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Uwe Goehring
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MM (Materials Management)
SAP ERP | enterprise resource planning | pd | reorder level | sap erp logistics materials management | vv
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https://blogs.sap.com/2012/05/30/replenishment-strategies-in-sap-erp/ 1/11
23/8/2017 Replenishment Strategies in SAP ERP | SAP Blogs
V1. It is the combination in which the four MRP screens are set up, that
determines what strategy is actually executed by the system.
Yes, it looks like you are coaching a football team and the offense has exactly
two plays they can choose from: run the ball left or through the middle. Your
quarterback never learned how to throw the ball.
Lets introduce and put together a playbook with which you and your team rip
up the defense and move the ball (product) in the most effective way across
the playing field (your network).
Plan on Demand (PD), the most widely used replenishment strategy in the
SAP universe, also requires the most manual labor. In no way would I ever
say dont use PD, but give me a break; you use it for 98 percent of your raw
and packaging materials? Well, maybe you dont and then Im particularly
proud of you. since you are definitely the exception.
https://blogs.sap.com/2012/05/30/replenishment-strategies-in-sap-erp/ 2/11
23/8/2017 Replenishment Strategies in SAP ERP | SAP Blogs
PD is deterministic and therefore, in its purest form, waits for demand before it
springs into action. If there is demand and the MRP run gets executed, a
supply proposal is generated to cover that demand. No magic, no automation,
nothing. Its as simple as that. Before your kid doesnt ask for a bathroom you
dont look for one, right? And as long as she gives you enough lead time you
dont have a problem (ever took your three kids on a stroll through midtown
Manhattan, though?)
No demand, no supply! Which works really well when the purchased part is
expensive and therefore costly to store, its consumption is highly variable and
unpredictable and the lead time to procure is short. But when your production
lines starve because a component is missing, your customers are told that you
cant deliver the Porsche because you plan the standard cigarette lighter on
demand or your bakery starts making pretzels after you walk in to buy one (or
your butchers starts raising pigs after you order a pork sausage) then we
are in real trouble!
Your PDs should be worth the constant attention they need. It is ok to carefully
watch and monitor how much of Johnny Walkers Blue Label you hold behind
the bar, but to tell a patron that you ran out of salt because you were waiting to
buy a sack until they asked for it, is flat out ridiculous (take a quick check to
see if any one of your highest consumable, standard parts is set to PD)
There are ways to make a PD work for situations described above. You can
set a safety stock, create a parts forecast or work with lot sizing procedures.
That way you cover up the disadvantages of a PD, with stochastic
(consumption driven) methods which help you somewhat to automate.
However if the part calls for such methods, why not employing a standard
consumption based planning method altogether? That is why they are there
and they work beautifully if combined with the right lot sizing, safety stock or
availability checking rule.
becomes energy. You instinctively know that you have to have enough energy
left at the trigger point so that you dont run out completely within the
replenishment lead time. This is no different with the raw materials you need
to keep your lines going.
This kind of replenishment, like all other ones too, only works well in certain
situations. Since you can predict 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 would be completely unpredictable, the trigger point would have to be set
very high, because you really dont want to risk losing your life when you have
a very sudden drop in energy.
Also, if you are very far away from food lets say on a marathon run where
you cant stop and sit down for lunch you may eat some extra carbohydrates
beforehand so that your energy level is very high and gets you through a long
lead time. And last, but certainly not least, you want to think about your service
level. What is the percentage of time that would be acceptable for you to
wither away? (Now this metaphor does not work that well anymore).
These three variables determine where you set your reorder level. The more
predictable the consumption, the lower the reorder level needs to be. The
longer the lead time, the higher the reorder level needs to be. And the higher
your expectation to never run out (e.g. a 99% service level), the higher the
reorder level for safety. In the latter case the reorder level moves up
exponentially. This kind of thinking will also help us to determine at what
situation reorder level planning does not make sense anymore. Obviously, if
you have unpredictable consumption in combination with a long lead time and
high expectations to never run out, you should look for another strategy. Your
reorder level, and therefore your inventory holding, is too high.
Oh and dont forget about the other dimensions: value and size. Salt,
something that is cheap and does not take up much room, is assumed to be in
inventory at all times (I wouldnt go back to a restaurant that could not get me
a salt shaker on the table, after I asked for it). Even if the use is unpredictable,
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 reorder level, since
it is cheap to hold and easy to store.
Of course you could also plan salt on demand, but the point is, that if you do
that you would have to watch your salt at all times and with the reorder level
https://blogs.sap.com/2012/05/30/replenishment-strategies-in-sap-erp/ 4/11
23/8/2017 Replenishment Strategies in SAP ERP | SAP Blogs
procedure you get automation; you dont have to watch it; its out of the way
and plans itself.
SAP ERP provides you with four standard reorder level procedures to choose
from (technically there is a fifth one for time-phased planning which we will
cover later):
VB, the most basic of them all, where you set your reorder level
manually and MRP just simply creates a supply proposal when
inventory breaks through that level
V1, which also uses external requirements, like a sales order, within
the replenishment lead time only, to calculate when the reorder level is
broken
VM, where the reorder level (and the safety stock) is calculated
automatically by the material forecast
And V2 which is a combination of V1, using external requirement s
and VM, which calculates reorder level and safety stock using the
material forecast
In its original, simple sense, Kanban uses two bins with a certain quantity of
parts in each, and when one is empty, replenishment is executed while the
other bin or its content is used up. You just have to design the quantity
available in each bin, so as to have enough in one bin to not run out while the
other is filled back up.
So when do you use that kind of thing? Instead of a reorder level procedure?
Because its the same thing? I dont think so. Going back to our energy
example, it becomes clear that there are situations where you cannot simply
https://blogs.sap.com/2012/05/30/replenishment-strategies-in-sap-erp/ 5/11
23/8/2017 Replenishment Strategies in SAP ERP | SAP Blogs
trade a reorder level procedure for Kanban. I dont have a second bin of
energy that I can switch to, while I fill the empty one up. On an airplane you
usually have more than one tank and on my 1957 Money M20A, I was able to
switch over to the right wing tank before the left wing tank emptied out, but
that is simply not always possible (hmm was my fuel supply really Kanban
controlled?). When you fill Rum into bottles from a tank over the bottling line,
you dont want to switch back and forth between two tanks but rather start the
replenishment process for the blending at some point when that one available
tank gets to a level where the replenishment lead time fills it back up to where
it needs to be, before you run out.
Kanban is great for parts needed on an assembly line. You put two bins of
screws on there and the worker takes what she needs. When the bin is empty,
she takes screws from the second bin and sends the empty one to the
warehouse for replenishment.
Material forecast: I have not yet seen an SAP installation where the MRP
type VV is used to its full potential. Here are my five cents:
First off: a VV can also be used for finished goods. Its just that SAP never
thought about configuring that option into the initial version, so they didnt
customize the standard software delivery that way. You will have to maintain
some entries for VV in customizing transaction ???? before you can sell a VV
product in a sales order. There are many situations that would call to set a
finished product to VV. As an example, you can create a forecast in the
material rather then in S&OP and then copy the VV forecast as a VSF into
demand planning. This has the advantage that you have perfect, individual
control over the products forecast and the added advantage that sales orders
consume that forecast.
you that the current underlying model does not hold water anymore. So, like
all the other strategies, you can only use a VV when it fits the bill. Dont blame
SAP when you use VV for a finished product and you complain that it does not
pick up immediately on a demand spike. It simply wont.
Its like a squirrel planning for his family for the winter. Rocky has a forecast in
his head and brings walnuts in to provide for the upcoming winter season.
Should he become unusually hungry, he just eats up what he has and does
not bring in more to cover that spike. There are no more nuts! So it is with your
long lead time items that are predictable. If it takes 6 months to bring in peach
skin micro fiber from China, you dont want additional sales orders introduce
nervousness into your procurement schedule because it just wont do any
good anyway.
You can cover variability in demand; but in case of the VV you do this with
safety stock. Either static, forecast adjusted, or dynamic with a range of
coverage profile. Once the safety stock is depleted you run out and the service
level degrades.
Now the system is able to calculate the tracking signal for you which is
determined taking the error total divided by the MAD. If you think about it;
when that coefficient is high, then you have am]n error total which is high
above zero (therefore a bad model underlying your forecasting) and a low
https://blogs.sap.com/2012/05/30/replenishment-strategies-in-sap-erp/ 7/11
23/8/2017 Replenishment Strategies in SAP ERP | SAP Blogs
mean absolute deviation (meaning that consumption follows some pattern, just
not the one you had selected). Or, in different terms, the error total should be
close to zero and therefore if you get a high number out of the formula
FS/MAD, you have such a high error total that you might have to change
gears and select a different strategy altogether.
What is being compared to the tracking signal (TS = FS/MAD) in SAP is the
tracking limit. It is maintained on the forecast screen and in standard is set to
4.0. If the tracking limit is exceeded by the tracking signal, you get an
exception message in MP33 and you can even set the system so that a new
model selection procedure is automatically initialized.
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7 Comments
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Chintan Dhande
https://blogs.sap.com/2012/05/30/replenishment-strategies-in-sap-erp/ 8/11
23/8/2017 Replenishment Strategies in SAP ERP | SAP Blogs
Isam Kamel
Daniel Strange
Fantastic post Uwe! Brilliant use of metaphors to describe some difficult business
scenarios. Thanks for taking the time to write this.
Mariagrazia Bombini
thanks a lot.
Maria Grazia
https://blogs.sap.com/2012/05/30/replenishment-strategies-in-sap-erp/ 9/11
23/8/2017 Replenishment Strategies in SAP ERP | SAP Blogs
the only method that I can think of on th spot is Kanban. I once developed
this process for a rice company which stored rice in silos but there are too
many unknowns for me to come up with a definite solution
John Krech
Great summary of the complexities involved with MRP in SAP and how often settings
can be overlooked, especially when it comes to the inter-relationships between the
settings. Having a solution that ties together all the settings as well as all the
uncertainties in demand, lead-time, and yield can make identifying the right strategy
much easier. The key is to link them together with a metric to guide decisions, tools like
SAP Simple Logistics (S/HANA Enterprise Management) combine the multiple screens
but it cant tell you the impact of the different strategies. Fortunately, there are solutions
to this.
Regards
John
https://blogs.sap.com/2012/05/30/replenishment-strategies-in-sap-erp/ 11/11