Next-generation inventory management: Q&A on optimizing inventory levels while improving customer service

An integrated approach offers a powerful way to meet all of these requirements for modern supply chains. SAP Enterprise Inventory and Service-Level Optimization and SmartOps solutions provide predictive analytics and advanced reporting functionality that allows the delivery of enhanced customer service with accurate, real-time inventory investment levels. When integrated with SAP Advanced Planning and Optimization (SAP APO), these solutions help drive improvements in production planning and scheduling that enable more accurate demand forecasting.

Logistics and SCM, Manufacturing, Procurement, and PLM 2016 speaker Tom Chason recently answered readers’ questions on using SAP APO, SAP Enterprise Inventory and Service-Level Optimization, and SmartOps solutions together to optimize inventory levels and processes, reduce data volumes, and meet customer service objectives, such as: 

• How is the new module in IBP on inventory optimization different from current planning in APO, and how are customers are adopting it?
• Is APO available on cloud? Is inventory management in SAP able to cater to robots and drones?
• How is the new module in IBP on inventory optimization different from current planning in APO, and how are customers are adopting it?
• Don’t traditional APS, ERP, and MRP systems already do optimization? What are the biggest business benefits to leveraging inventory optimization within my organization?
• How are SAP Enterprise Inventory Optimization (EIO), EIS, and IBP different?

Transcript

Natalie Miller, SAPinsider: Hello and welcome to today’s live Q&A on optimizing inventory levels while improving customer service. I’m Natalie Miller, features editor of SAPinsider and insiderPROFILES, and I’m happy to introduce today’s panelist, Tom Chason, Principal at SCMO2 and speaker at our upcoming Logistics and SCM, Manufacturing, Procurement, and PLM 2016 event in Las Vegas.

Tom has over 16 years of SAP experience, including over 13 years as an SCM consultant and lead. Tom has a deep background in application implementation and supply chain process specialization and extensive hands-on experience with discreet and process manufacturing industries.

Hi, Tom, thank you so much for being here today!

Tom Chason, SCM02: Hey, everyone. Welcome to our Q&A on inventory optimization! Thanks for organizing, Natalie!

Natalie Miller: There are a couple great questions from readers already waiting for you, but to kick things off, can you supply some key reasons organizations should consider inventory optimization implementations for their business?

Tom Chason: Sure, Natalie. Organizations need to address uncertainty in their supply chain with tools rather than relying on tribal knowledge when determining what safety stock levels are appropriate in order to satisfy customer service level policies. Inventory optimization tools from SAP give you an integrated software platform in which you can answer these questions based on mathematics instead of intuition. The other key reason is that this leads to a deeper understanding of differences across products in how they behave. This idea of segmenting your products and customers leads many companies down new paths to increased profitability.

Natalie Miller: Thanks, Tom!

Comment from Mahes: Is APO available on cloud? Is inventory management in SAP able to cater to robots and drones?

Tom Chason: Hi, Mahes. As far as I know, APO is not available on the cloud. The newest version of APO, called IBP, is native to the cloud. I’m not sure about inventory management with drones and robots, but certainly they could be linked for drop-offs via the Internet of Things (IoT) functionality.

Comment from Edwin: How do we align the inventory level in the early phase of the product, since no stable forecast can be figured out?

Tom Chason: Hi, Edwin. Typically you would rely on some demand planning functionalities that address lifecycle planning issues. Functionalities like modeling, realignment of sales history from the old to the new product, or even interchangeability groups can help you manage the demand stream when transitioning products.

Comment from Sam: Should we implement IBP-Inventory or EIS, and why?

Tom Chason: Hi. It depends on which functionality you are looking for. Currently IBP functionality is around inventory optimization. EIS has additional functionality around customer service level optimization. If you are just looking for safety stock calculations, then you could choose either one. Obviously with IBP being the newest tool, you get the benefits of the cool new WebGUI and the Excel add-in. Conversely, you will also get to help SAP find any bugs. 🙂

Comment from Alok: Hi, Tom. How is the new module in IBP on inventory optimization different from current planning in APO, and how are customers are adopting it?

Tom Chason: Hi, Alok. The IBP-Inventory is different from APO in that APO primarily has a single-level statistical safety stock calculation while IBP has a multi-level one. This means that IBP will not only calculate a safety stock level for the network, but it will tell you were to hold it. APO can only hold inventory at the customer-facing plant/dc. Customers that I have worked with have primarily implemented EIS, which is the rebranded version of SmartOps. Newer clients are looking at IBP and deciding based on functionality/usability which package to select.

Comment from S.E.: Based on your experiences with customers, what are some of the biggest supply chain challenges they’re facing?

Tom Chason: One of the biggest challenges I see today is enabling the organization to be able to manage advanced applications such as inventory optimization. These systems do not have an easy button, and sometimes the effort level is underestimated by the business. Appropriate training and staffing are key.

Comment from Susan: What are some key challenges in optimizing inventory levels?

Tom Chason: Hi, Susan. Some of the challenges are organizational, as I mentioned in my prior response to SE. In addition to the organizational challenges, one of the main issues I see is how companies segment or do not segment their products in order to give a rational framework for how to think about setting your service levels. The service level (forecast error) is the biggest driver in the safety stock calculation. If, for example, you set a very high service level on your C items, be prepared to incur the inventory dollar costs associated with that decision.

Comment from Alok: We also have specific features in APO, like safety stock planning with different basic and advanced algorithms. What new features will be there in IBP for inventory? Along with safety stock planning, will it be extended to other inventory optimization techniques, too?

Tom Chason: Hi, Alok. As I mentioned in my prior reply to you, the main functionality available in IBP is the safety stock calculation. Additional functionality around customer service level optimization (available in EIS) and possibly lot size optimization are other features that will be in future releases.

Comment from Rus: Don’t traditional APS, ERP, and MRP systems already do optimization? What are the biggest business benefits to leveraging inventory optimization within my organization?

Tom Chason: Hi, Rus. When SAP talks about inventory optimization, it is really focused on determining safety stock levels and where to hold them in the network. APS, ERP, and MRP systems, for the most part, use safety stock as an input into their respective planning engines, but most do not have a multi-echelon inventory optimization tool. You can find single-level inventory optimization tools in ECC and APO. The biggest benefit to your organization is the alignment of your safety stock levels with your customer service policy and the ability to mathematically tie the two together.

Comment from Sam: Isn’t EIS available in the IBP platform?

Tom Chason: Hi, Sam. EIS functionality is available in the IBP-Inventory module. The current release is focused on the multi-echelon safety stock calculations, whereas EIS still has additional functionality around Customer Service Level Optimization that is not incorporated into IBP yet.

Comment from Mahes: ECC utilizes relational databases, currently in memory HANA. Is there a plan to build a new ECC or IBP system for Hadoop or a similar platform?

Tom Chason: Hi, Mahes. ECC on HANA is available, and the next release of SAP S/4HANA will also be on HANA, although with a much smaller footprint since this version dramatically reduces the number of tables required. IBP is also currently available on HANA, and I am not aware of any additional platforms being planned at this time.

Comment from Mahes: How are SAP Enterprise Inventory Optimization (EIO), EIS, and IBP different?

Tom Chason: Hi, Mahes. EIO was really the SmartOps standalone application name right after the acquisition. It was then rebranded to SAP EIS. This served as the basis for the functionality you now see in IBP. So EIO and EIS are basically the same. IBP, as mentioned in prior replies, is a subset of that functionality focusing on multi-echelon safety stock calculations. More EIS functionality will be rolled into IBP future releases.

Comment from Charles: Good afternoon, Tom. In your experience working with many organizations, have you identified any common areas companies tend to burn money when it comes to how they manage their inventory? For example, lack of visibility, inadequate reporting and analytics, etc.?

Tom Chason: Hi, Charles. I see a lot of companies chasing demand, and by that I mean increasing inventory on items you were caught short on. This ad hoc, reactionary approach helps service levels in the short run but at the cost of increased inventory. So I suppose that would be considered a lack of visibility into what is actually driving your safety stock decisions, like forecast accuracy and service level policy.

Comment from Guest: For an organization running SAP Integrated Business Planning for inventory, supply, and demand, do you feel the functionality achieved with this setup will provide results equitable to that of an organization investing in the SAP APO, SAP EIS, and SmartOps integration model?

Tom Chason: Hi. There is still functionality that you cannot get in IBP that is available in both APO/EIS, so I would say it’s dependent on your business requirements. SAP is devoting large amounts of time and money into IBP, so it is the application of the future for planning in the SAP landscape. The main question is, when is it mature enough to address your business needs? From a usability/feel point of view, everyone prefers IBP, but the question is, does it do what you need yet?

Comment from Ray: Tom, from your first comment, “inventory optimization tools from SAP,” would you elaborate on what these tools are and what displays present these tools?

Tom Chason: Hi, Ray. The primary tools from SAP for inventory optimization are EIS (Enterprise Inventory and Service Level Optimization) and IBP-Inventory.

Comment from Emilie: Are there any tools in APO or ECC to help display warehouse capacity?

Tom Chason: Hi, Emilie. In APO you can model warehouse capacity (let’s say in pallets) by creating a Resource and assigning it to the Location Master. You’ll also need to define some product/location master data that relates the base UOM (say case) to the storage unit of pallets. I think there are some standard reports in ECC as well, but I am not familiar with the specific names/tcodes.

Comment from Jon: In your opinion, what are some common mistakes you’ve observed that compromise effective management of inventory levels, and what do you recommend to avoid them?

Tom Chason: Hi, Jon. Gosh, it’s hard to know where to start on this one. Have people in the organization who understand how inventory behaves and the different layers of inventory (in transit, prebuild, safety, cycle, etc.). Also, have tools that match the capabilities of your organization. These newer tools are advanced, so you wouldn’t want to put these in somewhere that is low on the process maturity scale.

Comment from Lou: What type of industries is this kind of inventory optimization implementation ideal for?

Tom Chason: Hi, Lou. I would say it is typically implemented in industries that have a lot of capital invested in inventory. CPGs typically have a lot of their working capital tied up in inventory. Alternately, businesses with individual inventory items that are expensive to produce also benefit from this tool. It’s really not industry specific, but rather specific to businesses looking to align inventory dollars with customer service.

Comment from Ray: Thanks, Natalie! Thanks, Tom! Have a great day!

Tom Chason: Thank you, Ray!

Natalie Miller: Thanks again to all who joined today’s chat. And a special thank you to Tom for all these great answers!

Tom Chason: Thank you, Natalie, I appreciate your assistance. Thanks everyone for your time! I hope I was able to give you some insights into your questions. Feel free to contact me at tchason@scmo2.com with any questions. For those of you attending, I will be presenting on this topic in Las Vegas at the SCM conference March 21-23, so feel free to stop by. Thanks again!

Natalie Miller: Thanks again, everyone! It’s been a great discussion. As Tom said, he will be presenting at our upcoming SCM and Logistics and SCM, Manufacturing, Procurement, and PLM 2016 conference in Las Vegas. Check out details on his session, “Next-generation inventory management: An inside look at how to successfully integrate SAP APO with EIS and increase user adoption”.

And you can also click here for more information about the Logistics and SCM, Manufacturing, Procurement, and PLM 2016 event, including a full list of speakers and details about how to join us in Las Vegas!

An integrated approach offers a powerful way to meet all of these requirements for modern supply chains. SAP Enterprise Inventory and Service-Level Optimization and SmartOps solutions provide predictive analytics and advanced reporting functionality that allows the delivery of enhanced customer service with accurate, real-time inventory investment levels. When integrated with SAP Advanced Planning and Optimization (SAP APO), these solutions help drive improvements in production planning and scheduling that enable more accurate demand forecasting.

Logistics and SCM, Manufacturing, Procurement, and PLM 2016 speaker Tom Chason recently answered readers’ questions on using SAP APO, SAP Enterprise Inventory and Service-Level Optimization, and SmartOps solutions together to optimize inventory levels and processes, reduce data volumes, and meet customer service objectives, such as: 

• How is the new module in IBP on inventory optimization different from current planning in APO, and how are customers are adopting it?
• Is APO available on cloud? Is inventory management in SAP able to cater to robots and drones?
• How is the new module in IBP on inventory optimization different from current planning in APO, and how are customers are adopting it?
• Don’t traditional APS, ERP, and MRP systems already do optimization? What are the biggest business benefits to leveraging inventory optimization within my organization?
• How are SAP Enterprise Inventory Optimization (EIO), EIS, and IBP different?

Transcript

Natalie Miller, SAPinsider: Hello and welcome to today’s live Q&A on optimizing inventory levels while improving customer service. I’m Natalie Miller, features editor of SAPinsider and insiderPROFILES, and I’m happy to introduce today’s panelist, Tom Chason, Principal at SCMO2 and speaker at our upcoming Logistics and SCM, Manufacturing, Procurement, and PLM 2016 event in Las Vegas.

Tom has over 16 years of SAP experience, including over 13 years as an SCM consultant and lead. Tom has a deep background in application implementation and supply chain process specialization and extensive hands-on experience with discreet and process manufacturing industries.

Hi, Tom, thank you so much for being here today!

Tom Chason, SCM02: Hey, everyone. Welcome to our Q&A on inventory optimization! Thanks for organizing, Natalie!

Natalie Miller: There are a couple great questions from readers already waiting for you, but to kick things off, can you supply some key reasons organizations should consider inventory optimization implementations for their business?

Tom Chason: Sure, Natalie. Organizations need to address uncertainty in their supply chain with tools rather than relying on tribal knowledge when determining what safety stock levels are appropriate in order to satisfy customer service level policies. Inventory optimization tools from SAP give you an integrated software platform in which you can answer these questions based on mathematics instead of intuition. The other key reason is that this leads to a deeper understanding of differences across products in how they behave. This idea of segmenting your products and customers leads many companies down new paths to increased profitability.

Natalie Miller: Thanks, Tom!

Comment from Mahes: Is APO available on cloud? Is inventory management in SAP able to cater to robots and drones?

Tom Chason: Hi, Mahes. As far as I know, APO is not available on the cloud. The newest version of APO, called IBP, is native to the cloud. I’m not sure about inventory management with drones and robots, but certainly they could be linked for drop-offs via the Internet of Things (IoT) functionality.

Comment from Edwin: How do we align the inventory level in the early phase of the product, since no stable forecast can be figured out?

Tom Chason: Hi, Edwin. Typically you would rely on some demand planning functionalities that address lifecycle planning issues. Functionalities like modeling, realignment of sales history from the old to the new product, or even interchangeability groups can help you manage the demand stream when transitioning products.

Comment from Sam: Should we implement IBP-Inventory or EIS, and why?

Tom Chason: Hi. It depends on which functionality you are looking for. Currently IBP functionality is around inventory optimization. EIS has additional functionality around customer service level optimization. If you are just looking for safety stock calculations, then you could choose either one. Obviously with IBP being the newest tool, you get the benefits of the cool new WebGUI and the Excel add-in. Conversely, you will also get to help SAP find any bugs. 🙂

Comment from Alok: Hi, Tom. How is the new module in IBP on inventory optimization different from current planning in APO, and how are customers are adopting it?

Tom Chason: Hi, Alok. The IBP-Inventory is different from APO in that APO primarily has a single-level statistical safety stock calculation while IBP has a multi-level one. This means that IBP will not only calculate a safety stock level for the network, but it will tell you were to hold it. APO can only hold inventory at the customer-facing plant/dc. Customers that I have worked with have primarily implemented EIS, which is the rebranded version of SmartOps. Newer clients are looking at IBP and deciding based on functionality/usability which package to select.

Comment from S.E.: Based on your experiences with customers, what are some of the biggest supply chain challenges they’re facing?

Tom Chason: One of the biggest challenges I see today is enabling the organization to be able to manage advanced applications such as inventory optimization. These systems do not have an easy button, and sometimes the effort level is underestimated by the business. Appropriate training and staffing are key.

Comment from Susan: What are some key challenges in optimizing inventory levels?

Tom Chason: Hi, Susan. Some of the challenges are organizational, as I mentioned in my prior response to SE. In addition to the organizational challenges, one of the main issues I see is how companies segment or do not segment their products in order to give a rational framework for how to think about setting your service levels. The service level (forecast error) is the biggest driver in the safety stock calculation. If, for example, you set a very high service level on your C items, be prepared to incur the inventory dollar costs associated with that decision.

Comment from Alok: We also have specific features in APO, like safety stock planning with different basic and advanced algorithms. What new features will be there in IBP for inventory? Along with safety stock planning, will it be extended to other inventory optimization techniques, too?

Tom Chason: Hi, Alok. As I mentioned in my prior reply to you, the main functionality available in IBP is the safety stock calculation. Additional functionality around customer service level optimization (available in EIS) and possibly lot size optimization are other features that will be in future releases.

Comment from Rus: Don’t traditional APS, ERP, and MRP systems already do optimization? What are the biggest business benefits to leveraging inventory optimization within my organization?

Tom Chason: Hi, Rus. When SAP talks about inventory optimization, it is really focused on determining safety stock levels and where to hold them in the network. APS, ERP, and MRP systems, for the most part, use safety stock as an input into their respective planning engines, but most do not have a multi-echelon inventory optimization tool. You can find single-level inventory optimization tools in ECC and APO. The biggest benefit to your organization is the alignment of your safety stock levels with your customer service policy and the ability to mathematically tie the two together.

Comment from Sam: Isn’t EIS available in the IBP platform?

Tom Chason: Hi, Sam. EIS functionality is available in the IBP-Inventory module. The current release is focused on the multi-echelon safety stock calculations, whereas EIS still has additional functionality around Customer Service Level Optimization that is not incorporated into IBP yet.

Comment from Mahes: ECC utilizes relational databases, currently in memory HANA. Is there a plan to build a new ECC or IBP system for Hadoop or a similar platform?

Tom Chason: Hi, Mahes. ECC on HANA is available, and the next release of SAP S/4HANA will also be on HANA, although with a much smaller footprint since this version dramatically reduces the number of tables required. IBP is also currently available on HANA, and I am not aware of any additional platforms being planned at this time.

Comment from Mahes: How are SAP Enterprise Inventory Optimization (EIO), EIS, and IBP different?

Tom Chason: Hi, Mahes. EIO was really the SmartOps standalone application name right after the acquisition. It was then rebranded to SAP EIS. This served as the basis for the functionality you now see in IBP. So EIO and EIS are basically the same. IBP, as mentioned in prior replies, is a subset of that functionality focusing on multi-echelon safety stock calculations. More EIS functionality will be rolled into IBP future releases.

Comment from Charles: Good afternoon, Tom. In your experience working with many organizations, have you identified any common areas companies tend to burn money when it comes to how they manage their inventory? For example, lack of visibility, inadequate reporting and analytics, etc.?

Tom Chason: Hi, Charles. I see a lot of companies chasing demand, and by that I mean increasing inventory on items you were caught short on. This ad hoc, reactionary approach helps service levels in the short run but at the cost of increased inventory. So I suppose that would be considered a lack of visibility into what is actually driving your safety stock decisions, like forecast accuracy and service level policy.

Comment from Guest: For an organization running SAP Integrated Business Planning for inventory, supply, and demand, do you feel the functionality achieved with this setup will provide results equitable to that of an organization investing in the SAP APO, SAP EIS, and SmartOps integration model?

Tom Chason: Hi. There is still functionality that you cannot get in IBP that is available in both APO/EIS, so I would say it’s dependent on your business requirements. SAP is devoting large amounts of time and money into IBP, so it is the application of the future for planning in the SAP landscape. The main question is, when is it mature enough to address your business needs? From a usability/feel point of view, everyone prefers IBP, but the question is, does it do what you need yet?

Comment from Ray: Tom, from your first comment, “inventory optimization tools from SAP,” would you elaborate on what these tools are and what displays present these tools?

Tom Chason: Hi, Ray. The primary tools from SAP for inventory optimization are EIS (Enterprise Inventory and Service Level Optimization) and IBP-Inventory.

Comment from Emilie: Are there any tools in APO or ECC to help display warehouse capacity?

Tom Chason: Hi, Emilie. In APO you can model warehouse capacity (let’s say in pallets) by creating a Resource and assigning it to the Location Master. You’ll also need to define some product/location master data that relates the base UOM (say case) to the storage unit of pallets. I think there are some standard reports in ECC as well, but I am not familiar with the specific names/tcodes.

Comment from Jon: In your opinion, what are some common mistakes you’ve observed that compromise effective management of inventory levels, and what do you recommend to avoid them?

Tom Chason: Hi, Jon. Gosh, it’s hard to know where to start on this one. Have people in the organization who understand how inventory behaves and the different layers of inventory (in transit, prebuild, safety, cycle, etc.). Also, have tools that match the capabilities of your organization. These newer tools are advanced, so you wouldn’t want to put these in somewhere that is low on the process maturity scale.

Comment from Lou: What type of industries is this kind of inventory optimization implementation ideal for?

Tom Chason: Hi, Lou. I would say it is typically implemented in industries that have a lot of capital invested in inventory. CPGs typically have a lot of their working capital tied up in inventory. Alternately, businesses with individual inventory items that are expensive to produce also benefit from this tool. It’s really not industry specific, but rather specific to businesses looking to align inventory dollars with customer service.

Comment from Ray: Thanks, Natalie! Thanks, Tom! Have a great day!

Tom Chason: Thank you, Ray!

Natalie Miller: Thanks again to all who joined today’s chat. And a special thank you to Tom for all these great answers!

Tom Chason: Thank you, Natalie, I appreciate your assistance. Thanks everyone for your time! I hope I was able to give you some insights into your questions. Feel free to contact me at tchason@scmo2.com with any questions. For those of you attending, I will be presenting on this topic in Las Vegas at the SCM conference March 21-23, so feel free to stop by. Thanks again!

Natalie Miller: Thanks again, everyone! It’s been a great discussion. As Tom said, he will be presenting at our upcoming SCM and Logistics and SCM, Manufacturing, Procurement, and PLM 2016 conference in Las Vegas. Check out details on his session, “Next-generation inventory management: An inside look at how to successfully integrate SAP APO with EIS and increase user adoption”.

And you can also click here for more information about the Logistics and SCM, Manufacturing, Procurement, and PLM 2016 event, including a full list of speakers and details about how to join us in Las Vegas!