Integrating Strategy into the Demand Driven

Operating Model
Michael Lipton, Lead, SAP Supply Chain Planning Strategy & Architecture
PUBLIC
October, 2018
SAP solutions are engineered for the digital supply chain
Semi-autonomous planning is a potential long-term goal
The Demand Driven Operating Model takes us in this direction – it keeps us on the road
But, staying on the road is not sufficient, we have to plan a course towards our destination,
which changes constantly…
Introduction
SAP offers a platform to help customers enable the
processes that drive the most business value in their industry
MRP and context.
Lean
TOC We now offer DDMRP support in SAP S/4HANA, as well as
in SAP Integrated Business Planning, and we have a
DDMRP roadmap for evolving our offerings over the next years.
…
We are working with several partners and customers, some
of whom are here today, piloting and deploying DDMRP
solutions.

To name two, our partner Camelot ITLabs offers DDMRP

solutions for our SAP Supply Chain Management suite as
well as Integrated Business Planning, and Accenture offers
* solutions and services for DDMRP in SAP S/4HANA

* Partner solution available today

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Approach

Topic: “what are best practices for adopting the demand-driven operating model, and incorporating strategy
into the operating model?”

SAP is supporting several customers as they proceed on the journey to demand-driven.

We will share some general observations about how they proceed on this journey, and how they are evolving
from an operational approach towards a more tactical/strategic approach

We start with an “ as-is” state that incorporates a traditional Strategic/Tactical/Operational approach the way a
company might implement it, and then we will go step-by-step in a pathway to becoming demand-driven,
not only addressing the operational planning model, but evolving towards strategic as well

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 “Classic”: End to End Process

Strategic & S&OP Process

Real Time Analytics & Exception Handling

Financial Plan
Tactical Review
Create &
Long-term Review Management
Consensus Align Plans
Frequency: Monthly Supply Plan Review
Horizon: 1-3 years Marketing Plan Demand Plan
(RCCP)
Buckets: Months, Weeks

Consensus Inventory Supplier

Tactical & Sales History
Demand Plan Targets Forecast Commit
Operational
Mid-Term
Frequency: Weekly Sales Plan
Horizon: 1-12 months
Buckets: Weeks, Days Supply Proposals &
Product Allocations

Execution
Orders
Operational Deployment
Short-Term Sales Order
Stock
Frequency: Daily Confirmation
Horizon: 1-12 weeks Sales Orders Transfers
Buckets: Days
Sensed
Demand Plan
Sales and
Shipment ERP Execution System
History
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 Demand Driven: End to End Process

Strategic & S&OP Process

Real Time Analytics & Exception Handling

Financial Plan
Tactical Review
Create &
Long-term Review Management
Consensus Align Plans
Frequency: Monthly Supply Plan Review
Horizon: 1-3 years Marketing Plan Demand Plan
(RCCP)
Buckets: Months, Weeks

Consensus Supplier
Tactical & Sales History
Demand Plan
Buffers
Forecast Commit
Operational
Mid-Term
Frequency: Weekly Sales Plan
Horizon: 1-12 months
Buckets: Weeks, Days Replenishment
Proposals

Execution
Orders
Operational Deployment
Short-Term Sales Order
Stock
Frequency: Daily Confirmation
Horizon: 1-12 weeks Sales Orders Transfers
Buckets: Days
Sensed
Demand Plan
Sales and
Shipment ERP Execution System
History
© 2018 SAP SE or an SAP affiliate company. All rights reserved. ǀ 6
Starting Point

• Customers learn about DDMRP, many are intrigued,

• Engage with consultancy; simulations show promise and value

• Pilot DDMRP for specific items at specific locations in supply network

• Ultimately scale-up

Initial Questions:

• Does DDMRP work in our environment?

• For which items, which areas of our supply chain?

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Segmentation

Deciding on where/why DDMRP works in a customer’s environment is a Segmentation process.

Segmentation is a strategic/tactical planning topic.

We have seen our customers simulating inventory and service projections comparing MRP planning and
DDMRP planning under various assumptions (demand characteristics, lot sizes, lead times, buffer settings,

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What are the attributes / conditions we see where companies adopt DDMRP
vs classic planning?

DDMRP Classic MRP

Items with high demand variability New product launches with high (“by definition”)
forecast accuracy
Items with high forecast bias (tendency to
over- or under-forecast) Items where promotional demand dominates the
demand signal
Items where supply is bottlenecked, as
manifested by high supply leadtime variability, Highly seasonal items
poor schedule attainment, poor supplier
reliability **

** may require close coupling with scheduling process

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Segmentation

Customers develop a “rule set” to determine which items to plan by which method. We have seen different approaches:

• Company A (Consumer Electronics) uses a temporal assignment. “Build to Target” during product launch, switch to
DDMRP during steady state, switch back at end of product life cycle

• Company B (FMCG) uses a value-add approach: which items that are “high touch” can be planned with a more
automated process, while simultaneously showing improved supply chain results. Then how can they systematically
move the higher-touch items into a DDMRP process by applying more advanced logic, such as fine tuning ADU,
qualified spikes, control points, production scheduling

B In conclusion, determining which items to plan with DDMRP

is a tactical/strategic planning process
C
D
E
F

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Piloting DDMRP leading to Scale-Up

As customers deploy pilots, they go through a learning process to see the value of DDMRP, and learn how to
run the process. When the company decides to move forward into a productive solution, much of this
learning from the pilot phase then rolls into the productive process.

Looking at DDMRP, step by step

Step Description Comment

1 Determining Decoupling Points This is a tactical planning step, ultimately to be reviewed periodically as part of S&OP.

While monitoring the buffer performance of the existing buffers, look for symptoms of
buffers that do not stabilize that may be due to insufficient decoupling

Sourcing Single sourcing may not be the case. If there are multiple plants that can make the
same SKU, then sourcing decisions must be made, as single sources, or quota
arrangement.

Sourcing decisions are tactical and should be reviewed periodically within the S&OP
process.

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Piloting DDMRP leading to Scale-Up
Step Description Comment

2 Buffer Sizing Buffer profile assignments is a continuation of segmentation.

Where to draw the lines for Short/Medium/Long lead time, or High/Medium/Low

variability? Where to override buffer assignments?

These are also tactical planning processes

Setting up ADU (average, What are the rules for how ADU’s are applied?
forward, blended)

3 Dynamic Buffer Adjustment is borderline tactical/operational. Minor fluctuations in ADU are automatically
incorporated into the buffer, and if we are doing forward or blended ADU, certain
promotional events will be absorbed systematically.

But there are more significant fluctuations in demand and supply where planners must
actively manage the time-dependent buffers: bigger promotions; plant outages,
prebuilds

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Piloting DDMRP leading to Scale-Up
Step Description Comment

4 Replenishment Planning Step 4 of DDMRP falls squarely into operational planning, and we will not spend
time here.

Nevertheless, companies still need a master schedule for visibility within the
tactical range. These are used as projections to reconcile the operational plan
with the tactical plan, and to share with suppliers.

We have seen this done two ways:

- Use classic MRP planning to project future supply and inventory
projections beyond the first order

- Use the forecast to consume inventory from the DDMRP buffers to project
“soft” replenishment projections

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Piloting DDMRP leading to Scale-Up
Step Description Comment

5 DDMRP Execution Step 5, is a combination of operational, tactical, and strategic

Day to day alerts of potential stock-outs, and the need to expedite are
operational…

Buffer history reporting, tactical/strategic, in that it may indicate the need to

revise buffer profile settings, buffer profile assignments, and potentially review
the location and number of decoupling points

Overall KPIs guide the progress towards maturity and stability of the network.
This is a huge topic but essential to “close the loop” between operational and
strategic.

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Prebuilds

To the extent that demand and/or supply adjustments fit within the capacity “envelope” of the supply source, they
can be handled routinely as an operational planning decisions. But, if they are due to systemic capacity shortages
or demand surges, this brings us into the topic of “Prebuilds” which is a Tactical Planning decision that sits at the
intersection of DDS&OP and DDMRP.

– The “classic” way is to do a finite planning, which will pull

(smooth) certain items forward. The result is a “constrained
forecast” which would drive a “classic” supply planning master
schedule

– In DDMRP, the constrained forecast (or some variant) could be

the input signal to drive a Forward-Looking ADU to drive the buffer
sizing. In this way, anticipated prebuilds would drive the buffer
sizes up and trigger the prebuild activities

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Hybrid process: DDOM + “Modified S&OP”

Now, our company is operating a regularized DDMRP process, which includes operational planning, but already many
elements of tactical and strategic planning.

– Step 1 is to add the steps we just mentioned into a variant of a “classic” SI&OP process. Scenario planning is already
supported in the SAP S&OP module. So the hybrid process looks like this:

▫ Product Review includes strategic decisions about which items to plan as demand-driven; segmentation
▫ Demand Review includes evaluating alternate demand assumptions and actions
▫ Inventory Review includes strategic decoupling point decisions, ADU decisions, buffer profile assignments
▫ Supply Review includes evaluating alternate capacity and component assumptions and actions,
▫ Plan Alignment includes assuring alignment between demand, and capacity and component availability
assumptions, and generating a constrained demand signal to drive prebuilds.
▫ Mgmt review includes analytics, plan vs actual, and buffer history / flow metrics

– Even at this point, we have already made a critical change from classic S&OP to DDS&OP, in that the signal from
S&OP to operational planning is no longer the master schedule but rather the buffer policies.

– Note, the master schedule is still used for visibility purposes. For example, projected component/capacity requirements
from the plan are shared with suppliers and commitments can be secured

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Scenarios

An essential element of any S&OP process is the ability to support decision-making against alternate
scenarios. In classic S&OP, we create alternate simulation scenarios, and project the results of alternate
business plans against supply chain constraints: capacity, transportation, critical components.

This doesn’t change in DDS&OP, one can apply classic S&OP simulations, as well to help analyze tactical
and strategic trade-offs

This is consistent with DDMRP as long as the communication of the plan is via buffer policies and not the
master schedule

Going beyond classical S&OP, additional views/tools can be brought to bear:

▪ The ability to simulate inventory projections, by simulating and aggregating DDMRP buffer logic, which will
give us an inventory projections that give us further insights into ability of our operating model to “flex”

▪ The ability to make financial comparisons using contribution margin

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In Conclusion

DDMRP is showing potentially significant improvements

in inventory and service, conservatively “double digit”
inventory gains

Care must be taken in crafting a pilot program, selecting

the SKUs, determining the buffer policies, ADU methods,
etc.

Education and change management are key – this is a

journey where the team must monitor and measure the
results week by week, and learn how to operate the
process by identifying alert conditions and learning how to
resolve/avoid them

DDMRP must be seamlessly folded in to an overall

planning process - typically not all SKUs are planned
with DDMRP

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Thank you.