Component Inventory Strategy
Overview
Overview
1. Component Replenishment Introduction
2. Recommended Scenarios
3. Governance
4. Technical Background
5. Appendix
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Component Replenishment Introduction
Introduction
•
The overview section provides an introduction to the replenishment parameters available in SAP and how the
materials planner can leverage each option based on a particular business scenario
•
In addition, examples are provided to educate the viewer how replenishment works within SAP ERP, subsequently
allowing the materials planner to more effectively set the replenishment strategy on a regular cadence
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3
Inventory Strategy – FG to Component
Current State
Sales Order
Sales Orders
Safety Stock
Safety Stock
Safety Stock
Component Inventory
Production Planning
Finished Goods Inventory
Production
Assemble to Order
Production
Sales to production order
Forecast
Sales Orders
Safety Stock
Component Inventory
Production Planning
Finished Goods Inventory
Make to Stock
Production
Forecast
Safety Stock
Component Inventory
Sales to production order
Max between firm req.
and forecast
Production Planning
Title or Job Number | XX Month 201X
Sales Orders
/ Forecast
Finished Goods Inventory
4
Component Replenishment Overview
Introduction
An effective inventory strategy takes into consideration the SKU by assessing its replenishment parameters, lot size and service level. This document is intended to support the appropriate inventory parameter setting by
leveraging industry leading practices, XX specific inventory & production requirements, unique component/SKU characteristics, and all within the context of SAP’s capabilities. This sections provides an overview of all
the options and definitions of SAP replenishment and lot size settings that can be leveraged.
Parameter output
SAP MRP Type
V1/V2
Overview
• ROP replenishment with external requirements
(Consumption based planning)
VB/VM
• ROP replenishment (Consumption based
planning)
R1/R2
• Time phased (Consumption based planning)
VV
• Forecast based planning (Consumption based
planning)
PD
• Net requirements planning
MPS
• Master production scheduling
SAP Lot Size Strategy
Exact LOT Size (EX)
Fixed LOT Size (FX)
Fixed LOT size for customer specific order
(FK)
Replenish until max level (HB)
Groff Reorder Procedure
Part period Balancing
Periodic LOT Size
Least unit cost procedure
Replenish until Max Level
Dynamic LOT Size creation (DY)
Component Replenishment Overview
SAP MRP Type
Overview
V1/V2
• Standard ROP with external requirements
• If external rqmt in total horizon, the system takes reservation demand in next planning run (even if reservation demand is outside
replenishment LT)
• If within replenishment LT, the system does not include the reservation demand outside replenishment LT (until 2 weeks)
VB/VM
• SAP checks whether the available stocks are below the Reorder Point that has been set for the material and will create procurement
proposal if they are
R1/R2
• Historical data is also used in the material forecast to estimate future requirements. However ,in this procedure, the planning run is
only carried out according to pre-defined intervals
• If a vendor always delivers a material on a particular day of the week, it makes sense to plan this material according to the same
cycle, in which it is delivered
VV
• Like reorder point planning, forecast-based planning operates using historical values and forecast values and future requirements are
determined via the integrated forecasting program. However, in contrast to reorder point planning, these values then form the basis
of the planning run. The forecast values therefore have a direct effect in MRP as forecast requirements
PD
• PD is deterministic and therefore, in its purest form, waits for demand before it springs into action. If there is demand and the MRP
run gets executed, a supply proposal is generated to cover that demand.
MPS
• MPS is used for critical level or single level planning. Planning time fence is a must for MPS.
• In The MPS, the company level critical components are planned and in the materials master, the MRP type is chosen accordingly, this
is generally done for single level.
Component Lot Size Strategy - Overview
SAP LOT Size Strategy
Overview
Exact LOT Size (EX)
• System will create a planned order equal to demand or req qty as a single planned order
Fixed LOT Size (FX)
• Say fixed lot size 10. If demand is 100 when MRP run system will create 10 planned orders due to fixed lot size of 10.
Fixed LOT size for customer
specific order (FK)
• Static LOT size
Replenish until max level (HB)
• if you want to fill the stock up to the highest possible level or if you can only store a certain quantity of a material due to the
container size. This applies to a tank, for example. The capacity of the tank determines the maximum stock level.
Groff Reorder Procedure
• The Groff reorder procedure is based on the fact that additional storage costs are equal to the saving in lot size independent costs
according to the classical lot sizing formula for the minimum costs. Additional storage costs resulting from an increase in the lot size
are, therefore, compared with the resulting savings in lot size independent costs.
• The storage cost is generally needed when your lot size is splitted u have to mention storage cost indicator in OMI4.genrally fixed
lotsize will not require storage costs.
Part period Balancing
• The part period balancing procedure adheres to the "classic" lot size formula for the minimum costs whereby variable costs (storage
costs) are equal to the lot size independent costs.
Periodic LOT Size
• These are periodic lot sizes and will be used when you want to procure material on a periodic basis…one planned order.
• These LOT sizes are defined as: Hourly, Shift, Daily, Weekly, Bi Weekly, Monthly, and Quarterly
Least unit cost procedure
• Starting from the shortage date, successive requirements are grouped together to form lots until total costs per unit reach a
minimum level. The total costs are equal to the sum of the lot size independent costs plus the total storage costs.
Replenish until Max Level
• Replenish up to max stock level, when a replenishment proposal is created, system will replenish until the max stock level
Dynamic LOT Size creation
(DY)
• Starting from the shortage date, successive requirements are grouped together to form lots until additional storage
costs become greater than lot size independent costs
• In that the system will not give procurement proposals until the time the ordering cost justifies the inventory carrying cost.
Examples
Sales to Production Order
Component Replenishment
Supplier Delivery
Component STR
PR to PO at Del Rio
SAP Function
Replenishment Key Dates
STR/STO
Production Order
STO DR to ACUNA
Goods Receipt/Issue Date
(Del Rio)
Sales Order
Planned Order
Production start date
Goods Receipt Date
(ACUNA)
Loading Date
Material Availability Date
(Del Rio Facility)
Delivery Date
Goods Issue Date
Transfer time Pick pack time Load time
ACUNA to DR
Transport time
8
ROP Planning
ROP, simply put will replenish when current real time
demand causes the OH inventory to dip below the ROP and
causing it to reorder to set lot size
Component Replenishment
Supplier Delivery
Component STR
Material: 35-996630-03
(Washer)
Production Order
PR to PO at Del Rio
SAP Function
Replenishment Key Dates
Production Order
STO DR to ACUNA
Production start date
Qty: 15
Released Start date: Today
Order
Released
OH: 25
Goods Receipt/Issue Date
(Del Rio)
Goods Receipt Date
(ACUNA)
Lot Size
ROP: 15
Safety Stock
Lead Time
ROP Planning w/ External Requirements
ROP with external requirements will take into account
future demand within replenishment lead time and
replenish if that future demand will cause OH inventory to
dip below the ROP
Component Replenishment
Supplier Delivery
Component STR
Production Order
PR to PO at Del Rio
SAP Function
Production Order
Material: 35-996630-03
(Washer)
Qty: 15
Released Start date: 9/1
Order Released
Today
Replenishment Key Dates
STO DR to ACUNA
Production start date
OH: 25
Goods Receipt/Issue Date
(Del Rio)
Goods Receipt Date
(ACUNA)
Lot Size
ROP: 15
Safety Stock
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Lead Time
10
Net Requirements Planning
Component Replenishment
Supplier Delivery
Net requirements planning ensures components are
delivered to the facility by the production start date
(backwards scheduling).
Component STR
Production Order
PR to PO at Del Rio
SAP Function
Replenishment Key Dates
Production Order
STO (DR to ACUNA)
STO DR to ACUNA
Goods Receipt/Issue Date
(Del Rio)
Production start date
Goods Receipt Date
(ACUNA)
Start Date: 9/15/16
Qty: 15
Lead Time: 3 Days
Delivery start: 9/12/16
Lead Time: 10 Days
Purchase Order
PO to Start: 9/2/16
Delivery due date: 9/12/16
Qty: Lot Size
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Recommended Scenarios
Introduction
•
This next section will instruct the materials planning in how to set the appropriate replenishment and lot size strategy
based on the profile characteristics provided
•
Each of the 8 scenarios listed will have specific requirements to aid the planner in setting the appropriate strategy
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Component Replenishment and Lot Size Approach
1
2
Criteria
Replen
strategy
Batch Size
4
Criteria
Replen
strategy
Lot Size
• New part or phase out part
• Forecast driven
• PD (Net requirements planning)
• Dynamic Safety Stock
• Parent replen: PD
• Min Lot Size (Consistent with
MOQ)
• Replen to MAX (If limited
storage and high order cost)
•
•
•
•
•
‘B’ items
Established component
Med/High variability
Short lead time
Forecast driven
• PD (Net requirements planning)
• Parent replen: PD
• Dynamic safety stock
• Exact Lot Size
• Replen to MAX (If limited
storage and high order cost)
3
Criteria
•
•
•
•
Replen
strategy
• ROP (VB/VM)
• Statistical safety stock
• Parent replen: PD
Lot Size
•
•
•
•
Established component
‘B’ and ‘C’ items
Non demand driven
Low demand variability
Criteria
Established components
‘B’ and ‘C’ items
Med/High variability
Med to Long lead time
Forecast Driven
•
•
•
•
ROP (V1/V2) for ‘C’ items
PD with forecast for ‘B’ items
Parent replen: PD
Statistical & Dynamic safety stock
•
•
•
•
Biweekly (B item, LT < 8 weeks)
Monthly (B item, LT > 8 weeks)
Quarterly (C item)
Quarterly (High variability ‘B’/’C’)
Criteria
•
•
•
•
A item
Established part
Majority ATO
No forecast
• ROP (V1/V2)
• Parent replen: PD
• Statistical safety stock
Criteria
Replen
strategy
Biweekly (B item, LT < 8 weeks)
Monthly (B item, LT > 8 weeks)
Quarterly (C item)
Quarterly (High variability ‘B’/’C’)
5
•
•
•
•
•
Lot Size
6
• A item
• Established part
• Forecast driven
Replen
strategy
• PD (Net requirements planning)
• Dynamic Safety stock
• Parent replen: PD
Replen
strategy
Lot Size
• Exact LOT Size
• Replen to MAX (If limited
storage and high order cost)
Lot Size
• Optimizing or Exact Lot Size
Component Replenishment and Lot Size Approach
Criteria
1
Criteria
Replen
strategy
Batch Size
Product Lifecycle
Emerging
Differentiation – Reliability
Reliability
Volume
High
Criteria
Characteristic
Variants
Very Low
Product Lifecycle
Growth or Mature
Throughput constraints
DS and DP capacity
Batch Size
Medium
Variability
High
• PD (Net requirements planning)
• Dynamic Safety Stock
• Parent replen: PD
Differentiation
Reliability & Responsiveness
Demand
Volume
Medium
• Min Lot Size (Consistent with
MOQ)
• Replen to MAX (If limited
storage and high order cost)
Variants
Medium
Throughput constraints
Market demand
• New part or phase out part
• Forecast driven
Buffer
configuration
Decoupling
Points
Characteristic
• none
Infinite
Component Replenishment Strategy – Standard Approach
7
Criteria
Replen
strategy
Lot Size
8
Criteria
Replen
strategy
Lot Size
•
•
•
•
•
A item
Established part
Majority MTO/MTS
No forecast
Short lead time
• PD (Net requirements planning)
• Dynamic Safety stock
• Parent replen: PD
• Optimizing or Exact Lot Size
•
•
•
•
•
A item
Established part
Majority MTO/MTS
No forecast
Med to long lead time
• ROP (V1/V2)
• Parent replen: PD
• Statistical safety stock
• Optimizing or Exact Lot Size
Summary and Definition
1) Each of the 8 scenarios follows the general
logic provided by the decision tree
2) Once the definitions have been set, the
next step for the user is to segment each
component based on the 8 profile scenarios
identified in slides 20 and 21
3) Exceptions are to be managed on a case to
case basis, in the event that a lot size of
replenishment has to be adjusted due to
extenuating circumstances, then the
exceptions management process is where
each component/SKU and/or case will be
assessed individually
Replenishment Scenario
Scenario1
Criteria
Transition
• Item in phasing out
• Item is considered 14 months
or older
A Product
Sample: XXXNBL-1-CP
Total consumption value: $659,341 (Top 70% of inventory)
• New or transition component
• Forecast driven component
SAP MRP Type: PD
New Part
• Component just created or
has been existence for 4
months
Forecast driven
• Assemble to order
• Forecast drives material
requirements
Supplier Delivery
Component STR
PR to PO at Del Rio
Need Date
Component Forecast
Production Order
Start Date
• Warehouse inventory carries safety
stock to buffer against variability in
demand
• Production order and forecast drive
component material requirement
• PO to drive replenishment of
production and forecast requirement
Replenishment Scenario
Scenario 2
Criteria
• Item in existence between
months 5-14
Production Order
• Non demand driven
• Low demand variability
Qty: 15
Released Start date: Today
• Established component
• ‘B’ and ‘C’ item
Material: 35-996630-03
(Washer)
Established Component
Non Demand Driven
Order
Released
• Consumption based planning
• Forecast will not drive
material requirements
OH: 25
Low Demand Variability
ROP: 15
SAP MRP Type: VB/VM
Lot Size
• COV of historical demand is
less than 0.5
Safety Stock
‘B’ and ‘C’ item
• B – Next highest 20% by
consumption value
• C – Bottom 10% by
consumption value
Lead Time
• Everyday items with low demand volatility and low
consumption value support ROP replenishment
• PO is driven by inventory falling below ROP, future
demand plays no role in replenishment
Replenishment Scenario
Scenario 3
Criteria
• Established component
• ‘B’ and ‘C’ item
• Med/High Variability
Established Component
• Item in existence between
months 5-14
• ‘C’ item no forecast
• ‘B’ item, forecast drives
material requirements
• Med/Long lead time
• Forecast driven
SAP MRP Type: V1/V2 for ‘C’ item
SAP MRP Type: PD for ‘B’ item
Production Order
Approach
CBP vs. Forecast
Demand Variability
• COV of historical demand is
between .5 and 1 for med
• 1 and greater for high
‘B’ and ‘C’ item
• B – Next highest 20% by
consumption value
• C – Bottom 10% by
consumption value
Lead Time
• Med = 1 to 8 weeks
• Long = 8 weeks and higher
• C items, bottom
consumed value of all
inventory items with
high volatility and
med/long lead time
will leverage ROP
taking into
consideration
external production
orders (V1/V2)
• B items with
med/high volatility
and med to long lead
time will leverage
MRP Type PD with
forecast and
production orders to
drive material PO’s
Material: 35-996630-03
(Washer)
Qty: 15
Released Start date: 9/1
Order Released
Today
OH: 25
Lot Size / Min Order Qty
ROP: 15
Safety Stock
Lead Time
Supplier Delivery
9
Component STR
PR to PO at Del Rio
Need Date
Component Forecast
Production Order
Start Date
Replenishment Scenario
Scenario 4
Criteria
• Established component
Component lifecycle
• Established component for
items in existence from 5 to
12 months (can include phase
out parts)
• ‘B’ or ‘C’ item
• Short lead time
• Med/High variability
SAP MRP Type: PD
‘B’ and ‘C’ item
• B – Next highest 20% by
consumption value
• C – Bottom 10% by
consumption value
Lead Time
• Short lead time is defined as
PDT of less than or equal to 4
days
Demand Variability
• COV of historical demand is
between .5 and 1 for med
• 1 and greater for high
Approach
• ‘B’ and ‘C’ items
already in existence
with high demand
variability can be
countered by MRP
type PD only if the
lead is short (to
reduce risk of having
production order
placed within
replenishment lead
time)
Supplier Delivery
Component STR
PR to PO at Del Rio
Need Date
Component Forecast
Production Order
Start Date
Replenishment Scenario
Scenario 5
Criteria
• ‘A’ item
• Established part
Component lifecycle
• Established component for
items in existence from 5 to
12 months (can include phase
out parts)
• Forecast driven
SAP MRP Type: PD
‘A’ item
• A – Represents top 70% of
consumption value of
inventory
Forecast Driven
• Forecast drives component
material requirements
Approach
• An ‘A’ item would be
considered high
value, critical, and
historically shown as
‘high consumption’,
these are items one
will need to balance
between maintaining
leaner inventory
levels by supporting
demand
• ‘A’ items will be
driven by forecast
and production
orders to drive
material
requirements
• SS will be leveraged
to buffer against
variability in demand
Supplier Delivery
Component STR
PR to PO at Del Rio
Need Date
Component Forecast
Production Order
Start Date
Replenishment Scenario
Scenario 6
Criteria
• ‘A’ item
Component lifecycle
• Established component for
items in existence from 5 to
12 months (can include phase
out parts)
• Established part
• No Forecast
• SKU is mostly ATO
SAP MRP Type: V1/V2
‘A’ item
• A – Represents top 70% of
consumption value of
inventory
No Forecast
• Forecast does NOT drive
component material
requirements
Product segmentation
• Parent SKU is mostly ATO
(Assemble to Order)
Approach
• In the event forecast
is not driving
material
requirements at the
component level, the
strategy is to review
the parent SKU
product segmentation
• Assemble to order
items assume
components to be
readily available
when a sales order
comes in, this means
that component
inventory cannot be
lean and additional
buffer inventory must
be carried (i.e. ROP
w/ Safety Stock)
Production Order
Material: 35-996630-03
(Washer)
Qty: 15
Released Start date: 9/1
Order Released
Today
OH: 25
Lot Size / Min Order Qty
ROP: 15
Safety Stock
Lead Time
9
Replenishment Scenario
Scenario 7
Criteria
• ‘A’ item
• Established part
• Majority MTO/MTS (SKU)
• No Forecast
Component lifecycle
• Established component for
items in existence from 5 to
12 months (can include phase
out parts)
‘A’ item
• A – Represents top 70% of
consumption value of
inventory
• Short lead time
SAP MRP Type: PD
No Forecast
• Forecast does NOT drive
component material
requirements
Product segmentation
• Parent SKU is mostly MTO/MTS
(Assemble to Order)
Lead time
• Short lead time is defined as
less than or equal to 4 days
PDT
Approach
• In the event forecast
is not driving
material
requirements at the
component level, the
strategy is to review
the parent SKU
product segmentation
• MTO and MTS
suggests carrying lean
inventory, which SAP
MRP Type PD is good
for, however would
be ideal to carry for
components with
short lead time to
reduce risk against
sales orders placed
within replenishment
lead time
Supplier Delivery
Component STR
PR to PO at Del Rio
Need Date
Component Forecast
Production Order
Start Date
Replenishment Scenario
Scenario 8
Criteria
• ‘A’ item
• Established part
• Majority MTO/MTS (SKU)
• No Forecast
Component lifecycle
• Established component for
items in existence from 5 to
12 months (can include phase
out parts)
‘A’ item
• A – Represents top 70% of
consumption value of
inventory
• Med to long lead time
SAP MRP Type: V1/V2
No Forecast
• Forecast does NOT drive
component material
requirements
Product segmentation
• Parent SKU is mostly MTO/MTS
(Assemble to Order)
Lead time
• Med lead time is 1 week to 8
weeks
• Long lead time is >8 weeks
Approach
• In the event forecast
is not driving
material
requirements at the
component level, the
strategy is to review
the parent SKU
product segmentation
• MTO and MTS
suggests carrying lean
inventory, however if
the component
inventory is med to
long lead time, it
would be
recommended to use
ROP planning with
external
requirements instead
of PD (Net
requirements
planning)
Production Order
Material: 35-996630-03
(Washer)
Qty: 15
Released Start date: 9/1
Order Released
Today
OH: 25
Lot Size / Min Order Qty
ROP: 15
Safety Stock
Lead Time
9
Governance
Introduction
•
Playbook steps will need to be encompassed by a governance structure to ensure compliance to a standardized process
•
The governance structure will outline the roles, responsibilities, as well as the cadence of activities that are being
executed
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24
Governance and Controls – Proposed future state
Centralized development of
inventory policies /
strategy
SC General
Manager
SC
Manufact uring
Leader
SC Mat erials
and Fulfillment
Leader
Product
Product
Cat
Category
egory
Fulfilment
Fulfilment
Leaders
Leads
Cat
Category
egory
Analyst
Analystss
Cat egory
Mast er
Product ion
Planner
Supply
Supplyplanners
planners
for
forcat
category
egory
specific
specific
mat
erials
mat erials
Supply
Supply
planners
for
planners
for
sourced FGs
sourced FGs
Invent ory
Planning Lead
Supply
Supply
planners
for
plannersies
for
commodit
commodit ies
Plant manager
Shop floor ops
manager
Product ion
Product
Line ion
Lineors
Coordinat
Coordinat ors
Product ion
Product
Line ion
Line
Schedulers
Schedulers
Mat erials
Leader
Mat erial
Mat erial
coordinat
ors
coordinat ors

Global
Sourcing
Leader
Supply
Management
Lead
Cat egory
Demand
Planner
Summary
Cat egory DC
Cust omer
Experience
Leader
Raw and
Raw and
packaging
packaging
invent
ory
invent ory
planners
planners
Finished goods
Finished
goods
invent ory
invent ory
planners
planners

As a new inventory strategy is set in
place (i.e. replenishment, lot size
strategy supplier collaboration,
inventory safety stock, obsolescence,
etc.), a company wide approach will
need to be maintained to ensure the
strategy is properly adhered to
An organization with the brains at the
central planning level coupled with day
to day execution (arms and legs) at the
individual plants will best support
proposed inventory strategy
Governance and Controls – Proposed future state
Summary
SC General
Manager

SC Materials and
Fulfillment
Leader
Global Sourcing
Leader
Supply
Management
Lead
Supply
Supplyplanners
planners
for
forcategory
category
specific
specificmaterials
materials
Supply planners
Supply
planners
for
sourced
FGs
for sourced FGs
Inventory
Planning Lead
Supply planners
Supply
planners
for
commodities
for commodities
Raw and
Raw and
packaging
packaging
inventory
inventory
planners
planners
Fulfillment Data
Steward
Central IT
Finished goods
Finished
goods
inventory
inventory
planners
planners


The role of the data steward and central IT is
to ensure the master data is reflective of the
latest inventory strategy through data
maintenance and controls
As the inventory strategy is set at
ACUNA and the organization migrates to
a centralized decision making structure,
proper controls will need to be in place
to support new policies:

Replenishment strategy

Lot size strategy

Safety stock and ROP strategy

Obsolescence strategy
Key roles will need to be identified at
the central level to support temporary
governance & controls at NELA park
Key IT decisions will need to be made
regarding SAP roles
Technical Background
Introduction
•
This section is intended to provide a technical and strategic in depth view of inventory and materials planning
fundamentals
•
The reader will understand in more detail the specific differences between consumption based planning vs. net
requirements planning with regards to materials planning
•
The reader will also become educated with how to properly define the profile of each individual component based on
its unique characteristics (given the changing nature, i.e. consumption, capacity, usage across SKU’s, etc.…)
Title or Job Number | XX Month 201X
27
Component Decision Tree Overview
Introduction
Determining the most effective way of leveraging the replenishment strategy and lot size combination is to develop a decision tree to standardize an approach to setting inventory based on specific component
behaviours. The next set of slides provide a guideline to segment the component replenishment and lot size strategy based on the characteristics of the part, planning process, and lifecycle considerations.
Workings and example output
Replenishment strategy comes down to 2 major methods:
1) Consumption based planning – ROP planning, bases inventory
level on based historical data
2) Net requirements planning - Traditional MRP, purchases
inventory based on actual demand
Demand Driven
(Order and Forecast)
Yes
PD or MPS
Static
No
Low cost/High
volume/Low demand
variability
High cost/Short lead
time/leverages
forecast
Consumption based
planning
MPS
Seasonal
High order
cost/Negligible holding
cost/limited storage
No
VB/VM
V1/V2
VV
R1/R2
Standard ROP
ROP with external
requirements
(Sales Order,
Reservation, etc..)
Consumption
based forecast as
material
requirement
Time phased
Set delivery
schedules
Exact LOT Size
Old/Phase out material
Established material
New/Phase in material
Critical Part & Single
level planning
Yes
1)
2)
3)
4)
Lot Sizing is mainly based the following:
Product lifecycle (New, established, phasing out)
A/B/C stratification
Ordering and storage costs
Capacity
Yes
Periodic
No
Yes
Hourly to Quarterly Lot
Size
Replenish to MAX level
No
PD
Lead component < Lead of SKU
Compatible with MTO and MTS strategy
And/or SKU PIR forecast
Suitable with ATO applications
And/or ‘C’ or ‘B’ item replenishment
Static
•
•
•
•
High order cost
Negligible holding cost
Limited stockroom
Technical requirement
Periodic
• Demand driven/MTO
• Consumption based or
forecast BOM top level
• A item
• Planning, fixed order
delivery intervals
Optimizing
• A or B item
• Consumption based or
forecast BOM top level
• Limited stock room
• No fixed order/delivery
intervals
Exact LOT Size
Component Replenishment Strategy – Decision Tree
A simplified and sample decision tree delineates between choosing consumption based replenishment vs. traditional MRP
Demand Driven
(Order and Forecast)
Traditional MRP
Yes
PD or MPS
Consumption based
planning
No
Low cost/High
volume/Low demand
variability
High cost/Short lead
time/leverages
forecast
Consumption based
planning
Critical Part & Single
level planning
Yes
MPS
VB/VM
V1/V2
VV
R1/R2
Standard ROP
ROP with external
requirements
(Sales Order,
Reservation, etc..)
Consumption
based forecast as
material
requirement
Time phased
Set delivery
schedules
No
PD
Lead component < Lead of SKU
Compatible with MTO and MTS strategy
And/or SKU PIR forecast
Suitable with ATO applications
And/or ‘C’ or ‘B’ item replenishment
Component LOT Size Strategy – Decision Tree
A simplified and sample decision tree delineates between choosing between the various lot size strategies
Static
Seasonal
High order
cost/Negligible holding
cost/limited storage
No
Exact LOT Size
Old/Phase out material
Established material
New/Phase in material
Yes
Periodic
No
Yes
Hourly to Quarterly Lot
Size
Replenish to MAX level
Static
•
•
•
•
High order cost
Negligible holding cost
Limited stockroom
Technical requirement
Periodic
• Demand driven/MTO
• Consumption based or
forecast BOM top level
• A item
• Planning, fixed order
delivery intervals
Optimizing
• A or B item
• Consumption based or
forecast BOM top level
• Limited stock room
• No fixed order/delivery
intervals
Exact LOT Size
Component Definition Overview
Introduction
The very first step in the inventory parameter setting is to define the key component characteristics that support what lot size and replenishment strategy is needed. This means defining what is long lead time (opposed
to short), what is considered high variable item, how to define ABC, etc… The definition phase will require key inputs from the business and leading practices to form a guideline for this. Definitions for inventory
replenishment, lot size, and service level is defined in the preceding slides.
Workings and example output
Key Factors
Strategy
Lead Time
Replenishment strategy
Variability
Replenishment strategy
Stratification
Replenishment and lot size strategy
Usage Across SKU’s
Replenishment, Lot size, and Service level strategy
Product lifecycle
Lot size strategy
Carrying cost
Lot size strategy
Order cost
Lot size strategy
Capacity
Lot size strategy
Component Replenishment Strategy – Definitions
Methodology
Key Drivers
1
Lead Time
2
1
High
Med
Low
2
Variability
Lead time distribution
Variability - COV Analysis
3
Stratification
4
3
Consumption
4
Usage across SKU’s
Sales history
Sales history
Price
Month
1
Month
X
Month
X
Month
X
Month
12
Unit
Cost
25
100
350
75
44
$0.65
Total Consumption (1 Year): 594 X Price: $0.65
Consumption Value Analysis
SKU (ATO)
Sub Assy
Component
Usage Analysis
SKU 2 (MTO)
Component Replenishment Strategy – Definitions
Key Drivers
1
High
Low
Med
< 1 Week
1 to 8 weeks
Lead Time
2
Variability
3
Stratification
4
Usage across SKU’s
>8 weeks
Summary and Definition
• Current SAP definition of moderate to high lead time is defined as anything up to 8 weeks (Moderate) and those
greater than 8 weeks (High).
• Taking into account that most international shipments identified at XX are defined at 60 days or greater, 8 weeks
is an appropriate threshold
• Several factors play a roles in defining what short lead time is: 1) Given the multi level BOM setup between
child and parent, the overall replenishment lead time between sub-assembly and component will be
compounded, 2) In net requirements planning replenishment, if the sales order has moderate to high lead time,
there is a good chance it can be ordered within replenishment lead time which result in a material shortage
situation
• Therefore, this applies to externally procured components and their planned delivery lead time
• Lead time can be pulled from the material master in SAP (SAP ABAP table MARC)
Component Replenishment Strategy – Definitions
Key Drivers
1
Lead Time
Consumption
History
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Material123
10
25
36
150
233
22
57
99
88
102
160
455
119.8 124.69 1.04
Material234
33
25
36
77
99
44
57
99
88
102
110
105
72.9
Avg
Std
Dev
31.90
COV
0.44
2
Sample consumption history
Externally procured component
Variability
3
Stratification
4
Usage across SKU’s
•
500
450
400
350
300
250
200
150
100
50
0
COV 1.04
COV .44
0
2
Material123
4
Material234
6
8
Linear (Material123)
10
12
14
•
•
•
Linear (Material234)
•
Summary and Definition
Low demand variability is a great
fit for ROP replenishment due its
low volatile nature and low
stocking requirement
A key method of identifying
variability of consumption history is
to measure the data with a COV
analysis (Standard deviation /
Average)
Step 1: Extract Consumption history
from SAP ABAP (MVER table)
Step 2: Calculate average and
standard deviation of historical
demand
Step 3: Calculate standard
deviation/average consumption
Component Replenishment Strategy – Definitions
Key Drivers
Represents approx. Top 70%
of component population
1
A
Lead Time
Variability
C
B
• High consumption value, fast
moving materials (Pipe)
• Critical to operations
• Frequency count highest of all
material classifications
2
Represents approx. bottom 10%
of component population
Represents approx. bottom 20%
of component population
• Med consumption value, semifast moving material
• Frequency 2nd highest of all
classifications
• Low consumption value (i.e.
consumables, hardware) slow
moving items
• Count frequency the lowest of
all classifications
Summary and Definition
• Step 1: Consumption value is defined as the total consumption in a 1 year period * item price
• Step 2: All consumption values will be sorted by highest value to lowest and a running total will be calculated
for each material line
• Step 3: Running total range from 0 to ~70% will be ‘A’ stratification, range from ~71% to ~90% will be ‘B’
stratification, and range from ~91% to 100% will be considered the ‘C’ items
3
Stratification
Sample method of calculating consumption value
4
Usage across SKU’s
Material
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Price
123
10
25
36
150
233
22
57
99
88
102
160
455
$4.55
Consumption
Value
$6,538
234
33
25
36
77
99
44
57
99
88
102
110
105
$10.50
$9,187
555
2444
1500
3000
5000
3333
2777
5255
6667
7243
3000
2000 3700
$0.50
$22,959
Component Replenishment Strategy – Definitions
Key Drivers
1
Lead Time
MTO
ATO
SKU 1
SKU 2
SKU 3
Sub Assy 1
Sub Assy 1
Sub Assy 1
MTO
2
Variability
Sub Assy 2
3
Stratification
Sub Assy 3
Sub Assy 2
Summary and Definition
• The ‘usage across SKU’s’ methodology
is intended to support a replenishment
and service level strategy in the event
it is shared across 2 or more SKU’s with
differing segmentation and customer
designations
• This methodology is intended for ‘A’
components for replenishment analysis
that do not have forecast that drives
material requirements and all
components for service level analysis
• Rule 1: If the material is shared across
2 or more SKU’s, the majority
designation or majority sales history
will win (i.e. Shared across 3, 2 are
MTO, then assume it’s MTO)
4
Usage across SKU’s
Component A
• Rule 2: In the even its evenly shared,
then compare the sales history of the
finished SKU
Component LOT Size Strategy – Definitions
Methodology
Key Drivers
1
2
1
Product lifecycle phase
Cost breakdown
Inventory
Established
New product
•
•
•
•
•
•
Phase Out
2
Carrying Cost
Month 3
Month 12
Product Lifecycle Definition
3
Order Cost
4
Employee cost
Taxes
Insurance
Depreciation
Opportunity cost
Cost of capital
Carrying Cost
4
3
Capacity Analysis
FTE loaded
Rate
Time to
create PO
Total Order
Cost
19.50
.1 Hour
$1.95
• Physical capacity of
space dedicated for
storage relative to
warehouse facility
• Layout & Equipment
(i.e. shelving)
Capacity
Order Cost
Capacity
Component LOT Size Strategy – Definitions
Key Drivers
Product Lifecycle
1
Product lifecycle phase
New product
2
Carrying Cost
3
Order Cost
• Very little or no data
(newly identified SKU)
• Data is not substantial
enough to assess avg
consumption for
periodic lot sizing
• Approx life stage of
SKU is 0-4 months*
* Business will need to
decide appropriate time
frame
4
Capacity
Established product
• Product has sufficient demand history
• Product has consistent demand and active
forecast (including project demand and for large
events)
• Future demand can be reflective of consumption
history
• Inventory orders should be in bulk (to minimize
purchase and ordering cost) or optimized
(storage cost vs. purchase cost)
• Approx life stage of SKU is 5-13 months*
* Business will need to decide appropriate time
frame
Phase out
• Past consumption is
not reflective of
future demand
• SKU is nearing the end
of its expected life
(i.e. 18 months)
• Focus of inventory is
to maintain exact
demand for minimal
orders
• Approx life stage of
SKU is 14-18 months*
* Business will need to
decide appropriate time
frame
Component LOT Size Strategy – Definitions
Key Drivers
1
Product lifecycle phase
Inventory Carrying Cost% =
Money tied up in inventory+ Warehouse Cost+ Cost of Handling items + Deterioration and Obsolescence
Average annual inventory costs
Money tied up in inventory: Cost of Capital (Investment, interest on working capital) and Opportunity Cost invested in inventory
(instead of treasury, mutual funds, etc…) = WACC
2
Carrying Cost
Warehouse Cost: Rent or Cost of purchase depreciation, Utility (Heating, air conditioning, lighting), Cost, property insurance, Property
Taxes
Cost of Handling Items: Labor (Human resources, management, etc..), IT hardware and applications, insurance (Labor), 3PL
3
Order Cost
4
Capacity
Deterioration and Obsolescence: Shrinkage (loss of product from purchase to point of sale), value of right off
Summary and Definition
Inventory carrying cost is the cost of holding goods in stock. Expressed usually as a percentage of the inventory value and
includes cost of capital, warehousing depreciation, insurance, taxation, obsolescence, and shrinkage.
Step 1: Standard calculation can be determined based on equation provided above, however the carrying costs
percentage should be readily available through your finance or accounting department
Step 2: Once the carrying cost (As percentage is identified, use this as an input to the SAP lot sizing strategy (Optimizing
lot size) – USE Carrying Cost: 12% as input to LOT SIZE calculation
Component LOT Size Strategy – Definitions
Key Drivers
1
Product lifecycle phase
Ordering Cost = Fees placed for order (Invoice processing, accounting, or communication. These costs can be fixed
Inbound Logistics Cost = Related to transportation and reception (unloading and inspecting). These costs are variable
2
Carrying Cost
3
Order Cost
Summary and Definition
Cost of procurement and inbound logistics costs form a part of Ordering Cost. Ordering Cost is dependent and varies based
on two factors - The cost of ordering excess and the Cost of ordering too less.
Both these factors move in opposite directions to each other. Ordering excess quantity will result in carrying cost of
inventory. Where as ordering less will result in increase of replenishment cost and ordering costs.
Step 1: Identify the cost per order by component based on the equation above. Finance and/or Accounting may already
have this number calculated, this should be done first before attempting to calculate
Step 2: Use the ordering cost number ($) to use as an input for SAP Lot sizing
4
Capacity
Component LOT Size Strategy – Definitions
Key Drivers
Summary and Definition
1
Product lifecycle phase
• Step 1: Storage capacity can be assessed
qualitatively and quantitatively
60”
2
Carrying Cost
3
Order Cost
4
Capacity
36”
36”
Bin/Storage Location
Box 1
Box 2
Pallet
Box 3
1 36”x36”
pallet can fit in
the storage
space
Each pallet can hold 9
boxes (100 pieces), 7
boxes high, which
equates to 9*7*100 =
5600 (Capacity)
• Step 2: If the overall square footage of the
facility and the individual bin/storage locations
have not been sufficient to meet the demand of
the SKU’s and it’s components, then storage is
considered ‘limited’
• Step 3: A formal capacity plan at plant will help
support storage capacity of the facility relative
to active demand
• Step 4: For each component item, assess the
overall bin/storage location capacity by
determining how many components (or boxes of
components) can typically fit within the
enclosed space (prior purchase orders and
discussions with materials managers will help the
team assess capacity)
Appendix
Title or Job Number | XX Month 201X
42
Component Replenishment Strategy – Standard Requirements
List of criteria and key factors that play a significant role in determining replenishment parameters
Replen
Strategy
ABC
Segmentation
Unit Cost
Critical
Usage across
SKU’s
Planning Type
Component
Lead Time
LT + LT of BOM
successors <
Acc LT
Component
Variability
SKU
Segmentation
V1/V2
Low
B/C
No
Shared across
ATO and MTO
products
Consumption
Based
(Consider
external
requirements)
L/M/H
No
Low
MTS, ATO
VB/VM
Low
B/C
No
Shared across
ATO and MTO
products
Consumption
Based
(Continuous
Review)
L/M/H
No
Low
MTS, ATO
VV
Low
A
No
Shared across
ATO and MTS
products
Consumption
Based
(Periodic
review)
L/M/H
No
Med/High
MTS, ATO
PD
Med/High
A, B
Yes
Requirement
for MTO
Planning w/o
frozen horizon
Low
Yes
Low/Med/High
MTO, MTS
P1, P2, P3
Med/High
A, B
Yes
Requirement
for MTO
Planning w/
frozen horizon
Low
Yes
Low/Med/High
MTO, MTS
Component Replenishment Strategy - Standard Requirements
List of criteria and key factors that play a significant role in determining replenishment parameters
Replen
Strategy
Forecast
considered?
Order cost
Demand
Driven
Demand variability
Review frequency
Order Proposals
V1/V2
No
Constant demand
No
Continuous review
Auto or manual
VB/VM
No
Constant demand
No
Continuous review
Auto or manual
R1/R2
High
No
Constant demand
No
Periodic Review
Auto or manual
VV
Low
Yes
Variable demand
No
Periodic review
Auto or manual
Delivery rhythm
(Depends on
day of order)
No
Relatively stable avg daily demand
No
Periodic review
Auto or manual
PD
Yes
Constant or variable
Yes
Continuous review
Auto or manual
P1 & P3
Yes
Constant or variable
Yes
Periodic review
Auto proposal
automatic: Set and
fix order proposals
automatically w/o
manual control
P2 & P4
Yes
Constant or variable
Yes
Periodic review
Manual order
proposals: Set and
fix order proposals
automatically w/o
manual control
Component Replenishment Strategy – Standard Requirements
List of criteria and key factors that play a significant role in determining replenishment parameters
Replen
Strat
Critical w/
Demand?
Significant influence
on production
performance?
ABC
Segmentation
Order Proposals
Planning
BOM Level
M0
Yes
A
Y
No automatic fixing of proposals
Demand driven
Single
M1
Yes
A
Y
Set and order proposal automatically
without manual control (Pl orders created
at end of planning time fence, existing pl
orders firmed)
Demand driven
Single
M2
Yes
A
Y
Requirements in planning time fence not
covered. Existing pl orders are moved to
end of PTF
Demand driven
Single
M3
Yes
A
Y
Set and order proposal automatically with
manual control ((Pl orders and existing pl
orders created at end of planning time
fence)
Demand driven
Single
M4
Yes
A
Y
Requirements in planning time fence not
covered. Existing pl orders in PTF are
deleted
Demand driven
Single
X0, X1
No
According to BOM
explosion
N/A
ND
No
No demand, no
planning
N/A
N
NA
N
No planned orders created
Component Lot Size Strategy – Standard Requirements
List of criteria and key factors that play a significant role in determining Lot size requirements
Lifecycle
Order cost
Capacity/
Stockroom
Splitting of big
lots
Component
classification
Driving factor
Segment Driver
Lot Size Strategy
Seasonal
New phase in
material
High
Limited
No
B/C
Low holding cost and/or
technical requirement
Exact Lot Size
(EX)
NA
New phase in
material
High
Limited
Yes
B/C
Low holding cost and/or
technical requirement
Replenish to max
level (HB)
NA
Established
material
(Optimizing
Method)
NA
NA
Yes
B
Non seasonal and non
procurement material
Demand driven or
MTO
Part period
balancing
No
Established
material
(Optimizing
Method)
NA
NA
No
A
Non Seasonal and non
procurement material
Demand driven or
MTO
Groff reorder or
dynamic LOT size
creation
No
Established
material
(Optimizing
Method)
NA
NA
No
A/B
Non Seasonal and
procurement material
Demand driven or
MTO
Least unit cost
procedure
No
Old phase
out material
NA
NA
NA
C
No replenish to max
level
Non demand
driven
Exact final lot
size
NA
Component Lot Size Strategy – Standard Requirements
List of criteria and key factors that play a significant role in determining Lot size requirements
Lifecycle
Order
cost
Lead
Time
Capacity/
Stockroom
Splitting of
big lots
Component
classification
Driving factor
Segment
Driver
Lot Size
Strategy
Seasonal
Established
material
(Periodic
Method)
Low
Short
(<1D)
Very limited
and high rate
of
obsolescence
(<1D)
Yes
A
Planning in fixed
order deliveries
Demand driven
or MTO
Hourly LOT Size
Yes
Established
material
(Periodic
Method)
Low
Short
(<2D)
Very limited
and high rate
of
obsolescence
(<2D)
Yes
A/B
Planning in fixed
order deliveries
Demand driven
or MTO
Shift LOT Size
Yes
Established
material
(Periodic
Method)
Low
Short
(<7D)
Very limited
and High rate
of
obsolescence
(7 days)
Yes
A/B
Planning in fixed
order deliveries
Demand driven
or MTO
Daily LOT Size
Yes
Established
material
(Periodic
Method)
Low
Short
(<4Week
s)
Very limited
and High rate
of
obsolescence
(<4 Weeks)
Yes
A/B/C
Planning in fixed
order deliveries
Demand driven
or MTO
Weekly LOT
Size
Yes
Component Lot Size Strategy – Standard Requirements
List of criteria and key factors that play a significant role in determining Lot size requirements
Lifecycle
Order
cost
Lead
Time
Capacity/
Stockroom
Splitting of
big lots
Component
classification
Driving factor
Segment
Driver
Lot Size
Strategy
Seasonal
Established
material
(Periodic
Method)
Moderate
Short
(<8W)
Very limited
and
moderate
rate of
obsolescence
(<8W)
Yes
B/C
Planning in fixed
order deliveries
Demand driven
or MTO
2 Weekly LOT
Size
Yes
Established
material
(Periodic
Method)
Low
Long
(>8W)
Low rate of
obsolescence
(>8W)
Yes
B/C
Planning in fixed
order deliveries
Demand driven
or MTO
Monthly LOT
Size
Yes
Established
material
(Periodic
Method)
NA
NA
Limited
Yes
C Item
Coordination with
production
planning/item needed
for 1 production run
Demand driven
or MTO
Quarterly LOT
Size
Yes
Established
material
(Periodic
Method)
NA
NA
Limited
Yes
NA
Coordination with
accounting system &
when material cost
need to be
determined within
posting period
Demand driven
or MTO
Flexible period
Yes
Component Lot Size Strategy – Standard Requirements
List of criteria and key factors that play a significant role in determining Lot size requirements
Lifecycle
Established
material
(Periodic)
Established
material
(Static)
Order
cost
Lead
Time
Capacity/
Stockroom
Splitting of
big lots
Component
classification
A
Driving factor
Planning with fixed
order delivery
Segment
Driver
Lot Size
Strategy
Seasonal
Demand driven
or MTO
No
Demand driven
or MTO
No