INVENTORY OPTIMIZATION IN IBP

What is inventory optimization

Inventory Optimization is the process of maintaining the right amount of inventory required to meet demand, keep logistic cost low and avoid stock outs, overstocking and backorders.
SAP Integrated Business Planning’ is a product solution that supports the whole process from requirement to supply or procure.
Using SAP IBP for inventory optimization positions stock to absorb uncertainties, such as the following:

  • Forecast error
  • Demand variability
  • Supply uncertainty
Using a set of stochastic mathematical algorithms, inventory optimization determines the lowest possible stocking cost possible for locations throughout the supply chain and provides stocking targets directly to planners at the item-location-time period level.

Uncertainties multiply across the supply chain due to the interdependency between suppliers, plants, warehouses.

If you only consider one portion of a supply chain, you may hold too much safety stock at one location, which leads to increased holding costs. (Present Scenario)

Or hold too little safety stock at one location, which leads to stock-outs that either cause lower customer service levels or increased cost due to expedited orders.

Optimal inventory placement is based on inventory form and objectives, i.e. on inventory components. Inventory components comprise the total inventory of a given product. Calculating inventory components and their goals strengthens inventory optimization. Inventory components include estimates, targets, average quantities and currency values. Examples of inventory components include the following:
  • On-hand stock – Inventory that is physically in the supply chain, that is cycle stock and safety stock
  • Cycle stock – Inventory that use to meet current demand till next order be placed.
  • Pipeline stock – A supply chain that works in a route.
  • Safety stock – An excess quantity of a product that is stored in a warehouse to prevent an out-of-stock situation.


For configuring Inventory Optimization following tasks must be performed:
  • Master data types and input/output key figures required by your own project. The time profile of the planning area is daily, weekly, monthly, quarterly, and yearly.
  • Inventory operators.
  • Key data types and input/output key statistics required to list time profiles, especially if using aggregation and separation or technical weeks.
For inventory optimization we are using following algorithms:
  • Forecast Error Calculations Inventory Optimization.
  • Global (multi-stage) inventory optimization operator.
  • Calculate Target Inventory Components operator.
  • Decomposed (single-stage) inventory optimization operator.
Using these operators, we optimize inventory and view the results in an Excel add-in or web UI.

Forecast Error Calculations Inventory Optimization:

The system examines the actual forecast, which is a combination of the forecast made by the forecasting algorithm and (manual) modifications added by various participants in the forecasting process, and compares the values to the actual sales data.
Manage forecast error calculation the app is used to calculate the forecast error and is used as the primary input for inventory optimization at the base plan level.




Global(Multi-Stage) Inventory Optimization:

Multi-stage inventory optimization operators are used to recommend safety stocks at all products and locations in the supply chain. Customizable Total Security reduces stock holding costs while ensuring all service level targets are met. The operator also considers smoothing for continuous binary sourcing.
The operator performs the following:

  • Optimizes safety stock globally and simultaneously across all products and locations of the supply chain, taking into account demand uncertainties, supply uncertainties, supply volume, lead time, cost and service levels.
  • Calculates security stock targets, backorders, and average prompt volume.
  • Promotes forecasting and forecast variability to stocking nodes on demand from customers.

Calculate Inventory Components:

  • Calculate Target Inventory Components operator is used to calculate the types of inventory that comprise the total inventory for a given item to support a more granular inventory optimization calculation.
  • Runs a calculation with respect to optimal inventory targets.
  • Estimates target, average quantities, and currency values of inventory position, on-hand stock, cycle stock, pipeline stock, and merchandising stock.
  • Supports minimum stock requirements and cost per unit as inputs.
  • Calculates the reorder point and the days of supply for recommended safety stock and for on-hand stock (target, average and end of period).
  • Calculates values for the whole network.

Single Stage Inventory Optimization::

  • Single-stage inventory optimization operator is used to calculate recommended safety stock and target inventory position values locally for each product-location combination. .
  • It run simulations when you want to determine the impact on recommended safety stock for local changes to input key figures..
  • Because some of the inputs to the single-stage inventory optimization operator are the outputs of the multi-stage inventory optimization operator, you must run the multi-stage inventory optimization before running the single-stage inventory optimization.

Inventory optimization results produced by SAP IBP are available in the SAP IBP Excel plan view so you can review and update the data before transferring it to ECC or S/4 HANA.

After the review and necessary adjustments, the plan is saved in the Excel planning view.



For any inventory optimization related solution please contact to Baranwal Consultancy And Services.

Author

Vivekanand Vakil
SAP IBP Consultant, Baranwal Consultancy and Services (BCS), Pune, Maharashtra, India

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