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Background
CycloTech Ltd. (fictional company name), a leading manufacturer of high-end bicycles, faces significant challenges due to the seasonal nature of their products, long lead times, and a volatile market. The company operates manufacturing plants in Asia for components and in Europe for assembling the finished products. The supply chain includes regional warehouses, local warehouses and local retailers, with port locations in between used as administrative non-stock locations.
Challenges
1. Seasonality: Demand for bicycles peaks in warmer months, leading to high inventory levels during off-peak seasons.
2. Innovation: Rapid advancements in e-bike technology require frequent updates to product lines, complicating inventory management.
3. Lead Times: Long lead times for components, especially high-tech parts like batteries and motors, disrupt production schedules.
3. Market Volatility: Fluctuations in demand due to economic conditions and consumer preferences create uncertainty in inventory planning.
Strategic Deployment Planning with SAP IBP
Objective: To optimize inventory deployment, reduce costs, and improve customer satisfaction by leveraging SAP Integrated Business Planning (IBP) for Response & Supply.
Implementation
Chosen Algorithm: Optimizer
1. Cost Reduction
- Strategic Stock Allocation: CycloTech uses SAP IBP to allocate stock to regional distribution centres based on historical demand data. This reduces the risk of overstocking and minimizes storage costs.
- Example: By analyzing past sales data, CycloTech identifies that mountain bikes are more popular in regions with rugged terrain. They allocate more stock to these areas, reducing slow-moving inventory.
- Key settings: demand cost determination by demand prioritization, inventory holding cost rules based on product groups and location types.
2. Improved Customer Service
- On Time In Full (OTIF) KPI: SAP IBP helps CycloTech ensure that inventory is available at the right time and place, improving their OTIF KPI.
- Example: During peak season, CycloTech prioritizes the deployment of popular models to high-demand regions, ensuring timely delivery and enhancing customer satisfaction.
- Key settings: late delivery and non-delivery costs by demand cost rules based on segments, safety stock violation costs.
3. Enhanced Supply Chain Efficiency
- Reduced Urgent Orders: By planning inventory deployment in advance, CycloTech reduces the frequency of urgent orders, freeing up cash flow.
- Example: CycloTech uses the optimizer algorithm in SAP IBP to create a cost-optimized supply plan, ensuring that high-demand products are always in stock.
- Key settings: ‘zero’ maximum stock in port locations, push demand to local warehouses on high demand products, flexible periodical safety stock quantities (with the help of IBP for Inventory), inventory costs, subnetworks, transportation costs.
4. Innovation Management
- Frequent Product Updates: CycloTech leverages SAP IBP to manage frequent updates to their e-bike product line, ensuring that new models are deployed efficiently.
- Example: When a new e-bike model is launched, CycloTech uses the optimizer algorithm to calculate a cost-effective supply plan, considering constraints like production capacity and transportation costs.
- Key settings: use of allocations to protect new models in key markets, location product substitutions promotion (inventory holding costs).
5. Handling Market Volatility
- Flexible Planning: SAP IBP allows CycloTech to adjust their deployment strategy based on real-time market data.
- Example: During an economic downturn, CycloTech uses constraints to relax supplier delivery volumes, reducing excess inventory and aligning supply with reduced demand.
- Key settings: maximum stock and receipts at manufacturing locations for components during reduced demand periods.
Furthermore, the following settings play a key role in the deployment process for CycloTech:
1. Available to Deploy Profile
- Order Types: Define stock transfers to be pegged to specific order types such as purchase orders, stock transfers and production orders.
2. Switchable Constraints
- Supplier Constraints: Limit supplier delivery volumes per period to manage supply effectively.
- Capacity Constraints: Regulate production and transportation volumes based on available resource limits.
- Allocations: Strategically distribute supply among key product groups, protecting trending and upcoming markets with a low demand
- Maximum Receipts/Requirements: Limit order sizes for better stock management.
- Lot Sizes: Define minimum, maximum, and rounding values for orders to optimize batch processing.
- Freeze Horizons: Lock supply plans for short-term stability, coordinating with execution systems.
3. General Parameters
- Horizons: Define freeze horizon durations to align with operational execution systems (interaction between SAP IBP and S/4HANA).
- Substitution Priority Limits: Restrict substitution scenarios for better control over discontinuations, mutual substitution, and promotional substitutions.
4. Planning with Subnetworks
- Manufacturing Plants to Regional Warehouses: Segment the supply chain network into subnetworks, ensuring localized planning strategies for different parts of the network.
- Regional Warehouses to Local Warehouses and Retailers: Optimize the flow of goods from regional warehouses to local warehouses and retailers, ensuring timely delivery and reducing lead times.
5. Planning with Quotas
- Quota-Based Supply Sourcing: Apply quota-based supply sourcing to balance demand fulfillment across different regions and customer segments.
6. Optimizer Costs and Settings
- Inventory Holding Costs: Penalize excess stock to encourage efficient inventory management.
- Transportation Costs: Prioritize cost-effective transport modes to reduce logistics expenses.
- Late/Non-Delivery Costs: Penalize delayed or missed demand fulfillment to ensure timely delivery.
- Fair Share Mechanisms: Ensure balanced distribution of supply and safety stock across the network.
- Advanced Settings: Allow runtime optimization to balance complexity and efficiency, ensuring optimal performance during planning runs.
7. Use of IBP apps ‘Planner Workspace’, ‘Gating Factors and ’Advanced Dashboards’ for quick responses to changes in the market
8. Use of custom alerts in the deployment process
- Negative projected stock on key product groups
- Follow up on Confirmed Distribution Demand and Receipts in the past
- Stock overload based on days’ of supply
- Low days of supply on key product groups
- Transportation capacity issues
- Supplier capacity issues
Results
- Cost Savings: CycloTech reduces storage costs by 15% through strategic stock allocation.
- Improved Customer Satisfaction: OTIF KPI improvement from 78% to 96%, leading to higher customer retention rates.
- Increased Efficiency: The frequency of urgent orders decreases by 25%, freeing up cash flow for innovation and growth.
- Enhanced Flexibility: CycloTech adapts quickly to market changes, maintaining a competitive edge in the volatile cycling industry.
By leveraging SAP IBP for strategic deployment planning, CycloTech Ltd. successfully navigates the complexities of the cycling manufacturing industry, ensuring efficient inventory management and superior customer service.
Don’t let inefficient deployment planning hold your business back. By leveraging the power of SAP Integrated Business Planning (IBP), you can optimize your inventory management, reduce costs, and enhance customer satisfaction.
