Introduction

13

What is Inventory?

15

Definitions of Inventory

15

Reasons for Inventory

17

Advantages and Disadvantages of Carrying Inventory

18

Inventory Management in the Supply Chain

20

Supply-Driven versus Demand-Driven Supply Chain

21

Uncertainties in the Supply Chain

23

Inventory as Metric for Supply Chain Management

26

What is Inventory Optimization?

30

Contents of This Book

32

Who This Is Book For

32

How This Book is Organized

33

1 Inventory Management Basics

35

1.1 Movement Type Concept

35

1.1.1 Change or Add New Movement Type

36

1.1.2 Control Parameters

37

1.2 Document Principle

40

1.2.1 Material Document

40

1.2.2 Accounting Document

43

1.3 Common Inventory Types

44

1.3.1 Raw Material Inventory

45

1.3.2 WIP Inventory

46

1.3.3 Finished Goods Inventory

47

1.3.4 Spare Parts Inventory

48

1.3.5 Consignment Inventory

48

1.3.6 Vendor-Managed Inventory (VMI)

50

1.4 Inventory Costs

52

1.4.1 Ordering Costs

54

1.4.2 Storage (Carrying/Holding) Costs

56

1.4.3 Stockout (Shortage) Costs

62

1.5 Summary

64

2 Inventory Business Processes

65

2.1 Inbound Processes: Goods Receipts

66

2.1.1 Goods Receipt for In-House Produced Parts

68

2.1.2 Goods Receipt for Externally Procured Parts

71

2.1.3 Goods Receipts without References

74

2.1.4 Considerations and Tips

84

2.2 Outbound Processes: Goods Issues

88

2.2.1 Goods Issues to Production

90

2.2.2 Goods Issues (Sales) to Customer

92

2.2.3 Other Goods Issues

94

2.2.4 Return Deliveries to Vendors

103

2.2.5 Considerations and Tips

105

2.3 Internal Stock Transfer Processes

107

2.3.1 Stock Transfers between Storage Locations

108

2.3.2 Stock Transfers between Plants

118

2.3.3 Stock Transfers between Company Codes

124

2.3.4 Transfer Postings

125

2.3.5 Considerations and Tips

128

2.4 Reservations

130

2.5 Cancelling Material Documents

135

2.5.1 Cancel/Reverse a Material Document

135

2.5.2 Enter a New Movement Using the Reversal Movement Type

137

2.6 Printing Material Documents

139

2.6.1 Generating an Output for Goods Movements

140

2.6.2 Processing or Reprocessing the Output

143

2.7 Physical Inventory

144

2.7.1 Phases of a Physical Inventory

145

2.7.2 Using Batch Input Sessions in the Physical Inventory Process

152

2.7.3 Annual and Continuous Physical Inventory

153

2.7.4 Cycle Count Method

154

2.7.5 Inventory Sampling

155

2.8 Inventory Management Reporting

156

2.8.1 Stock Reports

156

2.8.2 List Displays

158

2.9 Summary

160

3 Master Data Settings

161

3.1 Service Level and Safety Stocks

161

3.1.1 Defining Service Levels

162

3.1.2 Defining Safety Stocks

165

3.1.3 How Service Level and Safety Stock Affect Stock Levels

172

3.2 Safety Time

174

3.2.1 Defining Safety Time

174

3.2.2 How Safety Time Can Affect Stock Levels

175

3.3 Lot Sizes

175

3.3.1 Defining Lot Sizes

176

3.3.2 Static Lot Sizes

178

3.3.3 Periodic Lot Sizes

180

3.3.4 Optimum Lot Sizes

182

3.3.5 Other Lot Size Data

189

3.3.6 How Lot Sizes Affect Stock Levels

190

3.4 MRP Types

191

3.4.1 Deterministic MRP Types

193

3.4.2 Stochastic (Consumption-Based) MRP Types

197

3.4.3 Kanban

216

3.5 Replenishment Lead Time

218

3.6 Summary

221

4 Planning Around Inventory

223

4.1 Setting an Inventory Strategy

223

4.1.1 Determine the Optimal Buffers

224

4.1.2 Set Performance Boundaries, Targets, and Control Limits

229

4.2 Forecasting and Demand Planning

235

4.2.1 How Forecast and Demand Planning Impacts Inventory

239

4.2.2 The Bullwhip Effect

241

4.2.3 Demand Variability Management

243

4.2.4 Forecast Accuracy (or Lack Thereof)

246

4.3 Materials Requirements Planning (MRP)

254

4.3.1 MRP Basics

255

4.3.2 Objectives of MRP

258

4.3.3 Net Requirements Calculation

263

4.3.4 Impact of MRP on Inventory

267

4.3.5 The Four Pillars of Effective Materials Planning

274

4.4 Production

288

4.4.1 The Effect of Bottlenecks on Inventory

289

4.4.2 Capacity Planning as a Tool

295

4.4.3 Kanban as a Tool

296

4.4.4 Uncertainties on the Shop Floor

307

4.5 Summary

308

5 Inventory Optimization and Tools

311

5.1 Inventory Optimization Initiatives

312

5.1.1 Choosing the Correct Replenishment Type

314

5.1.2 Choosing the Optimal Lot Size

317

5.1.3 Choosing the Optimal Safety Stock and Reorder Point

320

5.1.4 Choosing the Correct Replenishment Lead Time

323

5.1.5 Segmenting and Classifying Materials for Inventory Controlling Purposes

331

5.1.6 Working with Hit Lists to Monitor Inventory Trends

341

5.2 Using the SAP Add-On Tools for Simulation

351

5.2.1 Why Every Company Should Use These Tools

351

5.2.2 Safety Stock and Reorder Point Simulation

353

5.2.3 Lot Size Simulation

361

5.2.4 Replenishment Lead Time Monitor

370

5.3 Using the Inventory Controlling Cockpit Add-On Tool

381

5.3.1 Purpose of the Inventory Cockpit

382

5.3.2 Prerequisites for Running the Inventory Cockpit

383

5.3.3 Executing the Inventory Cockpit

383

5.3.4 Aggregation Levels

390

5.3.5 Interactive Graphics

393

5.3.6 Periodical Comparison of Key Figures

395

5.3.7 Hit Lists

397

5.3.8 Measures and Resubmission

398

5.4 Multi-Echelon Inventory Optimization

399

5.5 Summary

402

6 Controlling, Monitoring, and Reporting on Inventory

405

6.1 Standard SAP ERP Reports

406

6.1.1 Stock Overview

406

6.1.2 Warehouse Inventory Reports

409

6.1.3 Material Document List

415

6.2 Analysis in the Inventory Controlling System

417

6.2.1 ABC Analysis

418

6.2.2 Stock Analysis

423

6.2.3 Receipts/Issues Analysis

427

6.2.4 Inventory Turnover Analysis

431

6.2.5 Range of Coverage Analysis

435

6.3 Analyses Using the MRP Monitor

438

6.3.1 XYZ Analysis

439

6.3.2 EFG Analysis

441

6.3.3 UWV Analysis

443

6.3.4 LMN Analysis

445

6.4 Inventory Reporting Methods for Accounting Purposes

446

6.4.1 LIFO Reporting

447

6.4.2 FIFO Reporting

448

6.5 Summary

448

7 Measuring Inventory Performance

451

7.1 Key Figures

451

7.1.1 Dead Stock

452

7.1.2 Slow-Moving Items

456

7.1.3 Inventory Turnover

458

7.1.4 Average Inventory Turnover

464

7.1.5 Annual Inventory Turnover

465

7.1.6 Range of Coverage

466

7.1.7 Average Range of Coverage

470

7.1.8 Stock Value

471

7.1.9 Usage Value

474

7.1.10 Requirements Value

479

7.1.11 Other Key Figures

484

7.2 Key Performance Indicators (KPIs)

485

7.2.1 Customer Service Level

485

7.2.2 Target Inventory Level

487

7.2.3 Average Inventory

488

7.2.4 Inventory Accuracy

489

7.2.5 Days Inventory Outstanding (DIO)

489

7.2.6 Safety Stock

490

7.2.7 Safety Stock Coverage

491

7.2.8 Days of Supply over RLT

492

7.2.9 Number of Stockouts

494

7.2.10 Number of Failed Availability Checks

494

7.2.11 Inventory Quality Ratio (IQR)

495

7.3 Dual Classification in the Logistics Information System

497

7.4 Summary

498

Appendices

503

A Additional Resources

505

B The SAP Add-On Tools

507

C SAP Key Figures in the Logistics Information System

509

D The Author

513