Replenishment Strategies in SAP ERP

Replenishment strategies can be setup by way of the MRP type on the material master's MRP1 screen. In combination with lot sizing, various safety stocks, lea times an other in icators, the replenishment strategy is efine . It is important to un erstan that the replenishment strategy is not !ust "P#$ or "%1$. It is the combination in which the four MRP screens are set up, that etermines what strategy is actually e&ecute by the system. 'o make up an e&ample( if the MRP type "P#$ is combine with a safety stock, then we are communicating to the system that we want to e&ecute the replenishment for that part as a combination of consumption base planning, whilst primarily waiting or planning for eman . )e cover eman spikes with the safety stock, but the actual replenishment happens strictly after the eman comes in. In the following we will iscuss possible replenishment strategies( how they work, how they may be set up an configure an what kin of results shoul be e&pecte . *pecial focus is given to the analytics that can be use to etermine what strategy most likely works best for any given situation. )hat works well for a specific item to ay, might not work so well tomorrow. +n item with very pre ictable consumption might su enly receive spikes in eman an is not fit for the current replenishment strategy anymore. 'his is why it is so important to un erstan all strategies an their implications, so that the right strategy can be applie when the circumstances call for it. If the material planner knows one, two or three strategies an oes not know how to switch from one to another, your supply chain will function sub,optimally. I have seen places where the MRP controller i not even have authorization to work in change mo e on the four MRP screens in the material master. I' was setting lot sizes, lea times, strategies, MRP types an the like as per re-uest. Many times the list of usable MRP types is limite to P#, an %.. /es, it looks like you are coaching a football team an the offense has e&actly two plays they can choose from0 run the ball left or through the mi le. /our -uarterback never learne how to throw the ball. 1et2s intro uce an put together a playbook with which you an your team rip up the efense an move the ball 3pro uct4 in the most effective way across the playing fiel 3your network4.

A Playbook for Replenishment Strategies

Plan on #eman 3P#4, the most wi ely use replenishment strategy in the *+P universe, also re-uires the most manual labor. In no way woul I ever say 5 on't use P#5, but give me a break( you use it for 67 percent of your raw an packaging materials8 )ell, maybe you on't an then I'm particularly prou of you. *ince you are efinitely the e&ception.

P# is eterministic an therefore, in its purest form, waits for eman before it springs into action. If there is eman an the MRP run gets e&ecute , a supply proposal is generate to cover that eman . 9o magic, no automation, nothing. It's as simple as that. .efore your ki oesn't ask for a bathroom you on't look for one, right8 +n as long as she gives you enough lea time you on't have a problem 3ever took your three ki s on a stroll through mi town Manhattan, though84 9o eman , no supply: )hich works really well when the purchase part is e&pensive an therefore costly to store, its consumption is highly variable an unpre ictable an the lea time to procure is short. .ut when your pro uction lines starve because a component is missing, your customers are tol that you can't eliver the Porsche because you plan the stan ar cigarette lighter on eman or your bakery starts making pretzels after you walk in to buy one 3or your butchers starts raising pigs after you or er a pork sausage4; then we are in real trouble: /our P#s shoul be worth the constant attention they nee . It is ok to carefully watch an monitor how much of <ohnny )alker's .lue 1abel you hol behin the bar, but to tell a patron that you ran out of salt because you were waiting to buy a sack until they aske for it, is flat out ri iculous 3take a -uick check to see if any one of your highest consumable, stan ar parts is set to P#4 'here are ways to make a P# work for situations escribe above. /ou can set a safety stock, create a parts forecast or work with lot sizing proce ures. 'hat way you cover up the isa vantages of a P#, with stochastic 3consumption riven4 metho s which help you somewhat to automate. =owever if the part calls for such metho s, why not employing a stan ar consumption base planning metho altogether8 'hat is why they are there an they work beautifully if combine with the right lot sizing, safety stock or availability checking rule. Reor er level planning is a consumption base metho because it re-uires a minimum inventory to be available at all times an oes not wait until there is eman before replenishment is triggere . Imagine the way your metabolism works. Its inventory is energy an when that energy level rops you get hungry an a esire to fill it back up is triggere . /ou get some foo an eat. 9ow, you on2t wait until you2re completely eplete of all energy( there is an acceptable level > or range > from where you trigger replenishment. )hen you trigger energy replenishment, you usually have some lea time to eal with until you get that foo , eat it an metabolize it so it becomes energy. /ou instinctively know that you have to have enough energy left at the trigger point so that you on2t run out completely within the replenishment lea time. 'his is no ifferent with the raw materials you nee to keep your lines going. 'his kin of replenishment, like all other ones too, only works well in certain situations. *ince you can pre ict really well what your rate of loss of energy is over time, you intuitively know how to set your trigger point. If your energy loss rate woul be completely unpre ictable, the trigger point woul have to be set very high, because you really on2t want to risk losing your life when you have a very su en rop in energy.

+lso, if you are very far away from foo , let2s say on a marathon run where you can2t stop an sit own for lunch > you may eat some e&tra carbohy rates beforehan so that your energy level is very high an gets you through a long lea time. +n last, but certainly not least, you want to think about your service level. )hat is the percentage of time that woul be acceptable for you to wither away8 39ow this metaphor oes not work that well anymore4. 'hese three variables etermine where you set your reor er level. 'he more pre ictable the consumption, the lower the reor er level nee s to be. 'he longer the lea time, the higher the reor er level nee s to be. +n the higher your e&pectation to never run out 3e.g. a 66? service level4, the higher the reor er level for safety. In the latter case the reor er level moves up e&ponentially. 'his kin of thinking will also help us to etermine at what situation reor er level planning oes not make sense anymore. @bviously, if you have unpre ictable consumption in combination with a long lea time an high e&pectations to never run out, you shoul look for another strategy. /our reor er level, an therefore your inventory hol ing, is too high. @h; an on2t forget about the other imensions0 value an size. *alt, something that is cheap an oes not take up much room, is assume to be in inventory at all times 3I woul n2t go back to a restaurant that coul not get me a salt shaker on the table, after I aske for it4. Aven if the use is unpre ictable, or it takes a long time to get it, or I never want to run out. It still makes sense to bring it back in after it breaks through an even very high reor er level, since it is cheap to hol an easy to store. @f course you coul also plan salt on eman , but the point is, that if you o that you woul have to watch your salt at all times an with the reor er level proce ure you get automation( you on2t have to watch it( it2s out of the way an plans itself. *+P ARP provi es you with four stan ar reor er level proce ures to choose from 3technically there is a fifth one for time,phase planning which we will cover later40

, %., the most basic of them all, where you set your reor er level manually an MRP !ust simply creates a supply proposal when inventory breaks through that level , %1, which also uses e&ternal re-uirements, like a sales or er, within the replenishment lea time only, to calculate when the reor er level is broken , %M, where the reor er level 3an the safety stock4 is calculate automatically by the material forecast , +n %B which is a combination of %1, using e&ternal re-uirement s an %M, which calculates reor er level an safety stock using the material forecast

.e careful with the automate reor er level proce ures. 'hey use consumption patterns, lea time an service level to calculate reor er levels an if one of the parameters is off, your inventories might go through the roof. I always suggest to set the proce ure to Cmanual2 an simulate a calculation proce ure without saving it. If you o it that way, you can perform "what,ifs$ an monitor what2s happening without risk.

.efore we get to other consumption base replenishment strategies, I woul like to e&plore another metho , which is very often confuse with a reor er level proce ure an is not controlle by the MRP type on the MRP1 screen. =owever, it is a consumption base replenishment strategy nonetheless0 Danban: In its original, simple sense, Danban uses two bins with a certain -uantity of parts in each, an when one is empty, replenishment is e&ecute while the other bin > or its content > is use up. /ou !ust have to esign the -uantity available in each bin, so as to have enough in one bin to not run out while the other is fille back up. *o when o you use that kin of thing8 Instea of a reor er level proce ure8 .ecause it2s the same thing8 I on2t think so. Eoing back to our energy e&ample, it becomes clear that there are situations where you cannot simply tra e a reor er level proce ure for Danban. I on2t have a secon bin of energy that I can switch to, while I fill the empty one up. @n an airplane you usually have more than one tank an on my 16FG Money MBH+, I was able to switch over to the right wing tank before the left wing tank emptie out, but that is simply not always possible 3hmm; was my fuel supply really Danban controlle 84. )hen you fill Rum into bottles from a tank over the bottling line, you on2t want to switch back an forth between two tanks but rather start the replenishment process for the blen ing at some point when that one available tank gets to a level where the replenishment lea time fills it back up to where it nee s to be, before you run out. Danban is great for parts nee e on an assembly line. /ou put two bins of screws on there an the worker takes what she nee s. )hen the bin is empty, she takes screws from the secon bin an sen s the empty one to the warehouse for replenishment. Material forecast0 I have not yet seen an *+P installation where the MRP type %% is use to its full potential. =ere are my five cents0 Iirst off0 a %% can also be use for finishe goo s. It2s !ust that *+P never thought about configuring that option into the initial version, so they i n2t customize the stan ar software elivery that way. /ou will have to maintain some entries for %% in customizing transaction 8888 before you can sell a %% pro uct in a sales or er. 'here are many situations that woul call to set a finishe pro uct to %%. +s an e&ample, you can create a forecast in the material rather then in *J@P an then copy the %% forecast as a %*I into eman planning. 'his has the a vantage that you have perfect, in ivi ual control over the pro uct2s forecast an the a e a vantage that sales or ers consume that forecast. *o what oes the %% o8 It is a consumption,base replenishment strategy, in that it maintains inventory in anticipation of actual eman . 'he inventory is replenishe to a forecast which is base on the materials own consumption history. =ence Cmaterial forecast2. 'his is a goo strategy when you have pre ictable eman but the lea time to replenish is long. *ince you put Cartificial2 eman out there by way of a forecast, MRP is able to generate all supply elements way ahea of time an all you have to o is to turn the re-uisition into an or er at the ate the system tells you to o so. .ut beware( it oes

not take eman spikes into consi eration. +ny changes in eman will flow into the consumption pattern an eventually be picke up by the forecast mo ule. 'he system might increase or ecrease the forecast or tell you that the current un erlying mo el oes not hol water anymore. *o, like all the other strategies, you can only use a %% when it fits the bill. #on2t blame *+P when you use %% for a finishe pro uct an you complain that it oes not pick up imme iately on a eman spike. It simply won2t. It2s like a s-uirrel planning for his family for the winter. Rocky has a forecast in his hea an brings walnuts in to provi e for the upcoming winter season. *houl he become unusually hungry, he !ust eats up what he has an oes not bring in more to cover that spike. 'here are no more nuts: *o it is with your long lea time items that are pre ictable. If it takes K months to bring in peach skin micro fiber from Lhina, you on2t want a itional sales or ers intro uce nervousness into your procurement sche ule; because it !ust won2t o any goo anyway. /ou can cover variability in eman ( but in case of the %% you o this with safety stock. Aither static, forecast a !uste , or ynamic with a range of coverage profile. @nce the safety stock is eplete you run out an the service level egra es. + %% provi es a high egree of automation, but it nee s to be monitore an *+P provi es various options to o so. @ne of the parameters you can look at to see how goo the forecast was, is the error total 3I*4. It looks at each perio where there was a forecast an subtracts the forecast values from what was actually consume . +s the consumption most likely iffers from the forecast, the -uestion is0 how much ifferent8 If the un erlying mo el 3constant, tren , season or seasonal tren 4 is correct then the error shoul sometimes e&cee an sometimes fall short of what was forecaste an over the long run average out an appro&imate zero. +nother parameter calculate by the forecasting app is mean absolute eviation 3M+#4. 'his is a measure of variability an forecast -uality. 'he M+# is calculate by a ing up all absolute values of Arror an ivi ing it by the sum of the actual consumption values. 'his provi es you with a measure on how much the actual consumption eviates from the forecast on average. 'he smaller the M+#, the better the forecast was( the smaller the average eviation, the better. 9ow the system is able to calculate the tracking signal for you which is etermine taking the error total ivi e by the M+#. If you think about it( when that coefficient is high, then you have amMn error total which is high above zero 3therefore a ba mo el un erlying your forecasting4 an a low mean absolute eviation 3meaning that consumption follows some pattern, !ust not the one you ha selecte 4. @r, in ifferent terms, the error total shoul be close to zero an therefore if you get a high number out of the formula I*NM+#, you have such a high error total that you might have to change gears an select a ifferent strategy altogether. )hat is being compare to the tracking signal 3'* O I*NM+#4 in *+P is the tracking limit. It is maintaine on the forecast screen an in stan ar is set to P.H. If the tracking

limit is e&cee e by the tracking signal, you get an e&ception message in MPQQ an you can even set the system so that a new mo el selection proce ure is automatically initialize .