Driving Supply Chain Excellence with SAP Enterprise Inventory & Service-Level Optimization (SAP EIS)

Driving Supply Chain Excellence with SAP Enterprise Inventory & Service-Level Optimization (SAP EIS) (great idea, though... let's talk about it in some year's time)

Driving Supply Chain Excellence with SAP Enterprise Inventory & Service-Level Optimization (SAP EIS) Oslo, October 24, 2013

SAP Enterprise Inventory & Service-Level Optimization (SAP EIS) Jesper Waaben Solution Principal, Supply Chain Management, SAP EMEA October 2013

The Real-Time Supply Chain Real-Time Responsiveness Real-Time Collaboration Real-Time Monitoring Real-Time Distribution Real-Time Operations Create a great user experience Use SAP HANA for all supply chain applications Provide highly collaborative processes in the Cloud Offer mobile applications for highly automated business processes Extend capabilities for Demand Driven Supply Chain and Supply Chain Execution 2013 SAP AG. All rights reserved. Confidential 4

SAP Enterprise Inventory & Service-Level Optimization Overview

What makes inventory management tougher today? SKU proliferation Short product lifecycles Inaccurate forecasts Marketing promotions Late delivery penalties Off-shoring Supply variability Manufacturing variability In the life sciences industry, the number of SKUs has grown by 50% in just the past 7 years. In the high tech industry, product lifecycles have decreased over 65% in the past 15 years. In the manufacturing industry, over 40% of innovation services are now off-shored. 2013 SAP AG. All rights reserved. Confidential 6

What is inventory optimization? The science of calculating inventory targets To meet desired service goals At lowest total inventory cost possible Across the entire supply chain Inventory optimization should Calculate at the item/location/period level Bridge the gap between planning and execution Provide dynamic parameters to ERP and APO systems 2013 SAP AG. All rights reserved. Confidential 8

Inventory vs. Service Level Trade-Off Inventory Investment current 90 m optimized 30 m 25 m Reduced Inventory 85% 90% 95% 100% Service Level Better Service 2013 SAP AG. All rights reserved. Confidential 12

Inventory vs. Service Level Trade-Off Inventory vs. Service Level Trade-Off Service level improvement is typically accompanied by dramatically increasing inventory Optimized inventory locations and levels execution efficiency Material Inventory Reduced Inventory Service Level Better Service 2013 SAP AG. All rights reserved. Confidential 13

EIS Reduces Working Capital while maintaining or improving customer service Basic Supply Chain Example Optimal inventory targets - impact on your supply chain: Lower inventory levels Free up working capital Decrease financing charges Reduce storage and production requirements Enable the sale of higher value products Inventory Locations Prevent product shortages Increase operating margin Reduce firefighting / expediting of products Decrease open market purchases Increase sales Improve market reputation 2013 SAP AG. All rights reserved. Confidential 14

With SAP EIO, ConAgra realized higher margins, without missing service targets Industry: Consumer packaged goods Products/Services: Leading US food producer, offering name brand packaged and frozen foods, including brands such as Banquet, Egg Beaters, Healthy Choice, Hunt's, PAM, etc. Revenue: $12 billion Solutions: SAP ERP, SAP APO and SAP EIO Business Challenges Improve sales and earnings while cutting costs Migrate from 8 planning organizations to enterprise structure with single, unified strategy SAP EIO is Enabling ConAgra to Meet Aggressive Inventory Goals Objectives Best-in-class functionality for inventory optimization Support for supply chain planning at right level of granularity Ability to model production constraints, batch size requirements, bills of material, and variability factors Why SAP EIO? Record of reducing operating costs and working capital Integrated supply chain planning and governance infrastructure, minimizing need for custom interfaces Leadership in consumer packaged goods industry Benefits Significant cost reductions in inventory, expediting and transportation 20% reduction in days in inventory with improved service levels Enhanced capacity planning Improved productivity by automating manual processes 2013 SAP AG. All rights reserved. Confidential 15

Supply Demand Supply Chain Robust inventory planning is fundamental to supply chain success How much inventory do I need at my manufacturing plant? How much inventory do I need at my distribution center? Lead times Lead time uncertainty Time-phased BOMs, technology refresh cycle Schedule attainment variability Lot sizes, minimum order quantities Supply reliability Capacity restrictions Frozen production/planning periods Multiple, dynamic supply sources Service level targets Forecast Forecast error Forecast bias Intermittent demand Outlier sales or forecasts Customer segmentation policies Product lifecycle, new item introductions Internal and external demand 2013 SAP AG. All rights reserved. Confidential 17

SAP EIS Calculates & Provides Visibility into Supply Chain Uncertainty To simultaneously reduce inventory while holding service levels high you have to have visibility into all forms of supply chain uncertainty including demand, supply, production & lead times across the extended supply chain: Forecast Error Variability Forecast error Should reflect demand classification (frequent seller, intermittent, etc) other characteristics Should capture error and bias around forecasts across all relevant lags Service variability Should capture less-than-perfect service from internal replenishment points Service Variability Lead Time Variability Supply Quantity Variability Lead time variability Should capture variations in lead times due to natural, external forces Should not include the effects of expediting and advance order placements Supply quantity variability Should capture variations in received quantities due to natural, external forces Can also account for chronic over- or under-production 2013 SAP AG. All rights reserved. Confidential 18

Decrease Increase Inventory Level Supply Chain Inventory Positioning: One Size Does Not Fit All Effect of Variability on Inventory Positioning Even today most organizations still use a one size fits all strategy ignoring service level & variability As variability increases so should inventory levels to cover the uncertainty in the supply chain Variability Increases Most companies position too much on low variability items and not enough on high variability ones SAP EIS Adjusts the Mix of Inventory By adjusting inventory requirements to meet the variability of individual items across the supply chain we can reduce inventory while still improving service 60% 40% 20% 0% -20% -40% -3% -5% -12% 11% -18% -25% -6% -18% -30% -19% -40% -7% -16% -21% 2% -25% -33% 15% -31% -7% -35% 13% -19% -23% -28% -30% -30% -43% 13% -25% -10% 46% 8% 4% -14% -33% -60% 2013 SAP AG. All rights reserved. Confidential 19

SI&OP - Sales Inventory & Operations SAP EIS Business Process Evolution S&OP Sales, Inventory & Operations Setting optimal inventory targets across supply chain Perfect Order Fulfillment with Minimum Inventory Example ECC & EIS Sales (SAP ECC) Weekly Historical & Future Forecast Forecast error SAP EIS Capacity Inventory Targets Safety Stock Targets MRP (SAP ECC) Example APO & EIS Demand (SAP APO DP) Weekly Historical & Future Forecast Forecast error SAP EIS Supply ratios Capacity Inventory Targets Time varying Safety Stocks Supply (SAP APO SNP) 2013 SAP AG. All rights reserved. Confidential 20

SAP Sales & Operations Business taking S&OP to the next level Align and synchronize across all functions in an organization Sales & Operations Business Sales & Operations Inventory & Service Level Optimization Supply Chain Scenario Plan for real world supply chain complexities and uncertainties Leverage a unified model of demand, supply chain, and financial data analyze in real-time at any level of granularity or dimension Synchronize inventory deployment across extended supply chains Run rapid simulations and compare business scenarios including demand fluctuations, capacity constraints and inventory projections Financial Optimize the S&OBP process with real-time social collaboration S&OP Supply Demand Inventory Optimization 2013 SAP AG. All rights reserved. Confidential 21 SAP AG 2009. All rights reserved. / Test & Quality Management / Page 21

SI&OP Sales, Inventory & Operations SAP EIS Business Process Evolution S&OP Sales, Inventory & Operations Setting optimal inventory targets across supply chain Perfect Order Fulfillment with Minimum Inventory Example S&OP & EIS Consensus Demand (SAP S&OP) Demand Plan Forecast error Time varying Inventory Targets Safety Stock Targets Supply (SAP S&OP) Example ERP, APO & EIS SAP EIS Network Capacity Supply ratios Capacity Demand (SAP APO DP) Weekly Historical & Future Forecast Forecast error Time varying Inventory Targets Safety Stocks Inventory Targets Capacity Safety Stocks MRP (SAP ECC) Supply (SAP APO SNP/PPDS) 2013 SAP AG. All rights reserved. Confidential 22

Inventory deployment must be synchronized across extended supply chains to eliminate double-buffering Traditional Approach SAP EIS Stage S S S S S S 3 2 1 Single Stage Calculations: Isolated planning results in overbuffering of inventory at each stage Multistage Optimization: Coordinated planning eliminates over-buffering of inventory C C C C C C 2013 SAP AG. All rights reserved. Confidential 23

Increased Visibility into Inventory Drivers Identifying the different purposes for inventory at each stage provides insight into what drives inventory Pre-Build Stock Drivers: Time-varying Capacity Time-varying demand Sourcing ratios Changes in safety stock How SAP EIS Creates Value Mio 150 Safety Stock Drivers: Demand Demand uncertainty Lead times Lead time uncertainty Review frequency Service level targets Service times Cycle Stock Drivers: Review Frequency Demand Batch Sizes Mio 150 64 25 Pipeline Stock Drivers: Order Processing lead times Transit times Demand 27 34 Safety Stock Cycle Stock Pipeline Stock Pre-Build Total Inventory 2013 SAP AG. All rights reserved. Confidential 25

Master Uncertainty with SAP EIS by SmartOps Chemical Consumer Products Manufacturing Leading provider of supply chain management solutions deployed in the cloud, hosted, or on-premises Track record of delivering significant sustainable value to customers worldwide Pioneer in supply chain management research and innovation High Tech Life Sciences Distribution/Retail 2009 Solution extension: Enterprise Inventory Optimization (SAP EIO) 2013 Acquired by SAP 2013 SAP AG. All rights reserved. Confidential 27

EIS delivers tangible, near-term, and sustainable value Improve Customer Service Levels 5-10% increase in order fill rates and on time delivery 18-48% reduction in out of stocks and order lead time variability Reduced Inventory & Working Capital 11-30% reduction in inventory and working capital 18-41% reduction in inventory carrying and obsolescence costs Improve Planner Productivity 15-30% reduction in time used in expediting 10-26% reduction time spent on manual inventory planning processes Reduced Production & Distribution Costs 10-20% reduction in PPE and depreciation due to excess storage facilities 2013 SAP AG. All rights reserved. Confidential 28

Case Studies

Agenda Enterprise Inventory & Service-Level Optimization (EIS) Overview Customer Case Study: PPG Customer Case Studies Solution Overview Methodology Customer case Study: Pfizer Coordinate : Math and Multistage Inventory Use Case Questions Integration Overview Engagement Model Implementation and Time-To-Value 2013 SAP AG. All rights reserved. Confidential 30

With SAP EIO, Eastman Chemical Company optimized global inventory deployment Industry: Chemicals Products/Services: Global manufacturer of chemicals, plastics, and fibers. Leading producer of coatings, adhesives, specialty plastics, and cellulose acetate fibers Revenue: $5 billion Solutions: SAP ERP and SAP EIO Business Challenges Manage inventory and trade-offs to optimal inventory investment Minimize working capital while maintaining customer service Manage key stakeholders Elevate supply chain planning to the next level Eastman EIO Impact: Sustainable Inventory Gains Since SAP EIO Go-Live Objectives Enable forward look regarding inventory strategy Optimize material flow from raw material to finished goods Provide solid framework to support what-if analysis Why SAP EIO? Optimization of inventory profile simultaneously across entire network, from raw materials to finished goods Efficient, enterprise-scale optimization algorithms Characterizes variability sources from transactional data Proven record of success at leading chemical companies Benefits More than 10% reduction in inventory investment Facilitated collaborative S&OP process Improved planner productivity and visibility Built confidence in planning process 2013 SAP AG. All rights reserved. Confidential 31

With SAP EIO, Johnson & Johnson realized higher margins, without missing service targets Industry: Consumer products Products/Services: Well-know brands include Band-Aid bandages, Tylenol medications, Johnson's baby products, Neutrogena skin and beauty products, Clean & Clear facial wash, and Acuvue contact lenses Revenue: $61 billion Solutions: SAP ERP, SAP APO and SAP EIO Business Challenges Optimize existing spreadsheet-driven planning process Adopt standardized, dynamic approach for inventory planning with strategic visibility into inventory drivers SAP EIO integrates seamlessly with J&J s existing SAP platform Objectives Best-in-class inventory optimization without compromising on customer service levels Automate and synchronize inventory targets for business units Ability to plan ahead regarding inventory strategy for all items and locations across time Why SAP EIO? Proven record of success in the consumer products industry Automated, dynamic integration with existing SAP architecture Robust scenario analysis to help make strategic decisions Benefits Improved working capital and P&L results Same customer service level with 15-20% less inventory Improved customer satisfaction Protected service levels for traditionally under-stocked SKUs 2013 SAP AG. All rights reserved. Confidential 32

EIS Process: Inventory Use Cases

EIS Enhances Existing Supply Chain Processes Supply Chain 4 Business Strategy & Goals SAP EIS enables more robust Supply Chain : 1. Appropriately characterize variability 3 Review Performance Demand (APO DP) 1 2. Right size inventory targets 3. Review actual performance relative to targets 4. Tie business policies to corporate objectives Supply (APO SNP) Inventory (EIS) 2 2013 SAP AG. All rights reserved. Confidential 34

Accurately Quantify Demand Uncertainty, Forecast Accuracy and Bias with Demand Intelligence Frequent Demand Intermittent Demand Seasonal Demand Missing Data Outlier Detection Forecast Bias Legend = Actual sales = Demand forecast 2013 SAP AG. All rights reserved. Confidential 36

EIS Enhances Existing Supply Chain Processes Supply Chain 4 SAP EIS enables more robust Supply Chain : 3 Review Performance Business Strategy & Goals Demand (APO DP) 1 1. Appropriately characterize demand variability 2. Right size inventory targets Multistage coordination Modeling all forms of supply chain variability Time phased inventory targets Exception management workflow Supply (APO SNP) Inventory (EIS) 3. Review actual performance relative to targets 2 4. Tie business policies to corporate objectives 2013 SAP AG. All rights reserved. Confidential 39

EIS Enhances Existing Supply Chain Processes Supply Chain 4 SAP EIS enables more robust Supply Chain : 3 Review Performance Business Strategy & Goals Demand (APO DP) 1 1. Appropriately characterize demand variability 2. Right size inventory targets 3. Review actual performance relative to targets Supply (APO SNP) Inventory (EIS) 4. Tie business policies to corporate objectives 2 2013 SAP AG. All rights reserved. Confidential 43

EIS Enhances Existing Supply Chain Processes Supply Chain 4 SAP EIS enables more robust Supply Chain : 3 Review Performance Business Strategy & Goals Demand (APO DP) 1 1. Appropriately characterize demand variability 2. Right size inventory targets 3. Review actual performance relative to targets Supply (APO SNP) Inventory (EIS) 4. Tie business policies to corporate objectives 2 2013 SAP AG. All rights reserved. Confidential 45

Tie Inventory Levels to Corporate Objectives with Service Level Optimization Service Level Optimization Profit Optimization Common Target All product-locations set to the global service level objective ABC Segmentation Products grouped into like categories based on a single or multiple criteria (e.g. sales volume, gross margin, demand variability, etc ) Product groups receive differentiated service Global Target Optimization Service levels are set based on the unique characteristics of each demand stream Differentiated service levels are set to meet corporate service objectives with the minimum investment in inventory Service levels are set based on the unique characteristics of each demand stream The tradeoff between revenue generation and inventory investment is evaluated to determine optimal service level for each demand stream Basic Process Maturity Best Practice 2013 SAP AG. All rights reserved. Confidential 46

EIS Enhances Existing Supply Chain Processes Supply Chain 4 SAP EIS enables more robust Supply Chain : 3 Review Performance Business Strategy & Goals Demand (APO DP) 1 1. Appropriately characterize demand variability 2. Right size inventory targets 3. Review actual performance relative to targets Supply (APO SNP) Inventory (EIS) 4. Tie business policies to corporate objectives 2 2013 SAP AG. All rights reserved. Confidential 48

Questions

Thank You! Contact information: Jesper Waaben Solution Principal, SCM Center of Excellence, SAP EMEA +45 2923 3552 jesper.waaben@sap.com