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Strategic inventory levels

to satisfy customer
requirements
Northern
Cal OAUG Training Day
Sridhar Hoskote
Partner, Inspirage
LLC
January
21, 2009
Copyright Inspirage LLC, 2009. Private and confidential. All rights reserved

Page 1

The Oracle APS and Demantra Specialists

Agenda

Introduction
Business Challenges
Supply Chain
Need for System Support
IO implementation
Integrating IO with constrained ASCP
Cutover process
Results and Summary
Q&A
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The Oracle APS and Demantra Specialists

Inspirage is recognized as a premier consulting firm


specializing in Oracle Advanced Planning and Demantra
Founded by former Oracle APS Product Development Senior Managers
Applications.
responsible for design and development of many APS applications

Strategic partnership with Oracle product development in


Areas of new product design and development
Preferred partner for training other System Implementers
Recognized as subject matter experts within the Oracle APS community
Numerous highly successful reference clients
Leadership role in OAUG special interest groups for Advanced Planning and
Demantra
Contribute to knowledge sharing by presenting in forums such as OAUG and
Oracle Open World conferences
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Page 3

The Oracle APS and Demantra Specialists

Inspirage Customers

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The Oracle APS and Demantra Specialists

Inspirage provides the complete expertise of the integrated Oracle


forecasting and supply planning solutions
Advanced Planning

S&OP

Monitor plans to actual, collaborate,


and respond

DM
Demand
Management, Stats
Forecast, Multi-tier
Collaboration

Workflow, AF/DM,
Chaining, Member
Management

CP
Trading Partner
Collaboration

SNO
Strategic
Sourcing

IO
Inventory
Strategy

PS
Detailed
Scheduling

GOP
Schedule,
Un-schedule orders

Schedule orders

Collect Planning
Data

ASCP
Consume
Forecast
Constrained /
Optimized Planning

ERP

Release orders

Distribution/ Service
Parts Planning

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SO History

Page 5

The Oracle APS and Demantra Specialists

Introduction

Source Photonics designs and manufactures wide variety of


optoelectronic devices
Broad product line of PON, Telecom, and Datacom transceivers
One of the largest volume suppliers of non-VSCEL based
transceivers in the world~ 4-6M per year of 1310nm and 1550nm
transceivers

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Page 6

The Oracle APS and Demantra Specialists

2006

2007

Summer 08

November 08

Gl
o
Pr ba
om l O
is rde
in r
g/
Pi
lo

tC
P

iz
at
io
n-

In
v
Ph ent
as or
e yO
2
pt
im

iz
at
io
nIn
v
Ph ent
as or
e yO
1
pt
im

Or
pr acle
od E
uc xe
ts cu
tio
n
Co
ns
tra
in
ed
AS
CP

Oracle footprint

Feb 09

Implemented Oracle E business suite in late 2006 and early 2007


Implemented constrained ASCP in 2007
Inventory optimization with demand variability in Summer 08
Integration of IO and ASCP, supplier LT variability in November 09
GOP is slated for early 09

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Page 7

The Oracle APS and Demantra Specialists

Business
Challenges

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The Oracle APS and Demantra Specialists

Business Challenges
Customers

Scheduled Ship
Date
Request Date

14 wks LT

How much inventory do you need to satisfy request dates?


Where do you keep those inventories?
How do deal with huge lead time requirements?
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Page 9

The Oracle APS and Demantra Specialists

Business challenges
Not able to satisfy requirements by request date with
current inventory levels
Need to determine and add inventory strategically
Need flexibility in using common materials into large
number of finished goods
Customers do not always provide enough lead times
Lead times can be up to 14 weeks

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The Oracle APS and Demantra Specialists

Business challenges
Forecast accuracy and demand stability are quite poor
Supplier delivery performance contributes to
uncertainty
Need to rely upon key trading partners to fulfill
demands
Exploit the natural build lead times to push inventory
away from finished goods
Complex supply chain structure makes it very difficult
to plan for inventory levels
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The Oracle APS and Demantra Specialists

Supply Chain

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The Oracle APS and Demantra Specialists

Characteristics of supply Chain


Generally 5 to 8 levels deeps
Goes across 3 organizations
Each end item has anywhere from 100 to 400 components
Relatively short manufacturing lead times
Long material procurement lead times
Extensive commonality of components in each family of end
products
Same common materials can be packaged into a vast number of
finished goods

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The Oracle APS and Demantra Specialists

Simplified supply chain BOM

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The Oracle APS and Demantra Specialists

Products fan out

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The Oracle APS and Demantra Specialists

Need for System


Support

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The Oracle APS and Demantra Specialists

Several critical complexities to consider


Time varying
Inventory

Multiechelon

Y
B

A
A
I

E
D

J
Pooling

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Postponement

Page 17

The Oracle APS and Demantra Specialists

Need for programmatic inventory calculation


Consider legitimate drivers for inventory requirements
such as Service Levels
Consider the entire supply chain BOM structure
Consider uncertainties namely demand uncertainty
and supplier delivery performance
Consider appropriate lead times at various levels
Consider dependent demand and propagate need for
inventory across the supply chain

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The Oracle APS and Demantra Specialists

Modeling

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The Oracle APS and Demantra Specialists

Modeling

MAPE (Mean Absolute Percent


Error) for each product
line

Demand Variability

Via simple
probability
distribution
of lateness

Lead Time
Variability

Strategic
Strategic
Inventory
Inventory

Service
Levels

Primary driver for setting this


was based on OTD

Supply Chain BOM


Supply Chain BOM using BOM,
sourcing, routings
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The Oracle APS and Demantra Specialists

Modeling
Demand Uncertainty
MAPE calculated by comparing history to actual
Default MAPE where there was no history
Varied MAPE to calculate reasonable inventory levels
Supplier Delivery Performance
Set up dummy supplier
In IO plan all purchased parts were sourced using above
dummy supplier
Lateness distribution associated with dummy supplier

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The Oracle APS and Demantra Specialists

Implementing
Inventory
Optimization

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The Oracle APS and Demantra Specialists

Important set up for IO to run


Safety Stock method - MRP planned % vs non MRP planned
Lead times Processing, pre-processing, post-processing,
intransit
ABC classes - plan selects items based on ABC classes
Alternate BOMs and Substitutes made a strategic decision to
not consider alternates and substitutes
Forecast error measure MAPE fed at item level
Supplier LT variability

Single supplier source for all buy items


Establish ASL relationships
Feed distribution st supplier level
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The Oracle APS and Demantra Specialists

Other significant set ups

Used internal cost roll up instead if actual costs


Set up Weights to increase the rolled up costs
Carrying costs was set to a global value
Set postponement factor to 20
Used profiles to prevent SS calculation on
alternate paths and substitute items
Used 24 by 7 calendar in all orgs to smooth out
safety stock requirements
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The Oracle APS and Demantra Specialists

Plan options
IO runs with 36 weekly buckets and no period
buckets
Penalty factors chosen to derive stable results
No existing supplies or scheduled receipts
considered
DP scenarios used to feed MAPE numbers
into the plan
Enforce service level plans
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The Oracle APS and Demantra Specialists

Enhanced postponement
X

X
A

LT= 65
days

LT= 5
days

LT= 65
days

LT= 5
days

Postponed SS is in
matched sets
Both A and B will get SS
based on max LT which is A
NORMAL POSTPONEMENT

Postponed SS is based on
LT for each component
A and B will get SS based
on their LTs
ENHANCED POSTPONEMENT

Source Photonics used Enhanced Postponement


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The Oracle APS and Demantra Specialists

ASCP plans with IO as input


Constrained ASCP plans with decision rules was already in
production
Introduced transient (temporary) safety stock requirements using
IO
Objective was to introduce IO as input without significantly
affecting plan quality (lateness, inventory etc.)
Integrating ASCP and IO was a significant effort
Safety Stocks vary across the horizon and finally disappear
(transient)
No dedicated supplies created to satisfy SS requirements
The actual supplies are pulled forward instead of creating new
supplies. Needed to make room for this effect
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The Oracle APS and Demantra Specialists

Propagated service levels


IO calculates propagated Service Levels to derive SS
for buy items
With large number of items at a given level the Service
Level tends to go to 99.99% very fast
Beta factor allowed for tempering the above effect
Source photonics used this factor to fine tune SS
levels for buy items

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The Oracle APS and Demantra Specialists

Plan facts
Plans very intricate and a long supply chain up to 120
days cumulative lead time.
Each end item can have to 300 items
We avoid planning all substitute and alternate paths in IO
Demand variability modeled via MAPE measure
Postponement used to push safety stocks through all levels
of BOM (max of 8 levels)
Used enhanced postponement logic lead time specific
safety stock for sibling items
We use supplier lead time variability to model delivery
performance
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The Oracle APS and Demantra Specialists

Plan facts
Enforce Service Level plans
IO plans approximately 7300 items in 2.5 hours
Safety Stocks calculated for about 4000 items
Plan horizon is 36 weeks
Demand variability specified via MAPE
Includes both demand and supplier LT variability
Do not consider scheduled receipts

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The Oracle APS and Demantra Specialists

IO Integration with
Constrained ASCP

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The Oracle APS and Demantra Specialists

Steps taken to make ASCP work


Sized the requirements from safety stocks to make it true
transient safety stock
Added additional internal resources to accommodate both
regular demands and safety stocks requirements
Used profiles to minimize shared supplies between regular
demands and SS requirements
Smoothed safety stock requirements such that system had
a chance to consume all supplies within plan horizon

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The Oracle APS and Demantra Specialists

Factors considered to fine tune ASCP

Lot for Lot


Number of supplies to be scheduled
Number of times to re-schedule shared supplies
Supplies used to satisfy safety stock
Demand and Supply Window widths
Use Optimization Phase dates for pegging
Split planned orders to perform safety stock pegging

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The Oracle APS and Demantra Specialists

Cutover Process

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The Oracle APS and Demantra Specialists

IO plans

Plans with postponement


Demand variability only
Plans with no
postponement,
Demand variability only

Plans with postponement


Demand and supplier lead
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variability

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The Oracle APS and Demantra Specialists

Explaining output from IO


Days of supply needed to hold/support manufacturing activities
Instead of verifying exact SS calculations, concentrated on
factors that could affect SS and sensitivity of SS due to each
factor
Role of lead times in arriving at SS
Importance of Service Levels in calculating SS
Important set up issues that could affect SS ABC classes,
SS method, lead times, types of lead times

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The Oracle APS and Demantra Specialists

ASCP plans
Constrained ASCP
Constrained ASCP

Plans

Plans

Plans with postponement

Plans with postponement

Demand variability only

Demand and supplier lead


time variability

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The Oracle APS and Demantra Specialists

Adoption of IO into ASCP plans


Initially fed SS for only buy items into ASCP
Provided a gradual ramp up of SS to give a chance for
manufacturing and other resources to react
Made SS requirements transient to avoid pegging to
excess
Cut off SS requirements after the longest cumulative Mfg lead
time
Set SS to zero for a few buckets prior to end of demands

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The Oracle APS and Demantra Specialists

Results &
Summary

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The Oracle APS and Demantra Specialists

Results
The overall safety stock planned is in line with expectationsapproximately 6 weeks of inventory in the system
The inventory value matches with the current levels in plan with
no postponement
Plans with postponement shows improvement up to 20% in
inventory value
Satisfaction of orders by customer request date is expected with
a comprehensive execution of IO plans

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The Oracle APS and Demantra Specialists

Summary
Needed a comprehensive inventory planning system to plan
and satisfy requirements by request dates
Utilized Oracle Inventory Optimization to plan inventory
levels
Used demand and supplier lead time variabilities to
influence safety stock requirements
Significantly improved customer fulfillment and inventory
reduction

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The Oracle APS and Demantra Specialists

Question & Answers?

Sridhar Hoskote

510 676 6753

Sridhar.hoskote@inspirage.com

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The Oracle APS and Demantra Specialists