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SAP SCM
TM
Enable the planning capabilities
of your after-sales business
By: Ute Messmer
Version: 1.1
Whitepaper
Service Parts Planning with SAP SCM
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WHITEPAPER
Contents
1 Introduction ...................................................................... 3
2 Planning Process Overview ............................................ 4
3 Planning Features ........................................................... 5
3.1 Modeling the service parts distribution network (supply
chain design) ..................................................................... 5
3.2 Capture and manage demand history and forecast
demands (demand planning) ............................................. 6
3.3 Determine optimal stock levels for ensuring high product
availability by minimal costs (inventory planning) ............. 7
3.4 Define the overall procurement plan (supply planning) ..... 9
3.5 Deploy the goods within the network and balance excess
and need (distribution planning) ...................................... 10
3.6 Interchangeability of products ......................................... 12
4 System Landscape for the Service Parts Planning
Environment .................................................................. 14
5 Summary ....................................................................... 16
Service Parts Planning with SAP SCM
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1 Introduction
The after-sales market is a constantly growing business with attractive future profit potential.
Manufacturing companies make 25-55% of their profit with service (parts), although the latter only
contribute 10-25% to their revenues. Therefore todays aftermarket business carries significantly
higher profit margins than the initial sale.
Within this market environment, effective service parts management is gaining more and more
strategic importance and becomes a main factor for companies aspiring to improve customer
satisfaction, customers brand loyalty and repurchase of products. Service parts management has
also turned into a key differentiator in competition with other companies.
Effective service parts management must strike a balance between high service levels and
increasing logistics costs. The key challenge is having the right part, at the right time at the right
location to fulfill the service requests without having huge inventory buffers or managing excess
stock. The service parts business is defined by the following attributes:
Increasing number of service parts for all active and old products (esp. for long warranty
items)
High number of line items with small quantities
High number of product storage locations and extensive distribution network
High inventory buffers
Complex product-interchangeability
Time critical deliveries
Irregular and unpredictable demand
Right stocking decision for the critical mix of slow and fast movers
Intricate optimization of supply alternative (make or buy, repair, substitution)
Therefore supply chain management for service parts requires another focus than the supply chain
management for finished goods.
This article will primarily discuss the planning process within service parts management and how it
can be handled efficiently with SAP Advanced Planner and Optimizer (APO) which is part of SAPs
supply chain management module SAP SCM. Service Parts Planning (SPP) was introduced with
SAP SCM 5.0. It relies on completely new planning functions to cover the special requirements for
service parts and cannot be seen as a close derivative of the existing planning functionalities of
Demand Planning (DP) or Supply Network Planning (SNP) in SAP APO.
Supply chain execution for service parts such as procurement, warehousing, fulfillment and
transportation is not part of the scope for this article.
Service Parts Planning with SAP SCM
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2 Planning Process Overview
The target of the service part planning process is to determine the required inventory levels at the
customer facing locations to
meet the target service level,
plan procurement
and plan the replenishment needs for the customer facing locations.
Service Parts Planning with SAP offers a variety of planning features that support this target. It
offers transparency throughout the service parts supply chain from the appearance of demand to
the delivery of the service product. The following process flow helps to get a better understanding
of SAPs planning sequence for service parts:
Planning Process Sequence
During Supply Chain Design, the distribution network is modeled by so-called bills of distribution
(BODs).
Within Demand Planning, the demand history of the parts is captured and depending on that, the
forecast is done with the help of extended and sophisticated forecast models. Forecast services
cover the whole product life cycle from phase-in planning to product interchangeability to phase-out
planning.
Inventory Planning deals with the determination of economic order quantities (EOQ) in
combination with safety stock. It also makes decisions about stocking or de-stocking of products
and helps to identify surplus quantities in the network.
The results from the demand and inventory planning processes serve as input into Supply
Planning. Supply planning determines the distribution requirements as procurement proposals.
After the approval process, the proposals are handed over to the execution side.
Finally Distribution Planning decides about the deployment of the received inventory along the
distribution network. Inventory balancing is used when receiving does not cover the requirements
in customer facing locations.
The result of the planning process should guarantee that customer facing locations have sufficiant
inventory to fulfill customer requirements.
Monitoring and Analysis
Service Parts Planning with SAP SCM
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3 Planning Features
3.1 Supply Chain Design - Modeling the service parts distribution network
An important element of the service parts planning is the bill of distribution (BOD). It reflects the
standard distribution path of the service part and serves as basis for most planning activities.
A BOD always consists of one or more entry locations and can contain so-called parent locations
and child locations. The entry location defines the location to which the supplier delivers the parts.
The location from which the customer is served is called a customer facing location. Parent
locations ship to other locations that are then called children. For locations that ship directly to the
customer and also to other location(s), a virtual child needs to be introduced. All data related to
customers as e.g. forecast, safety stock, etc. is then assigned to the virtual child. As a result, stock
transfers will be created from the physical to the logical location in order to cover the demand.
Example: The supply chain for a service part looks like:
Bill of distribution
Entrylocation
Child location
to Stuttgart
Parent
location to
New York and
Vancouver
Berlin, New York, Vancouver, Hannover and Virtual Frankfurt are customer facing locations
Virtual child
location
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The assignment of a product to a BOD can change over time. Data relevant to planning will then
be rerouted to the new BOD. The planning process will also consider any future BODs. As the
distribution hierarchy is firmly predefined by the BOD, the planning process can run without a time
consuming supply source determination.
The concept of virtual consolidation locations is used to group physical locations with relatively
small demand into one logical location within the BOD. Although this aggregates the data for
demand and replenishment planning, the physical locations are yet deployed according to their real
demand.
SPP is also able to deal with subcontractors, so-called contract packagers (CP). A contract
packager packs and repacks the goods (e.g. from containers to pallets) for the warehouses within
the BOD. In case of contract packaging, the CP needs to be assigned to a specific location within
the BOD. The assignment is done in the ERP
1
system. When using SAP Extended Warehouse
Management (EWM) at the subcontractors warehouse, there is no loss of information about
inventory and goods movements for the service parts planning process.
3.2 Demand Planning - Capture and manage demand history and forecast demands
The demand history forms the basis for further forecasting and planning processes. Historical
demand data is usually captured from SAP Customer Relationship Management (CRM) or SAP
ERP. During this upload process, the data is reorganized according to certain events such as e.g.
a future BOD becomes valid for a product,
a supersession (product replacement rule) is created for a product,
stocking or de-stocking decisions have changed for a product.
The system aggregates the demand for the product in different time buckets (weeks, months, fiscal
periods) along the BOD for each stockholding and customer facing location. The system allows
manual adjustments to the raw data (sales orders from SAP CRM or SAP ERP) and to the
aggregated demand data. The aggregated demand history serves as input into the forecasting
process. This process is divided into the following steps:
1. Aggregation of demand along the BOD (as part of demand capture and management
process).
2. Calculation of forecast at all customer facing and parent stockholding locations by use of a
suitable statistical model.
3. Disaggregation of statistical forecast of the entry location along the BOD down to the
customer facing locations. This disaggregation is done in proportion to the statistical
forecast of the respective child locations.
4. Either the statistical forecast or the disaggregated forecast can now be used for inventory
and supply planning. Usually the disaggregated forecast is used as it has a broader
database which delivers better results in statistical models.
The forecast service contains a huge number of forecast models. The selection of the appropriate
model is based on the analysis of the demand history types as e.g. constant, seasonal, sporadic
demand with or without trend. Before each forecast run, the forecast model can be evaluated and
changed where required.
1
EnterpriseResourcePlanning
Service Parts Planning with SAP SCM
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The following table provides an overview of the forecast models for SPP:
Forecast model Applicable for
First Order Exponential Smoothing Products with small demand data history;
Used as default model for forecasting
Second Order Exponential Smoothing Products with assumed trend
Moving Average All kind of products when a very simple
model is desired
Linear Regression Products with trend
Seasonal Trend Model Seasonal products with less than 24
months demand history
Seasonal Trend Model with fixed
Periods
Seasonal products
Intermittent Model Products with sporadic demand
Dynamic Moving Average Slow movers
Declining Demand Products with decreasing demand (end of
life period)
Forecast service also offers scenarios for phase-in and phase-out of a product in order to support
the whole life cycle planning. Thereby, the forecast calculation for new and end-of-life products
refers to the demand history of reference products which the user can define within a product
group.
3.3 Inventory Planning - Determine optimal stock levels to ensure high product
availability by having minimal costs
The inventory planning process determines the required safety stock and the optimal order
quantity of a service part for a certain location. The overall aim is to ensure optimal service levels
to the customer whilst keeping the inventory and purchasing costs as low as possible. During this
process
stocking and de-stocking decisions are made,
the economic order quantity (EOQ) in combination with safety stock is calculated and
surplus and obsolete quantities are identified.
Determination of EOQ
The amount of safety stock is dependent on the defined service level and the reliability of the
forecast. The higher the forecast error, the higher the safety stock must be, to ensure the defined
product availability. Other influencing factors are the replenishment lead time and the order
quantity. Long lead times and small order quantities requires a higher safety stock. SAP Service
Parts Planning uses sophisticated statistical methods to determine the required safety stock in
Service Parts Planning with SAP SCM
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order to supply within a defined service level. Once determined, EOQ and safety stock are used in
the replenishment planning to calculate the procurement requirements.
Another feature of the inventory planning service is the identification of surplus quantities in the
distribution network. The stock in a location plus all stock in transit for a service part within its BOD
that exceeds the probable demand for a certain time frame are called surplus stock. Surplus stock
can be removed (scrapped) by an interactive approval process.
3.4 Supply Planning - Define the overall procurement plan
The so-called distribution requirements planning (DRP) determines the required replenishment
quantities considering the output from the demand and inventory planning process. It is a multi-
staged procedure that ultimately generates procurement proposals for the entry location(s) of the
BOD. To determine the proposals, a net demand calculation is performed for all stock holding
locations on each level of the BOD. This net demand is then shifted to the next higher level with
consideration of the relevant lead times (e.g. goods issue time, transportation duration, goods
receipt time). To get a balanced planning, DRP also generates stock transfer proposals to cover
the net demand at the child locations.
The following picture shows a simplified view of the net demand calculation process (rounding is
disregarded):
The net demand at each level is always rounded according to EOQ, additionally considering other
factors such as e.g. pack sizes.
At the end of the DRP process, procurement proposals need to be approved and handed over to
the execution side where they are transferred into purchase orders resp. delivery schedules of a
scheduling agreement. Stock transfer proposals which were generated during the DRP run are not
released to the execution system. The latter are recalculated in the subsequent deployment
process and afterwards approved and executed.
DRP also supports the concept of consolidated ordering
2
for virtual locations. Demands and
inventories of the individual locations are aggregated and a consolidated net demand is
determined for the virtual location.
Supplier shutdowns can also be integrated in the distribution requirements planning. The
demand will then be sourced earlier.
3.5 Deploy the goods within the network and balance excess and need (distribution
planning)
3.5.1 Deplyoment Process
The purpose of the deployment process is the distribution of goods within the BOD. It is always
performed from one level of the BOD to the level below. For deployment, it has to be ensured that
a demand is available on the child location and a distributable quantity is available for the parent
location. If the BOD contains more than two levels, the BOD is split into sub-BODs and several
deployment runs are performed.
i
Author
UteMessmerstudiedindustrialengineeringwithfocusoninformationtechnologyandoperationsresearchatthe
UniversityofKarlsruhe,Germany.BeforejoiningWesternacherandbecomingaconsultant,sheworkedforHewlettPackard,
Germanyinseveralsupplychainoperation,designandmanagementfunctions.