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SAP Service Level Optimization (Part of the Enterprise Inventory and Service-Level Optimization software)
Overview
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Agenda
SLO Overview
Global Service Level Targets
SKU-level Service Level Target Setting
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Service Level Optimization: Basics
Target service levels are key inputs for inventory planning
Some industries measure service level at the global level
Planning requires that global target be disaggregated to item-location-specific
targets
Managers try to balance conflicting pressures from
– Reducing inventory and operating costs
– Improving service and customer satisfaction
– Reducing lost sales
A tool is required to determine the item-location service levels
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Given supply chain topology information and cost parameters, determine
stocking point-specific service level targets to
– Minimize total safety stocks
– Minimize total inventory cost , or
– Minimizing total inventory cost and lost margin
– Ensuring target global fill rate, when applicable
– Enforcing min-max limits on individual service levels
Service Level Optimization Purpose
Objectives
Constraints
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Inputs and Outputs
Inputs
• Replenishment characteristics
• Unit Cost, Unit Purchase Cost and Unit Transfer Price
• Service Level Measure
• Minimization Objective
• Minimum and Maximum Service Level Allowed
• Lost Sales Percentage
• Global Service Objective (Optional)
Outputs
• SKU Service Levels
• Inventory Targets
• Lost Demand and Margin
• Optimal Global Service Objective (When not input)
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Service Level Optimization Use Cases
SLO Feature Meet Global Target Balance Costs with
Lost Margin
Optimization Objective Minimize Inv. Costs Minimize Σ(Inv. Costs, Lost
Margin)
Global Service Constraint Yes
(Unit or Dollar Fill Rate)
No
(The optimal global service
level is an output based upon
the tradeoff between
inventory cost and lost
margin)
Allowable Range for Item-
Loc Service Level
Input Input
Sales Price
Not required Input
Lost Sales Percentage** Not required Input
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Agenda
SLO Overview
Global Service Level Targets
SKU-level Service Level Target Setting
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Intuition Building Example – Meet Global Target
Consider 3 items subject to a global
fill rate of 95%
Assume
– PBR = 1 and LT = 1
– Holding Cost Percentage = 20%
Consider when all three items are
set to 95%
– Annual SS Holding Cost: $55,121
– Annual Inv Holding Cost: $173,583
Item Case
Inv.
Cost
Weekly
Demand
Forecast
Forecast Error
Target Fill
Rate
1 $100 500 25% 95%
2 $200 1000 25% 95%
3 $100 1500 100% 95%
95.0%
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
Baseline
Total SS Annual Holding Cost
95.0 %
95.0 %
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94.0%
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
Scenario1
Total SS Annual Holding Cost
Intuition Building Example – Scenario 1
To lower cost, let’s reduce the fill
rate of Item 3 by 1% to 94%
To maintain the global fill rate, we
need to adjust the fill rate of the
remaining items. Let’s adjust the fill
rate of Item 2 by 1.5% to 96.5%
Annual SS Holding Cost: $54,365
(a 1% improvement)
95.0 %
96.5% Target
Fill Rate
95.0%
96.5%
94.0%
Item Case
Inv.
Cost
Weekly
Demand
Forecast
Forecast
Error
1 $100 500 25%
2 $200 1000 25%
3 $100 1500 100%
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Intuition Building Example – Scenario 2
However, note that Item 1 is less
expensive than Item 2. Instead of
adjusting Item 2, let’s adjust the fill
rate of Item 1 by 3% to 98%.
Annual SS Holding Cost: $53,248
Item Case
Inv.
Cost
Weekly
Demand
Forecast
Forecast
Error
1 $100 500 25%
2 $200 1000 25%
3 $100 1500 100%
Target
Fill Rate
98%
95%
94%
94.0%
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
Scenario2
Total SS Annual Holding Cost
98.0 %
95.0%
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Intuition Building Example – Optimal
The most cost-effective approach is
to set
– Item 1 to 98.36%
– Item 2 to 96.10%
– Item 3 to 93.15%
Annual SS Holding Cost: $53,081
(a 4% improvement)
Annual Inv Holding Cost: $171,543
Item Case
Inv.
Cost
Weekly
Demand
Forecast
Forecast
Error
1 $100 500 25%
2 $200 1000 25%
3 $100 1500 100%
Target
Fill Rate
98.36%
96.10%
93.15%
93.15%
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
Optimal
Total SS Annual Holding Cost
96.10 %
98.36%
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Example Recap: Meet Global Target
Customer Service level: unchanged
Business saves money with no
adverse customer impact
Optimal solution found within
Global Service level constraint
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
Total SS Annual Holding Cost
Baseline Scenario 1 Scenario 2 Optimal
95.0% 94.0% 94.0% 93.15%
96.10% 98.0%
96.5% 95.0%
98.36% 95.0% 95.0% 95.0%
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Agenda
SLO Overview
Global Service Level Targets
SKU-level Service Level Target Setting
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Service Level Optimization: Balance Costs with Lost
Margin
How is an inventory target set?
Managers try to balance conflicting pressures from
– Reducing inventory and operating costs
– Improving service and customer satisfaction
– Reducing lost sales
How can we run the calculation to determine optimum service level in the
absence of a Global service level?
– Balance cost of lost sales with cost of higher service
– Use EIS granular, item-location-time period approach
A tool is required to determine the item-location service levels
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SLO Intuition Building Example 2 – Minimizing inventory
cost and lost margin
Consider unit purchase cost, unit transfer (sell) price and lost sales percentage
when service is not perfect
Item Case
Inv.
Cost
Weekly
Demand
Forecast
Forecast
Error
Case
Purchase
Cost
Case
Transfer
(Sell )
Price
Lost
Sales
Perc.
Optimal Fill
Rate
Based on Min
Inv Alone
1 $100 500 25% $80 $120 10% 98.36%
2 $200 1000 25% $150 $250 15% 96.10%
3 $100 1500 100% $100 $130 15% 93.15%
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Intuition Building Example – Minimizing inventory cost
and lost sales
Consider item 3 (“yellow” item)
Total cost of inventory holding and
lost sales is $132,278
93.15%
$0
$10
$20
$30
$40
$50
$60
93.15%
Th
ou
san
ds
Total SS Annual Holding Cost
$39
$45
$48
$-
$20
$40
$60
$80
$100
$120
$140
93.15%
Th
ou
san
ds
Total Cost of Inventory Holding and Lost Sales
SS Holding $Other Holding $Lost Sales $
96.10%
98.36%
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Intuition Building Example – Minimizing inventory cost
and lost sales
Let’s vary the service level target
$39 $41 $45 $49 $55 $62
$73
$45 $45 $45
$45 $45
$45
$45
$48 $43 $37 $30 $23 $16
$9
$-
$20
$40
$60
$80
$100
$120
$140
93.15% 94.0% 95.0% 96.0% 97.0% 98.0% 99.0%
Total Cost of Inventory Holding and Lost Sales
Lost Sales $
Other
Holding $
SS Holding $
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Intuition Building Example – Minimizing inventory cost
and lost sales
The most cost-effective approach is
to set Item 3 to 97.59%
Total cost of inventory holding and
lost sales become $122,566 from
$132,278
$59
$45
$19
$-
$20
$40
$60
$80
$100
$120
$140
Optimal
Th
ou
san
ds
Total Cost of Inventory Holding and Lost Sales
SS Holding $Other Holding $Lost Sales $
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Intuition Building Example – Minimizing inventory cost
and lost margin
Across all items, we get optimal fill rates as below
The overall global fill rate will be 98.44%, showing the optimal cost structure existing
at a higher service level than the previous estimated 95% global target
Item Case
Inv.
Cost
Weekly
Demand
Forecast
Forecast
Error
Case
Purchase
Cost
Case
Price
Loss
Perc.
Optimal
Fill Rate
1 $100 500 25% $80 $135 10% 98.86%
2 $200 1000 25% $150 $230 15% 99.49%
3 $100 1500 100% $100 $130 15% 97.59%
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Sample SLO Results
Recommended Service Level Target Changes
by Stocking Point
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
Ch
an
ge i
n S
erv
ice L
evel
Service
Increases
Service
Decreases
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Service Level Optimization Summary
EIS’ Service Level Optimization module (SLO) is designed;
• to determine the right item-location-specific service targets
• to minimize inventory investment and lost margin
• while meeting a global service objective, or
• while setting service level objectives based on the balance between cost-to-serve and cost of lost sales
SLO evaluates the true cost drivers with its EIO backbone;
• Product volume
• Product cost
• Demand and supply variability
• Batch and lot sizes
• Coordinated multistage inventory planning
• Trades off lost margin versus holding cost
Service Level Optimization has provided:
• an additional 5-10% on hand inventory reduction on top of EIO
• better understanding and decision-making capability around the trade off between service and inventory
Thank you