Outlining How to Achieve Fair Share for Inventory

Let us now assume that you want to achieve a supply distribution for a given finished good in the following sequence:

1. Fulfill all independent demands

2. Fulfill the safety stock levels of all locations

3. Store up to the maximum stock level of all locations

4. Store excess stock

In addition, to achieve a fair share for inventory for all locations you have to ensure the following:

• Define the same inventory holding costs for all locations. You can do this either by the Inventory Holding Cost Rule in the Planning Run Profile or in the Inventory Holding Cost key figure.
• Define a safety stock level for each location. If you leave the safety stock empty in one or more buckets, the optimizer assumes a 0 in these buckets. You can do this by either maintaining the Safety Stock or Safety Days of Supply key figure.
• Define the same safety stock violation costs for all locations. You can do this either by the Safety Stock Violation Cost Rule in the Planning Run Profile, or in the Safety Stock Violation Cost Rule.
• Define a maximum stock level for each location. If you leave the maximum stock empty in one or more buckets, the optimizer assumes an infinite maximum stock. In order to get a fair share for maximum stock and a fair share for excess stock, it is mandatory to define a maximum stock for all locations in all buckets. A maximum stock of 0 characterizes a non-stocking location, it is recommended to also set the safety stock to 0.
• Define the same maximum stock violation costs for all locations.
• Define the non-delivery costs of all demands to be higher than the maximum of safety stock violation cost and maximum stock violation cost plus inventory holding cost for all periods in the planning horizon. You can do this either by the Non-Delivery Cost Rule (Demand Costs determined by Demand Cost Rules) or by the Non-Delivery Cost Weight (Demand Costs determined by Demand Prioritization).

All location materials in the supply chain network participate in the fair share distribution.

Fair Share for Maximum Days of Supply is not supported.

• To achieve the best Fair Share for Inventory results, it is recommended that you define the same inventory costs for all location materials.
• To prioritize the inventory levels of certain location materials, the master data attributes Fair Share Safety Stock Segment, Fair Share Maximum Stock Segment and Fair Share Excess Stock Segment can be used.
• The fair share inventory segments determine the proportion of generated fair share costs added to the defined inventory costs of the location material.
• The number of fair share inventory segments is limited:
  • Safety Stock Segment: 0, 1, or 2
  • Maximum Stock Segment: 0, 1, or 2
  • Excess Stock Segment: 0 or 1
  • For each attribute 0 is the highest priority segment

If you do not define a segment in the master data of a location material, the fair share inventory segment is by default 0.

• Assuming that for all location materials the same inventory costs are defined in the cost rules or in the cost key figures, the inventory cost increments given to each fair share inventory segment build a prioritization sequence of eight segments.
• According to the available supply in the network, fair share distribution will occur in one of the segments while the inventory levels of all segments with higher priority are fulfilled completely.
• If you define different inventory costs for location materials, this may interfere with the location materials’ fair share segmentation, but fair share is still achieved among those location materials with the same inventory costs.

• You can achieve the desired inventory distribution patterns in your supply chain network by setting the right fair share inventory segments and maintaining the right safety and maximum stock levels for location materials with same inventory the costs.

  Example of Inventory Distribution using Fair Share across a Supply Chain

• Let’s assume that for one material you would like to represent the following situation:
  • Factory is non-stocking
  • DC1 and DC2 have higher inventory keeping priority than the local DC3 to DC6
  • Fair share is applied among DC1 and DC2 as well as among the local DC3 to DC6
• You can achieve this by setting the values as shown in the figure, Segment Values.

Expected inventory distribution for different amounts of supply are shown in the figure Expected Inventory Distribution.

Fair Share for Inventory is achieved by applying tiered linear cost functions to safety stock violation costs, inventory holding costs and maximum stock violation costs.

Without fair share, the linear progression of safety stock violation costs would make equal costs of satisfying safety stock in only one location and of satisfying safety stock to 50% in both locations.

If costs are equal, optimizer decides randomly for one solution. This can often result in satisfying safety stock for just one location.

Similar to Fair Share for Demands and the Non-Delivery Cost Function, a tiered, linear cost function for safety stock violation costs achieves the cheapest cost by an even distribution.

The inventory holding costs have been omitted in the total cost because they are the same, but they are usually added to the safety stock violation costs.

The amount of supply is high enough to avoid safety stock violation costs and low enough to avoid maximum stock violation costs in both locations. Therefore, total cost is determined only by inventory holding costs.

Tiered Linear Cost Functions for Fair Share Inventory Segments → Similar to Fair Share for Demands, tiered linear cost functions are applied to make an even distribution of inventory the cheapest cost solution for the optimizer.

Tiered Linear Cost Functions for Excess Stock Segment 0:

• Location materials in Excess Stock Segment 0 get tiered linear cost functions for Maximum Stock Violation Costs.
• Location materials in Excess Stock Segment 1 get non-tiered linear cost functions for Maximum Stock Violation Costs.
• Because there is no upper limit for excess stock, two times the maximum stock is taken to determine the tiers for location materials in segment 0.

When considering costs used by the optimizer, it is important to be aware that relative costs play a huge role and that the overall cost structure, if designed with flaws, will be dictating an undesired behavior.

Given that the objective function of the optimizer is to use the correlation of variables, it is advised to make sure that the cost structure adhere to the rules depicted in the following figure:

In the cost structure rule, "＞＞" means significantly larger. It depends on the number of days in the planning horizon. As the linear discounting of demand costs that is automatically applied, the larger the horizon, the larger the NDC must be.