Discovering Added value to your Integrated Business Planning through Inventory Optimization

Every company does some kind of inventory planning. During the execution of this process, companies often assume that inventory is a necessary evil. However, inventory is a lubricant to keep the supply chain working smoothly in times of uncertainty and risk, while making sure customers are served on time. Nevertheless, it´s costly and hard to tell how much inventory is needed.

As logical consequence, we see a dilemma:

• The finance department considers inventory holding as a pain point for the working capital.
• On the other hand, customers always want to be served as soon as they order without having to wait long periods of production.
• Excessive inventory in the wrong place and the wrong time will cause excessive logistical costs.

An oversimplified inventory planning process implies:

• Single-stage logic
• Insufficient granularity
• Ignore variability
• Infrequent updates
• Improperly characterize uncertainty
• Constant inventory targets

When the dilemma between finance, operations and sales escalates, and an inventory planning oversimplification does not deliver conclusive results, there are common signs that the inventory planning process needs to be upgraded, for example:

• Lower service levels than expected.
• Too much working capital tied up in Inventory.
• Large write-offs for slow and obsolete inventory.
• Customer service is not a formal corporate planning objective, but an outcome of the planning process.
• Inability to respond to change in demand or supply.
• Infrequent planning cycles.
• Absent scenario planning or what-if analysis capabilities.
• Planning focused on reactive tasks.

SAP Integrated Business Planning (IBP) for inventory achieves the right balance between service levels and inventory investment. That is, through the execution of optimization algorithms encapsulated within the Inventory Planning Process in SAP IBP for inventory, companies can estimate the investment per customer service level, finding the optimal level for the enterprise and customers. Sometimes, the investments should be increased to reach optimal values of service levels improving the company current performance. In other cases, inventory should be reduced so as not to affect service levels but to reduce unnecessary investments. Put briefly, SAP IBP for inventory not only improves the company performance but it fixes the mix of inventory, increasing or decreasing inventory.