. Many variables on the customer side impact stocking levels, including:
- Simultaneous internal and external demand
- Time-varying demand including seasonal demand
- Errors in demand forecasting
- Over and under forecasting demand
- Outliers and unplanned spikes in demand
- On-time product delivery variability to customer warehouses
- Late changes in promotional/event plans, e.g., delayed execution, scope of planned items, modified type of promotion/event.
On the supply side, there are also many factors that can impact stocking levels, such as:
- Lead times
- Lot sizes
- Late shipments
- Frozen planning windows
- Multiple supply sources
- Seasonal supply sources
- Regulatory QA production holds
- Bill of Materials
These types of uncertainties multiply across the end to end supply chain network because of the inter-dependencies between suppliers, plants, warehouses, and customer sites. Inventory optimization helps manage that variability and uncertainty by right-sizing the safety stock held in the supply chain. Inventory optimization at the item-location-time period level of granularity drives more effective supply planning by reducing the number and severity of changes needed in execution relative to planning.
How does Inventory work within Integrated Business Planning?
While ERP, APO, Integrated Business Planning for sales and operations, and Integrated Business Planning for supply handle difficult deterministic math, Integrated Business Planning for inventory considers stochastic mathematics, or the variability and uncertainty in the supply chain. The Integrated Business Planning for inventory application optimizes internal service levels and inventory targets across the supply chain at an item-location-time period level of granularity to achieve customer service levels at the best possible cost, using inventory to most efficiently absorb risk. The Integrated Business Planning for inventory application can use the outputs from the Integrated Business Planning for demand application (forecast, forecast error, forecast bias), sets optimized inventory targets, which the Integrated Business Planning for sales and operations, and Integrated Business Planning for supply applications use. Setting optimized safety stock targets drives better supply planning. Also, the target inventory outputs in the Integrated Business Planning for inventory application allow proper compensation of uncertainty in Integrated Business Planning for sales and operations planning. In addition, the Integrated Business Planning for inventory application is linked to other applications within Integrated Business Planning to support management-level roll-up analytics to evaluate and prioritize improvement opportunities. This linking is typically done in a single planning area (single data model) and then does not require any movement of data.
The Integrated Business Planning for inventory application uses the same Excel-based user interface as other applications in Integrated Business planning. With the IBP-add in, you can create and run versions and scenarios and see the impact of inputs such as forecast accuracy, lead time, and supply uncertainty on inventory outputs.
How does Integrated Business Planning for inventory build the end to end supply chain network?
Integrated Business Planning for inventory uses the concept of a supply chain model. This supply chain model can be viewed using the Network Visualization chart in Analytics. The concept is also important to the understanding of how inventory optimization uses all inputs from all the elements of a supply chain to determine inventory recommendations for the entire supply chain. This model is built automatically by the inventory operators in real-time, using source data from the ERP and source systems – it is not manually built by any user. This supply chain model is a graphical representation of a supply chain network and the entities it contains. These entities, or nodes, represent supplier locations, customer locations, stocking and non-stocking locations. Nodes are linked by supply paths that represent the flow of inventory—either raw materials or finished goods.
In a typical supply chain model, a supplier node is where materials originate and a customer node is where finished products reach customers. In between supplier and customers, there are a number of other nodes that represent other locations where inventory resides as it flows from supplier to customer, such as manufacturing plants, warehouses, and docks. These points are either:
- Stocking nodes – any location where inventory is carried:
- Internal stocking nodes – have internal demand streams, for example a warehouse supplying raw materials to a manufacturing plant
- Customer-facing stocking nodes – have customer-facing demand streams, for example a location that supplies a store.
- Hybrid nodes – have both internal and customer-facing demand streams, for example, a location that ships finished goods to customer nodes, but also ships to an internal node to create multipacks
- Non stocking nodes – locations that do not hold any inventory, such as production plants or cross docks
- Process points – not physical locations, but logical points along the supply chain model where processing of inventory occurs, such as creation of Bill of Materials (BOMs).
Once the input data is provided, Integrated Business Planning for inventory operators can be run to create the network topology and then to determine the optimal amount of safety stock to carry at stocking locations across the supply chain. A visual representation of the supply chain can be displayed using the network visualization chart within the Analytics application. A true multi-echelon end to end inventory optimization must be able to:
- Create the supply chain network topology
- Propagate forecast and forecast error through the supply chain network (forecast error propagation is not MRP!) and handle multiple sources, time-varying bill of materials, etc.
- Optimize the internal service levels at the upstream stages
- Calculate the safety stock, inventory targets for each item-location-period taking into account all types of demand, service level, supply factors including inventory level decisions at the upstream stages and its impact downstream.
How to get more information on Integrated Business Planning for inventory use cases and best practices?
[February 03, 2020 update]: Read the book!
Save 15% on Inventory Planning and Optimization with SAP IBP when you use the code INVPO15 at checkout. Click on the link below.
[end of update]
Follow me on SCN! Follow Alexis Lozada on SCN! We plan on publishing a series of blogs on Integrated Business Planning for inventory to increase the knowledge material on Inventory Planning. I have a decade’s worth of experience in working with Supply Chain teams at many global companies in their successful adoption of inventory optimization and planning tools as well as directing the development of inventory optimization algorithms and inventory planning. Alexis has significant experience in leading the implementation of demand-driven supply chain projects in the Consumer Products industry. Here are some topics you may see in the future. Feel free to vote for your favorite topic or request one you do not see on the list.
- What are the different inventory operators and their use cases and inputs
- What are some of the key drivers of safety stock?
- What are the details of the Integrated Business Planning for inventory data model
- What are the best practices in calculating forecast error for safety stock?
- What are the different forms / components of inventory?
- What is a good process setup for inventory optimization and review?
- How can I setup network visualization chart for my planning area?
- What are some useful excel templates and planning views for inventory planning?
- How can I setup target service levels based on ABC classification
- How can I configure EOQ calculation and use in Inventory?
- How can I configure Inventory to use Consensus Demand from Integrated Business Planning for sales and operations?
- How can I track my current inventory investment versus the target inventory investment proposed by the Integrated Business Planning for inventory?
- How does Integrated Business Planning for inventory compare with the SmartOps solution acquired by SAP?
- What is a useful process to enable and audit planner over-rides?