SAP Integrated Business Planning (IBP) for Supply Chain in the Sales and Operations Process
Inventory optimization is performed weekly and uses the combined output of the demand planning and demand sensing processes to create an inventory plan. Inventory optimization calculates inventory targets for each material at each location in a supply chain, and considers and compensates for uncertainties in demand forecasts, supply timing, and supply quantity. The inventory plan serves as an input to the sales and operations planning process.
SAP IBP for Inventory
Inventory planning and optimization is not a process that can be executed in a vacuum. It's a crucial part of the sales and operations planning cycle that companies go through on a regular cadence. However, if you look at most framework and definitions of sales and operations planning, you can recognize the following steps:
- Product/portfolio review: Assess the performance of your product portfolio, including new products, phase-out products, and the product roadmap.
- Demand review: Establish and agree on the constrained consensus demand signal that forms the basis for the S&OP horizon.
- Supply review: Leverage the consensus demand planning signal and propagate it through the supply network in the organization to establish a constrained plan for production and transport.
- Operational S&OP review (integrated reconciliation): Bring all aspects of the plan together to ensure there is one consolidated, agreed-upon plan for the organization, considering demands and their priorities, available supply, and financial feasibility.
- Executive S&OP: Make sure the agreed-upon number is endorsed and supported by the executive leadership in the organization, allowing a consistent execution.
Looking at the process flow, you could ask where inventory planning and optimization fits in. The most logical answer is that it fits into the supply review process because it shares a dependency with the rest of supply planning on a finished demand signal, and it forms a key input to supply network planning because it sets the inventory targets. Finally, the perhaps somewhat hidden nature of inventory planning and optimization has been called out by some companies that have renamed their S&OP process to Sales Inventory and Operations Planning – for sales, inventory, and operating planning – making it more explicit that inventory is a critical item in their S&OP cycle.
In advanced supply network planning scenarios, there can be more intricate interdependencies at play between supply network optimization and inventory optimization. Although inventory optimization is dependent on a supply network in which the sourcing rules are uniquely defined, supply network optimization attempts to redefine the flows in the network. Yet for supply network optimization to do so, it requires a firm grip on the inventory targets. In other words, running inventory optimization and supply network optimization sequentially might result in non-convergence, that is, a solution doesn't yield a single solution and instead flips back and forth between solutions.
In SAP IBP, you should run three operators to make a complete run, as depicted in the following figure:
Say the process starts with supply network optimization (assuming the inventory targets from the previous cycle). In this case, the network propagation will be performed based on the cost optimization engine available in SAP IBP for response and supply. To make sure the multi-echelon inventory optimization engine runs on the "correct" sourcing rules, there is an algorithm available that computes sourcing ratios (customer sourcing, location sourcing, and production sourcing) based on the results of the supply network optimization algorithm. This paves the way for inventory optimization to determine the "correct" new inventory targets based on renewed network flows.
However, when the inventory targets change, the supply network optimization should be run again to make sure it accounts for the inventory targets. There are various ways out of this vicious circle, which can be analyzed during your implementation to make sure your approach is aligned to your corporate objectives.
In this training, we cover how inventory planning and optimization fits within the recurring S&OP process. In the upcoming chapters, we detail the steps of the inventory planning and optimization approach itself as established in the following figure.
