Spare Parts Planning with SAP at a glance.

By Grgoire Schaub and Diederik Lebbink

Table of contents

Introduction SAP Spare Parts Planning (SPP) Tactical Planning Bill-of-Distribution (BOD): a New Planning Concept A Starting Cycle Balancing the Demand Balanced History to Balanced Forecast Economic Order Quantity (EOQ) and Safety Stock Operational Planning From Tactical Planning to Operational Planning Through the BOD Life Cycle Management Conclusion A Parts Planning Tool, But Not Only Spare Parts Planning with SAP - A Ford Testimonial Deloittes Service Effectiveness Dimensions Contacts

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Introduction

1 More information about the SAP SPM suite at http:// www.sap.com/solutions/sam/ featuresfunctions/servicepartsmanagement/index.epx

For a long time the service parts industry has realized that the planning tools available to them did not have the necessary capabilities to effectively organize and plan their operations. In 2002 an alliance was formed between The Ford Motor Company, Caterpillar Logistics and SAP in order to join forces and build a new state of the art Service Parts Management (SPM) tool. This journey resulted in the SAP SPM1 suite providing an integrated solution for parts planning, parts procurement and extended warehouse management. In this Alliance, SAP was selected as the key technology solution enabler and Deloitte as the key integrator for providing support, advise and implementation services towards both Ford and CAT.

SAP Spare Parts Planning (SPP) Spare Parts Planning (SPP) is the planning module of the SAP SPM solution integrated within the Supply Chain Management (SCM) Business Suite of SAP. It has been specifically designed to meet the requirements of the spare parts business, among which the most significant ones are listed below. Many other industries can also take advantage of the numerous SPP advanced planning features. Deloitte clearly expects a growing interest for this solution outside and inside the service industry in the near future. Industry-specific requirements: Nowadays customers expect more and more a high service level regarding the service parts.
Figure 1: classic vs. service parts supply chain

Aftermarket companies are typically dealing with a very high number of SKUs. Several hundreds of thousands active product references are not unusual. The distribution network, and as a consequence the planning processes, are more complex than in a normal supply chain. Dynamic distribution networks, horizontal moves and remanufacturing processes, among others, are standard attributes of service parts supply chains (Cf. Figure 1: classic vs. service parts supply chain) Single customers can typically be supplied by multiple distribution centers (Cf. Figure 1) depending on the parts and their dynamic stocking policies. High variablity of the parts portfolio in term of volume and demand patterns, physical dimensions, price...

Finished Goods Supply Chain Supplier Plant Distribution Center Customer

Service Parts Supply Chain

Regional Distribution Center Plant Distribution Center Regional Distribution Center

Supplier

Primary Distribution Center Regional Distribution Center Remanufacturer Distribution Center Regional Distribution Center

Customer

Spare Parts Planning with SAP at a glance Introduction

Tactical Planning

Bill-of-Distribution (BOD): a New Planning Concept One cannot talk about SAP Spare Parts Planning without presenting what the BOD concept is. The well known BOM (Bill-of-Materials) which specifies the list of parts used to build a product has now its distribution counterpart; the list containing the structure and the locations used to distribute a product is saved as a new master data element and called Bill-of-Distribution (BOD). This concept is central in the Service Parts Planning solution and all the planning functionalities, without any exception, are linked to this main product attribute. This feature acts as a decoupling point between the planning processes and the physical distribution network which, in the aftermarket, typically requires regular modifications. This BOD-based architecture allows the planning supply chain model to be dynamic and adaptive to the market conditions. This flexible feature actually assumes that each part belongs temporarily to a pre-defined distribution network, and that this network can be, transparently for a user, replaced by another one without harming any planning process nor without the need for any manual cumbersome maintenance.

A Starting Cycle There is no single starting point in the functional flow of SPP, but if there were one, it would be somewhere on the cycle represented on the following figure. On one hand, the sales orders of the service parts business are captured on the right location in SPP (Capture Demand function) whereas on the other hand the Stocking/ Destocking feature determines which one is the right location.

Capture Demand

Stocking/ Destocking

Figure 2: examples of BOD's

Contract Packager Concept In many service parts companies activities like packaging and/or repackaging within the network are outsourced. SAP SPP enables an easy activation or change between several contract packagers at location product level. The BOD is then extended to the packager which can be dened on product location level. This additional network function is transparently integrated within the planning calculations (e.g. lead times, deployment) 4

Capture Demand records each order item on the best facing location depending on defined rules and dynamic decisions (e.g. Stocking/Destocking). The rules can be static and very straightforward like a geographical assignment based on the closest delivering plant, or can be much more advanced and supported by dynamic rules together with gATP, the Global AvailableTo-Promise tool of SAP. The idea that an order can be assigned to different locations is directly impacting the operational flow; it also means that a single order can potentially be delivered from diverse sources to the final customer. This is where the second half-cycle, Stocking/ Destocking, answers the question: Where should an order supplied from to reach a certain customer? This rule-based tool decides automatically for each part where it needs to be stocked or not, and by consequence where it needs to be delivered from. The dynamic nature of an aftermarket supply chain requires that kind of decision much more than for a traditional supply chain for which a single plant is classically

delivering all the customers in a given geographical zone around it. In order to optimize the distribution of the numerous SKUs of an aftermarket organization, this automated relocation is a must. Although very flexible, the rules at the origin of the stocking decisions are mainly based on the combination of volume and cost. Of course additional rules critical to the industry are foreseen like for instance the exclusion of items based on regulations or hazardous conditions. The usual heavy, expensive and slow moving parts of the automotive industry like the body shells or the engines are not forgotten by this process: a Procure-to-Order scenario can also be automatically assigned (no stocked location in the BOD) when the service level becomes less critical compared to the inventory carrying cost or the obsolescence risks. Balancing the Demand When Stocking/Destocking stops the planning (destocking decision) of a product location, the associated demand history is transferred to another facing location of the BOD in order to still generate the right level of forecast for the customer base even though no longer from the same location. The demand history, and consequently the service, is simply switched from a warehouse to another in order to optimally deliver the parts. This mechanism, called demand realignment, is following the same principle as the one used during capture demand and ensures that each sales order is always optimally assigned within the supply chain.

Supersession in a nutshell Supersession planning handles the replacements (complex or simple) and discontinations of parts during their lifecycle. Typically the supersession chains create a lot of confusion within the aftermarket industry as well as others mainly due to the fact that the chains can contain a huge number replacements and that they have an impact on all the departments, from the warehouse to the senior management. SPP gives the visibility regarding the supersession chains and handles them efficiently in each planning process, thanks for instance to the demand realignment. More information on Supersession can be found in the article: Managing Supersession by Euan Macleod April 2009 Deloitte. Next to the Stocking/Destocking decisions, other planning processes can trigger the realignment of the demand history like a modification of the BOD assignment, a promotion or a supersession chain. Balanced History to Balanced Forecast The sections above explain why, how and when the demand history is captured and realigned depending on the planning decisions. But this process would be meaningless without an ultimate goal which is the generation of the forecast. The guarantee that the demand is at any given moment in time recorded on the right location signifies that the forecast is generated always in the locations where the goods will be physically delivered from. The SPP suite contains nine predefined forecasting models (based on the realigned demand history), which are capable of accurately forecasting (if possible) the future demand of parts according to different types

Figure 4: Destocking decision leading to a demand realignment

Germany Parent

Germany

France

Spain

Poland

Sales Order

Sales Order

Spare Parts Planning with SAP at a glance Tactical Planning

Trigger-Based Planning The high number of parts and locations creates IT risks in term of system stability and runtimes. For instance the processing of all the very advanced features of forecasting can be time-consuming. An interesting point of the SPP architecture is the eventbased framework thanks to which the planning activities are only performed for the items which were affected by a particular event; a daily planning calculation refresh even for a portfolio of hundreds of thousands of parts is no longer a problem.

of demand patterns such as constant, trend, seasonal, intermittent and exponentially declining. Some models are part of the eminent algorithms known by all within the supply chain planning world while others have been specifically designed by aftermarket industry insiders or adapted from existing models. The forecast process is by far the most comprehensive (not to say complex) of the solution and encompasses, among others, advanced tools like an automatic model selection, composite forecasting run, rough and fine tuning of model parameters, outlier corrections, trend limitations, parameters inheritance, tripping, triggs tracking, adaptive initialization of models, disaggregation throughtout the BOD, manual and automated approval, recalculation in the past for optimized forecast error calculation All these topics are out of the scope of this article, but it is most important to remember that the flexibility and the best-of-breed algorithms provided make SPP a very powerful tool to forecast.

Economic Order Quantity (EOQ) and Safety Stock As briefly noted in the previous section, SPP provides a recalculation of the forecast in the past methodology which gives as an advantage to always have an accurate forecast error evaluation (standard deviation) regardless of the forecast model change, realignment of demand history or other modifications of network lead times. This standard deviation is directly used by the EOQ and safety stock module which generates these two values in a time-phased manner, and most important, in an interdependent way. The algorithm is based on the optimization of the total stockholding and procurement cost depending on the forecast, forecast error, target service level, lead times and probability distributions. An automated segmentation of the parts portfolio is executed regarding both the target service levels and the statistical distributions used. The first one is defined based on flexible rules in order to meet the service policies of the company while the second one is optimally assigned depending on the demand pattern of the part location. Additionally the service level is also dependant on the lifecycle of the parts which allows using a higher service level during the demand peaks, as shown on the Figure 5: adaptive target service level. SPP inventory planning is based on the normal probability distribution as well as the Poisson distribution which is particularly important to deal accurately with the abundant slow movers/lumpy demand items.

Figure 5: adaptive target service level High service level

Demand

Medium service level

Time

Operational Planning

From Tactical Planning to Operational Planning So far the main tactical planning functions of SPP have been described. The outcome of these activities are used by the operational planning tasks in order to, on one hand, generate the appropriate procurement proposal, and on the other hand to manage the movements of parts inside the distribution network from the suppliers to the customers. The first action is performed by the module Distribution Requirements Planning (DRP) which uses the BOD as the main structure to roll up the demand from facing locations to entry points in the network. Its calculations are based on the forecast, external demands, EOQ and safety stock values as well as on data coming from the operational system (ERP) such as the stock figures. DRP provides also the following interesting features: Various planning Horizons and stability options which ensures the alignment of the planning flow and the supplier contracts Anticipated demand coverage (DRP provides the possibility to smooth seasonal demand patterns by pulling ahead peak season demand into lower seasons) Pre-season safety stock planning Product group procurement optimization Supplier shutdown handling Virtual orders consolidation (for slow movers) Planning of remanufactured products Multi-sourcing Advanced approval rules Through the BOD The creation of the Stock Transfer Orders (STO) are generated by two processes: the first one considers the vertical top down movements throughout the BOD (deployment) while the other one takes care of the horizontal requirements coming from potential unbalances inside the network. Deployment differs in some ways from the classical APO deployment. Among others the fact that the deployment is done day by day without any creation of orders in the future, or the use of priority tiers for the demand in case of shortage to guarantee an optimized use of the available supply. Next to that, the deployment can also generate expedite shipments when the business conditions require it. As every planner knows, planning is mainly dealing with uncertainties. When these uncertainties unbalance inventories, the inventory balancing tool of SPP provides an automated way to overcome these situations by generating horizontal movements

within a BOD. Although this flow results into more expensive operations, it can be very useful when the cost of a stockout is higher than an additional STO. Of course inventory balancing provides the possibilty to define the balancing areas based on the regulations or geographical zones for instance, and can be easily used as an analysis tool thanks to its embedded approval functions. Life Cycle Management Given the huge number of SKUs, the warranty agreements and the demand patterns of typical aftermarket parts, surplus and obsolescence issues are common. In addition to the supersession planning (cf. frame above), SPP provides a Surplus and Obsolesence tool which handles the life cycle of the parts (end of life). Old parts produced in the eighties are no longer stored forever thanks to an automated determination of the surplus stock based on the long-term forecast and the retention policies of the companies. Moreover SPP determines when is the best time to remove a part from stock depending, among others, on the market responsiveness. Since the obsolete stock is an important source of cash loss within the parts business, the potential return of using such a tool is very high.

Spare Parts Planning with SAP at a glance Operational Planning

Conclusion

A Parts Planning Tool, But Not Only Following the development phase of the SAP Service Parts Management suite, Ford has decided to start the implementation in Europe with the planning functionality (SPP) closely followed by Extended Warehouse Management (EWM). This exciting journey supported by Deloitte turned out to be a great success story; the Ford Customer Service Division (FCSD) in Europe is now planning its whole portfolio of spare parts thanks to SAP SPP which has brought along numerous benefits. Some of them are listed below: Deployment of global processes and best practices across multiple departments Achieved highest levels of customer satisfaction in terms of fill rates and back orders by developing and implementing new business processes Reduced cost by maximizing the fill rates while reducing the network wide inventory levels Improved customer satisfaction and service levels by a more accurate, fully integrated and fast responding service parts planning solution Reducing IT spending by reducing the investment in Legacy systems proportional to the launch timeline

The business expectations were more than achieved and provided a very positive return on investment for Ford. Being part of the SAP SPM project from the very beginning, Deloitte has developed an unmatched inhouse expertise in the implementation of the SAP Service Parts Management (SPM) suite, both on an operational and a technical level. Based on its expertise, Deloitte has clearly identified SPP as a very promising planning tool based on functionalities applicable to many companies far beyond the sole aftermarket industry. We believe that many planning concepts developped by the alliance together with our market knowledge have a huge potential to help our clients achieve a differentiating competitive advantage. Currently new projects are being rolled out, within as well as outside the service industry, as more and more companies perceive the benefits of the solution. Dont wait, and contact us to see how we can help you improve your business!

Spare Parts Planning with SAP A Ford Testimonial

What were your main objectives at the beginning of this ambitious project? The main ambition was to replace the fragmented and outdated legacy environments by an integrated/real-time landscape able to perform efficient planning tasks for the whole service parts supply chain. As part of the global SPM implementation enablement of a global Parts Supply & Logistics platform we targeted as well an improved warehouse efficiency, inventory reduction and accuracy as well as higher customer service levels. What are the main benefits provided by the new forecasting and inventory planning algorithms of SPP? The improved planning of seasonal, slow-moving and sporadic parts together with an enhanced phase-in and phase-out approach are some of the numerous benefits provided by the new forecasting flow; those positive points have been rapidly and impressively translated to an increase of the forecast accuracy by 20%. Next to that, the powerful combined planning of EOQ and Safety Stock, the smart management of stocking rules and the PLM features (Product Life-cycle Management) have led to a drastic reduction of the inventory levels and a global increase of the service fills. This has been achieved thanks to the combination of those tactical planning features and the operational planning tools such as DRP, Deployment and Inventory Balancing. How have the service fills and the inventory levels been impacted following the go-live? What were the short vs. longer term impacts? The following results have been reached directly thanks to the SPP implementation: - Service Parts Inventories -15%, - Obsolescence -10%, - Referral Costs -10%, - Local Fill Rates +0,5%, - Forecast Accuracy +20%. From a long term perspective we expect further improvements from the implementation of Push Deployment (NB: available in SPP standard but not activated yet at Ford) and the European roll-out of the Extended Warehouse Management (EWM). Supersession is a particularly hot topic within the service parts industry. What benefits does SPP bring related to this matter? Supersession has always been very hard to manage in our legacy systems, mainly due to the high complexity

Guenther Baermann Supply Chain Manager Ford Customer Service Division (FCSD) of the Supersession processes and their interactions with almost all other activities in our business. The SAP SPP implementation has solved many of the issues we faced in the past. For the preceding products, one of the key improvements has been the reduction of obsolete stock which has resulted in a 50% reduction of the value of scrapped products. On the succeeding side, the main enhancement is related to the service levels. Moreover, SAP SPP has extended the visibility of the Supersession information throughout the Supply Chain, internally but also externally towards our suppliers thanks the SAP Inventory Collaboration Hub (ICH) platform. Now that the SPP solution has been implemented what would you say are the main benefits? The tangible benefits have already been mentioned above. Additionally the following intangible benefits have been achieved: - global roll-out of processes and best practices, - reduced IT spending, - fully synchronized and integrated planning, - real-time visibility of the whole supply chain, - reduced risk of stockouts, - maturity and readiness for further improvements in service parts planning and execution processes. How did you perceive the corporation between Ford and Deloitte? Having the right partner for your project is always one of the key elements of a successful implementation. The efforts, expertise and support provided by the Deloitte teams were outstanding and clearly made the difference in reaching the targets we had set for this implementation.
Spare Parts Planning with SAP at a glance A Ford Testimonial 9

Deloittes Service Effectiveness Dimensions

The right product at the right place at the right time at the right price. Deloitte works with the worlds leading aftermarket organizations and solution providers to help our clients get these three factors in sync. We provide a fully integrated service offering including conceptualizing and strategizing, enterprise applications, processes and people

People We have a wide range of experienced practitioners in various domains and possess the required functional / technical expertise related to aftermarket / service operations We are truly a global organization that has the capabilities to reach out to each other to ensure that obstacles can get resolved with the right people We have a vast majority of people that are skilled in the various solution providers required to become the service organization of excellence

Strategy Our executive relationships with best in class aftermarket organizations to identify what is coming up and focus upon solutions to address them We are singularly positioned with the scale, scope, and multi-disciplinary capabilities necessary to address the most complex business challenges. As an integrated professional services firm, we can draw upon a broad range of financial, tax, IT, and business process consulting capabilities to address client needs.

People

Strategie

Service Effectiveness

Technology

Process

Technology We have a unique portfolio of technology expertise ranging in the various domains relevant for aftermarket organizations. This build on top of a strong Enterprise Application / Technology Integration Practice We have been nominated as integration partner of choice for multiple vendors

Process Based on the experiences of work performed at best in class aftermarket companies, we established best in class process models including a translation towards technology solutions We apply globally a structured methodology and process, along with specific tools to ensure that our work creates solid and measurable value for our clients.

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Contacts
For more information, please contact us. Eric Desomer Partner Manufacturing Lead EMEA + 32 497 59 63 91 edesomer@deloitte.com Steven Moors Director Ford Account Manager Service Effectiveness Lead EMEA Mobile: + 32 497 59 63 98 stmoors@deloitte.com Constantin Hellweg Manager + 49 177 2494434 chellweg@deloitte.de Grgoire Schaub Senior Consultant Mobile: + 32 486 515 523 gschaub@deloitte.com Diederik Lebbink Consultant Mobile : + 32 477 68 58 29 dlebbink@deloitte.com

Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 140 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte's approximately 169,000 professionals are committed to becoming the standard of excellence. Deloittes professionals are unified by a collaborative culture that fosters integrity, outstanding value to markets and clients, commitment to each other, and strength from cultural diversity. They enjoy an environment of continuous learning, challenging experiences, and enriching career opportunities. Deloittes professionals are dedicated to strengthening corporate responsibility, building public trust, and making a positive impact in their communities. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. May 2010 - Deloitte Consulting. Member of Deloitte Touche Tohmatsu Designed and produced by the Creative Studio at Deloitte, Belgium