A Five-Step Approach to Develop and Maintain an Operational Planning Model to Enhance Supply Chain Agility and Stability

Transcription

1 A Five-Step Approach to Develop and Maintain an Operational Planning Model to Enhance Supply Chain Agility and Stability Thomas Brassøe Stavanger October 22 nd 2015

2 First, a question: What makes planning value adding? 2

3 Detailed Planning Effort Can Be Futile Planning at a detailed level over a long horizon requires a lot of effort, and yet it does not improve quality Detail level Family level The higher you fly, the easier it is to see where to land Tom Wallace Detailed level Suicide Quadrant Near Far Time Source: Tom Wallace and Bob Stahl, Forecast Less and Get Better Results (T.F. Wallace & Co., 2007). We need to consider what level of planning is needed on short-term horizon and what is needed on long-term horizon. We call that the Planning Hierarchy 3

4 What We ll Cover Introduction: What makes planning value adding? Five enablers to stabilize operational planning How to support the process with SAP tools Wrap-up 4

5 The Planning Hierarchy Strategic, tactical, and operational processes must be linked together in one planning hierarchy Strategic planning 5 years Actual planning data, capabilities Sales & Operations Planning 3-18 months Tactical planning 1-3 months Operational planning 0-6 weeks Policies, rules, and parameters Timing is business-dependent and can change significantly, particularly within heavy industry 5

6 Generic Process Is the Same at All Levels The generic planning process, based on the SCOR model, is the same at all levels of the planning hierarchy Strategic planning 5 years Sales & Operations Planning 3-18 months Tactical planning 1-3 months Demand planning Update Capacities Inventory planning Balancing Communicate plans and actions Operational planning 0-6 weeks Timing is business-dependent and can change significantly, particularly within heavy industry 6

7 Moving Up Decisions in the Hierarchy In order to establish a stable operational process, we need to move up decisions in the planning hierarchy Strategic planning 5 years Sales & Operation Planning 318 months Tactical Planning 1-3 months Focus on setting the parameters right Operational Planning 0-6 weeks Focus on executing the plan, not to re-plan Timing is business-dependent and can change significantly, particularly within heavy industry 7

8 Five Enabler Processes on Tactical Level Ensure simplification of the operational processes Demand planning The generic planning process: The generic planning process is the same on all levels but with different detail level Update Capacities Inventory planning Balancing Communicate plans and actions The enablers work as input for the master planning process and should be run with a fixed frequency Most frequently, the enabler processes are run quarterly but this depends on volatility in demand and product portfolio volatility Service level agreement Stock points Segmentation Planning methods Safety stock calculation The service level agreement is a balance between service level and inventory Sales/ Marketing Operations SLA Finance Based on footprint, forecast accuracy, sales volumes, lead times, and SLAs, it can be decided where to stock different products Decisions regarding push/ pull are also part of this decision, and segmentation and planning methods should be considered as well A product segmentation helps perform differentiated planning based on the behavior of the products Different planning methods can be used based on segmentation: MTS: Make-to-stock for stable products ROP: Consumption-based for unstable products Cyclic: Cyclic plan for stable products with a high volume MTO/ETO: Make-to-order, engineer-to-order Stock that is held in excess of expected demand due to demand and/or supply variability

9 What We ll Cover Introduction: What makes planning value adding? Five enablers to stabilize operational planning How to support the process with SAP tools Wrap-up 9

10 Enabler #1: Service Level Agreement Service level agreement Stock points Segmentation Planning methods Safety stock calculation The service level agreement is a balance between service level and inventory Sales/ Marketing Operations SLA Finance Based on footprint, forecast accuracy, sales volumes, lead times, and SLAs, it can be decided where to stock different products Decisions regarding push/pull are also part of this decision, and segmentation and planning methods should be considered as well A product segmentation helps perform differentiated planning based on the behavior of the products Different planning methods can be used based on segmentation: MTS: Make-to-stock for stable products ROP: Consumption-based for unstable products Cyclic: Cyclic plan for stable products with a high volume MTO/ETO: Make-to-order, engineer-to-order Stock that is held in excess of expected demand due to demand and/or supply variability

11 SLA Is the Basis for All Requirements The SLA towards the customer forms the basis for all requirements for the supply chain Supplier Production Warehouse Distribution center Customer S We need to determine: What is the expected lead time for customers? What is the target service level? Is it the same for all products/customers? External SL = XX% LT = y C 11

12 How Do We Set the Service Level? The Optimal Level of Product Availability Product availability is one of the most important factors when managing inventories Product availability (also referred to as the Customer Service level or Service Level) is the indicator for the amount of customer demand satisfied from available inventory and is measured by the Cycle Service Level or the Fill Rate Determining the appropriate service level In theory, the exact service level can be calculated by an equation based on: The cost of overstocking the product, which consists of the loss for every unsold unit The cost of being stockout, which consists of the impact of the lost sales, including lost profit, lost goodwill, etc. Inventory cost In practice, however, this information is, in most cases, impossible to quantify, and thus, a subjective consideration of the trade-off between service level and inventory is made. Often, the following factors influence the decision: Service levels are predetermined by customer Inventory budget constraint Service levels need to reflect the company strategy 95% 97.5 % Service level 12

13 Simulating Service Level and Inventory When setting the right service level, we cannot ask Sales, but we can simulate the consequences of service level changes on the inventory We need a tool to simulate the service level and inventory based on a number of levers and parameters Initiatives that can impact the service and NWC balance Increase service level Decrease inventory The goal is to balance service level and inventory with an optimal business impact Demand variability Spike order procedure Model using a differentiated approach based on item characteristics Order sizes & cost price Transportation frequency Supply variability Number of variants Storage cost Criticality Lead time 13

14 Enabler #2: Stock Points Service level agreement Stock points Segmentation Planning methods Safety stock calculation The service level agreement is a balance between service level and inventory Sales/ Marketing Operations SLA Finance Based on footprint, forecast accuracy, sales volumes, lead times, and SLAs, it can be decided where to stock different products Decisions regarding push/pull are also part of this decision, and segmentation and planning methods should be considered as well A product segmentation helps perform differentiated planning based on the behavior of the products Different planning methods can be used based on segmentation: MTS: Make-to-stock for stable products ROP: Consumption-based for unstable products Cyclic: Cyclic plan for stable products with a high volume MTO/ETO: Make-to-order, engineer-to-order Stock that is held in excess of expected demand due to demand and/or supply variability

15 Decide Where to Stock Products Based on Footprint, Lead Times, and SLAs Supplier Production Warehouse Distribution center Customer S External SL = XX% LT = y C We need to determine: What is the required lead time for the customer in the supply chain? Is it the same for all products? What to do: Determine stock points based on LT requirements Create planning groups for each supply chain tier to enable segmentation 15

16 Enabler #3: Segmentation Service level agreement Stock points Segmentation Planning methods Safety stock calculation The service level agreement is a balance between service level and inventory Sales/ Marketing Operations SLA Finance Based on footprint, forecast accuracy, sales volumes, lead times, and SLAs, it can be decided where to stock different products Decisions regarding push/pull are also part of this decision, and segmentation and planning methods should be considered as well A product segmentation helps perform differentiated planning based on the behavior of the products Different planning methods can be used based on segmentation: MTS: Make-to-stock for stable products ROP: Consumption-based for unstable products Cyclic: Cyclic plan for stable products with a high volume MTO/ETO: Make-to-order, engineer-to-order Stock that is held in excess of expected demand due to demand and/or supply variability

17 Refrigerator Logistics A Simple Example of Differentiated Planning When we plan everyday tasks at home, we use practical and plain systems we make it simple and easy for ourselves How do we replenish our refrigerator? Milk and bread Cycle planning Every time we shop, we buy, e.g., two litres of milk and one package of bread These are the easy ones. By making a fixed cycle for shopping for these products, a great deal of the total variation in our shopping basket will be reduced. And since the need is stable, the risk of obsolescence is small. Pasta and eggs Reordering Some products only go in the basket once in a while, e.g., pasta, eggs, butter, and cold cuts The simplest way to plan these products is to establish a reorder point (e.g., when we only have two eggs left in the fridge). When the actual stock level decreases to below the reorder point, the product goes on the shopping list again. In practice, this is carried out by monitoring the stock level on an ongoing basis. Strawberries and champagne Make-to-Order/Manual Some products only go in the basket on special occasions, e.g., strawberries and champagne Regardless of their volume, these types of products will always be difficult to plan, and the most obvious solution is to choose not to carry them in stock in the refrigerator on a regular basis, but only buy them when a concrete need arises 17

18 Volume/Impact Segmentation Helps Group Entities into Manageable Groups and Enables Differentiated Planning To get the best possible planning, group the items into manageable groups: Segmentation is a well-known methodology used to define groups of entities with the same characteristics When defining a planning concept, it is important to group items into groups that can be planned according to their characteristics For planning purposes, the most important characteristic is the predictability/stability of the demand for an item. This is important because the more predictable/stabile the demand is, the easier it is to plan. The second characteristics should be impact. The impact characteristic can be different depending on industry, but typical examples would be number of lines, capacity consumption on bottleneck, lead time, etc. When products have been grouped together, a planning concept can be defined per group The output from the segmentation model should be a set of planning principles High Low Low predictability, e.g., Tenders and new products, etc. Low Medium predictability and high volume/impact Low volume/impact Stability/predictability High predictability, e.g., Highrunners High 18

19 Segmentation Helps Group Entities into Manageable Groups High C B A Volume/Impact Low predictability, e.g., Tenders and new products, etc. Medium predictability and high volume/impact High predictability, e.g., Highrunners Low volume/impact D Low Low Stability/predictability High 19

20 Enabler #4: Planning Methods Service level agreement Stock points Segmentation Planning methods Safety stock calculation The service level agreement is a balance between service level and inventory Sales/ Marketing Operations SLA Finance Based on footprint, forecast accuracy, sales volumes, lead times, and SLAs, it can be decided where to stock different products Decisions regarding push/pull are also part of this decision, and segmentation and planning methods should be considered as well A product segmentation helps perform differentiated planning based on the behavior of the products Different planning methods can be used based on segmentation: MTS: Make-to-stock for stable products ROP: Consumption-based for unstable products Cyclic: Cyclic plan for stable products with a high volume MTO/ETO: Make-to-order, engineer-to-order Stock that is held in excess of expected demand due to demand and/or supply variability

21 For Each Group, We Can Now Determine the Correct Planning Principle High C B A Volume/Impact Manual planning/ MTO Lumpy ROP Handshake for phase-in and phaseout Reorder Point MRP Reorder Point MRP Cycle planning Master Planning MRP D Low Low Stability/predictability High 21

22 MRP Driven by Forecast Can Cause Plan Variability Due to the Actual Consumption Variance due to forecast consumption The actual sale is different than the forecast in most time buckets. When an unconsumed forecast is cleaned/deleted or in case of overconsumption, the first planned order outside the PTF will be adjusted upwards. This creates variance in the short-term. The impact of this can be reduced by increasing the period for which the actual demand is allowed to consume the plans. However, increasing this horizon will reduce the ability to react to changes. Planning time fence Planning time fence Planned orders Forecast The actual consumption is lower than the plan. The planned production has already taken place and, therefore, the next planned order outside the planning time fence is reduced. Planned orders Forecast The actual consumption is higher than the plan. The planned production has already taken place and, therefore, the next planned order outside the planning time fence is increased. 22

23 Even Small Incremental Updates in the Forecast Can Cause Plan Variability Variance due to fluctuations in the forecast When the forecast is updated, the plan is changed for the entire horizon. The next time the forecast is updated, the plan changes again. This creates variance on the short and long-term. Planning time fence Planning time fence New forecast qty Previous forecast qty Planned orders Forecast Production is planned according to the current forecast Planned orders Forecast New plan order qty Even small incremental changes to the forecast will update the plan The changes to plan orders will be affected by lot sizing rules and will spread backwards in the supply chain causing bullwhip effect in lower BOM levels 23

24 Master Planning/Cycle Planning From Stable Stock to Stable Production Planning time fence Stock Planning time fence Production Demand Production Demand Initial stock 2 Initial stock 2 Demand Demand Production Production Stock impact Stock impact A fixed quantity is placed every week based on the coming 6 months average demand. The plan is only changed if the stock is becoming higher or lower than the control limits set for the stock. This way, the variability is shifted from the production plan to the stock level. By only selecting products with high volume and with low variance, the risk of stock obsolescence is minimal. The fixed volume should be based on the demand a certain period ahead. The longer horizon the average is based on, the less responsive the plan is to the actual demand and the fewer changes will be necessary and vice versa. 24

25 Reorder Point Products Are Procured According to a Simple Calculated Reorder Point ROP stock point definitions and principles Stock qty In order to cope with demand variance and lead time, a stock point will normally have a buffer stock and a trigger point Trigger point: The point where an order should be placed if it should arrive when buffer stock is reached Buffer stock: Covers the uncertainty in demand during lead time Order is placed Lead time Order is received Time The buffer stock covers the uncertainty in demand in lead time and depends on the demand variability, lead time, service level, and stock supply order size The trigger point represents the stock level where a purchase order should be placed for it to arrive when the buffer stock is reached. The trigger point is equal to the buffer plus the expected demand in lead time. The control principle determines whether it is the trigger point or the buffer stock that is entered in the ERP system. If an order should be placed only based on actual stock level, a reorder point is set. If the system should calculate the trigger point based on the Demand Plan, a safety stock (or coverage profile) is set. Finding the size of the control parameters depends on the demand variance 25

26 Using Consumption-Based Strategies, the Normal Capacity Planning Process Must Be Changed MD04 lists will not contain orders for consumption-based materials In the MD04 stock requirement lists, no planned orders for reorder point and make-to-order materials outside the lead time will exist There will be planned orders only for cycle planned materials... So the capacity overview (CM01) will not show full load This means that the capacity view in ERP (CM01) will not show a full capacity load Load 100% MTO ROP Plan based Week 26

27 Alternatives for Capacity Planning and Vendor Forecast When Using Consumption-Based Planning In APO simulation versions and R/3 Long-Term Planning, plans can be generated for consumption-based materials... MRP can generate simulative plans also for ROP and MTO materials The demand from APO can be released as a forecast into a demand management version for LTP In LTP, the stock requirements list (MS04) will contain simulative orders for consumption-based materials This means that in the LTP module and APO, a full capacity load can be shown for all materials Forecast can be created for suppliers for all materials regardless of planning method... And the capacity can therefore be evaluated in the LTP capacity overview (CM38) or in APO 100% MTO ROP Plan based Load Long-Term Planning Week SAP ERP SAP SCM-APO SAP BW Operational Planning Planning scenarios Release of demand forecast LTP Capacity Planning Purchasing info system Capacity planning Reporting (vendor forecast, etc.) 27

28 Receipts Receipts Demands Demands Receipts Receipts Demands Demands Component Plans Can Be Copied from the Simulation Version Active version ROP ROP Simulation version ROP FG FG Production orders Production orders Planned orders Production reservations Production reservations COMP COMP Purchase reqs/strs Purchase reqs/strs 28

29 Segmentation Is Used to Control Planning Differently at Different Stages in the Supply Chain Control principles Based on the segmentation and the different stages in the supply chain, control principles can be applied The control principles can be assigned considering the supply chain structure and the general principles of segmentation PUSH strategy can be assigned to predictable high-volume products PULL/consumption-based strategy can be assigned to unpredictable products PULL/MTO strategy can be assigned to very unpredictable products Vendors: Production: Distribution Centers: MRP Master plan/cycle planning MRP A ROP Plan/ROP MRP B ROP/Order ROP/MTO MRP C Implementation direction 29

30 Enabler #5: Safety Stock Calculation Service level agreement Stock points Segmentation Planning methods Safety stock calculation The service level agreement is a balance between service level and inventory Sales/ Marketing Operations SLA Finance Based on footprint, forecast accuracy, sales volumes, lead times, and SLAs, it can be decided where to stock different products Decisions regarding push/pull are also part of this decision, and segmentation and planning methods should be considered as well A product segmentation helps perform differentiated planning based on the behavior of the products Different planning methods can be used based on segmentation: MTS: Make-to-stock for stable products ROP: Consumption-based for unstable products Cyclic: Cyclic plan for stable products with a high volume MTO/ETO: Make-to-order, engineer-to-order Stock that is held in excess of expected demand due to demand and/or supply variability

31 Understanding Demand and Supply Variability Is Important to Estimate Safety Stock And to Reduce It Quantity ROP Safety stock 3. Supply variability (order size) LT 1. Demand variability during lead time Time Demand and supply variability/unpredictability: 1. Demand variability during lead time. The safety stock has to cover the demand variability during lead time. Longer lead time leads to higher safety stock. The demand variability is measured as Mean Absolute Deviation from forecast during lead time. 2. Lead time variability: Total replenishment lead time for supply can vary due to delays in production, transport, quality control, etc. Higher lead time variability leads to higher safety stocks. The lead time variability is measured for a group of materials. A good way to understand what drives the lead time variability is to measure plan adherence and register why changes occur. 3. Supply variability (order size). The supply can vary due to component stock out, capacity issues, production variability, quality issues, etc. Higher supply variability leads to higher safety stocks if the order size is lower than demand during lead time plus safety stock. 2. Lead time variability 31

32 C(V) Variance The Root Cause of Variance Is Essential in Finding the Right Way to Cope The categorization matrix used for facilitating decision making High Stable/Predictable: Products in this box do not raise any forecast or inventory control issues. Use normal distribution. Erratic Erratic: Use normal distribution with spike order procedures and reduce possible bias. In special cases, a gamma distribution is used. 60 % Intermittent: Products characterized as having low variance and low and infrequent volumes. Use normal distribution. Lumpy: Products that can be put in this box are the most difficult to manage. Use compound Poisson distribution with spike handling procedures. For lumpy items, we can further segment the materials into subgroups with the same characteristics (viewpoint 7) Low Low Intermittent Stable/Predictable 8 lines/lead time High Lines/Lead time The cut-of-values are based on empirical experience 32

33 When Variance Is Low, the Safety Stock Can Be Found Using Normal Distribution When variance is low, use normal distribution Variance can be measured using either C(V) (the standard deviation relative to the mean) or MADP (Mean Absolute Deviation Percentage) Variance is considered low when C(V) in lead time is less than 60% or MADP is less than 50% The service level is expressed as the fill rate, meaning that it represents the share of demand quantity covered from stock The service level depends on demand variability, number of safety days, purchase/production order size and replenishment lead time Theoretically, a safety stock is calculated per material based on a target service level However, there are a number of advantages associated with setting safety stock days and calculation of service level: No 100% link between past and future MADP It is more intuitive and easier to implement due to the simplicity (fewer sets of safety stock days) It is easier to implement differentiated service levels, e.g., based on value, lines Direct link between forecast accuracy and service level Target Service Level Service Level Order Size Lead Time Variance Inventory Level 33

34 No. Frequency of months We Need a Special Inventory Model for Lumpy, Erratic, and Sporadic Materials For lumpy items, variance is driven by low volume. Use compound Poisson with spike order procedure. By setting a max-allowed order size, introducing a spike order procedure, and calculating an order size distribution, it is possible to simulate the relationship between safety stock and service level (using simulation tools such as Arena or AnyLogic) No. of sales order lines per lead time Maximum allowed order size = 3 x median Avr. Demand in medians MAX=RoP in medians RoP in medians 95% Avr. Stock in medians 95% RoP in medians 98% Avr. Stock in medians 98% 0,5 0,65 4 3,4 5 4,4 1 1,3 6 4,7 7 5,7 2 2,6 8 5,4 10 7,4 3 3,9 11 7,1 13 9,1 4 5,2 13 7,8 15 9,8 5 6,5 15 8, ,5 6 7,8 17 9, ,2 7 9,1 19 9, ,9 8 10, , ,6 6 5 No. of medians per order line 0, % 50% 25% 15% Even though the average stock may be low, the coverage is considerable when compared to the average demand in medians No. of lines per month The median is defined as the middle observation in a sorted list of observations The number of medians allowed to be covered from stock can be raised from 3 to any other multiple of the median. The stock needed to obtain the same service level will, however, increase significantly. The order size distribution can be adapted based on analysis of the actual order size pattern 34

35 What We ll Cover Introduction: What makes planning value adding? Five enablers to stabilize operational planning How to support the process with SAP tools Wrap-up 35

36 The Process Can Be Partly Automated by SAP Tools Calculation engine Input Data (ECC/APO) + Segmentation Parameter Calculation Service Level and Inventory Cost Simulation Update Parameters (ECC APO) Master Data Demand Data Replenishment Data Safety stocks and reorder points are calculated on the basis of predefined formulas Simulate Inventory Cost with different service levels Simulate Service Level with requested Inventory Cost Parameters are updated in SAP ECC Simulate Total Cost/Delta Cost with fixed service level LT Safety stock Service levels (fill rate) 20 days 10 days Purchase orders per year Variance % 100,0% 100,0% 100,0% 100,0% 20% 99,8% 99,7% 99,4% 98,8% 30% 99,2% 98,3% 96,6% 94,1% 40% 98,0% 96,0% 92,4% 88,2% 50% 96,6% 93,3% 88,0% 83,0% 60% 95,1% 90,4% 84,0% 78,8% 70% 93,5% 87,5% 80,5% 75,4% 36

37 New Values Can Be Evaluated in Simulation Before Approval SAP ERP SAP SCM APO New safety stock not approved Safety stock with alternative service levels Active Version 000 Actual Master data Inactive Version 100 Simulation Master data Inactive Version 200 Simulation Master data Actual planning Data (Stock, sales orders, fixed production) Actual planning data Actual planning data Actual planning data 37

38 SAP APO for Safety Stock Planning SAP APO for Safety Stock Planning can be used in combination with SAP BW or as sole system Segmentation Stock point determination Safety stock/rop calculation Planning BW APO 38

39 ... But Many Alternatives Exist! Stock point determination Segmentation Safety stock/rop calculation Planning BW APO Excel ECC IBP 39

40 What We ll Cover Introduction: What makes planning value adding? Five enablers to stabilize operational planning How to support the process with SAP tools Wrap-up 40

41 Your Turn! How to contact me: Thomas Brassøe 41