How to Best Understand to Replenish or Replenishment in SAP

Executive Summary

  • Supply chain planning systems are intended to improve replenishment.
  • We cover automatic replenishment system or a continuous replenishment program, retail replenishment and replenishment triggers.
  • We cover where replenishment is found in SAP.

Introduction: Replenishment as the Objective of Supply Chain Planning

Replenishment is the name of the game for supply chain planning and is when orders are triggered in the supply network. You will learn how replenishment fits into the overall supply chain picture and where it is found in SAP.

What is Replenishment?

The term “replenish,” or replenishment is natural to commingle in one’s mind with purchasing. However, the replenishment strategy drives both procured materials and produced materials. To replenish simply means to fill again. But when we speak about a replenish definition, we’re not just discussing the inventory to be sold; we’re also talking about the raw materials needed to produce the inventory and support its manufacturing.  A replenish definition needs to explain that stock replenishment applies to a supply network.

What is a Replenishment Triggers in an Automatic Replenishment System?

Replenishment triggers are actions that cause replenishment to occur. The term replenishment is easy to comingle in one’s mind with purchasing. However, the replenishment strategy drives both procured materials and produced materials. To replenish simply means to fill again. But when we speak about replenishment, we’re not just discussing the inventory to be sold, we’re also talking about the raw materials needed to produce the inventory and support its manufacturing. To understand this complex system of supplies that will need replenishing, let’s talk about supply networks.

The analysis work that planners stems from this question: when will each stocking location run out of any given material good? Supply planning systems only need to replenish the stocking location when there is good reason to do so, as the objective of supply planning is to minimize inventory and maximize service level. Across a supply network there are both planning and execution triggers. Some of these triggers are system determined – either ERP, external supply planning system, or warehouse management. Some triggers are external to the system. No matter whether the trigger is system generated or generated by a buyer or IT specialist, all replenishments are,at some point, reflected in the supply planning system with both a transaction (acquisition or goods or sale or product)and a change to the stock holding position at the stocking location.

Execution Triggers

Supply chain management can be segmented into planning and execution areas. Planning looks into the more distant future and attempts to make decisions that put the supply chain in the best possible position to meet demand given certain restrictions. Execution is the actual doing, the execution of the plan. For instance, creation of a purchase requisition does not cause anything to actually happen, because a purchase requisition is a planning transaction, not an execution transaction. However, once a purchase requisition is converted into a purchase order – now the order is sent to a supplier and, at that point, the “wheels” begin turning. Accounting entries are posted and physical things begin to happen within the supply chain.

Execution triggers exist in both ERP systems and warehouse management or WM systems. One example of an execution replenishment trigger in an automatic replenishment system that will be explained in order to illustrate the differences between a planning trigger and an execution trigger is the KANBAN functionality within some ERP systems.

Replenishment Terms

Replenishment has a wide number of related terms which are used in supply chain management.

  1. Inventory Replenishment or Stock Replenishment
  2. Replenishment Stock or Replenish Stock
  3. Inventory Replenishment Methods
  4. Inventory Replenishment System
  5. Replenishment Planning
  6. Automatic Replenishment System, Auto Replenishment or Continuous Replenishment Program
  7. Retail Replenishment

1. Inventory Replenishment or Stock Replenishment

Inventory replenishment or stock replenishment is the act of replenishing the inventory in the system. Inventory replenishment or stock replenishment can be considered a primary objective of supply planning as it provides replenishment stock to the right locations.

2. Replenishment Stock or Replenish Stock

Replenishment stock or replenish stock is stock that is brought into the supply network for replenishment purposes. Replenishment stock or replenish stock is not normally called out as such or specifically, as it is implied that it make to stock manufacturing environments, the stock is all in some way replenishment stock or replenish stock.

3. Inventory Replenishment Methods

Inventory replenishment methods are the techniques used to make decisions as to how much and when to bring in replenishment stock. Inventory replenishment methods are mathematical. One inventory replenishment method is called reorder point. Another inventory replenishment method is MRP. Inventory replenishment methods are implemented in the computerized era with an inventory replenishment system.

4. Inventory Replenishment System

The inventory replenishment system is software that performs the calculation of replenishment using the planned stock on hand, planned issues and receipts and sometimes goals like service levels to calculate the replenishment stock. The most common inventory replenishment system is ERP, but there are many other systems that are more sophisticated in terms of replenishment calculation. The inventory replenishment system is strongly connected with the concept of replenishment planning.

5. Replenishment Planning

Replenishment planning is the forward calculation of replenishment stock. Replenishment can be execution in orientation, such as when an empty bin triggers a replenishment signal, or it can be replenishment planning focused where the replenishment order is based on forward-looking calculation.

6. Automatic Replenishment System, Auto Replenishment or Continuous Replenishment Program

Automatic Replenishment system, auto replenishment or a continuous replenishment program is simply replenishment logic that is automated. The use of the terms automatic replenishment system, auto replenishment or continuous replenishment program harken back to the pre-computerized age when stock replenishment was calculated on a periodic basis and by hand. Today some consulting companies and software companies use the term auto replenishment or continuous replenishment program as sort of buzzwords. Automatic replenishment system, auto replenishment or continuous replenishment should simply be synonymous with the inventory system.

7. Retail Replenishment

For whatever reason, replenishment is often associated with replenishment stock sent to retail locations. Interestingly, even SAP has a software application called Forecast Replenishment or FR, that is all about retail replenishment. It’s unclear why this association with retail exists, but it is inaccurate. Replenishment applies equally to all parts of the supply network, not only to retail replenishment. Retail replenishment is the same activity as replenishing any other location.

Replenishment Planning Activities

The analysis work that planners stem from this question: when will each stocking location run out of any given material good?

Supply planning systems only need to replenish the stocking location when there is good reason to do so, as the objective of supply planning is to minimize inventory and maximize service level. Across a supply network, there are both planning and execution triggers. Some of these triggers are system determined – either ERP, external supply planning system or warehouse management.

Supply Planning System Generated Replenishment Triggers

These stock replenishment triggers are created through planning runs – or automated procedures that take demand or consumption and create automated replenishment recommendations. The demand-oriented supply planning system replenishment triggers are forecasts and sales orders – or projected demand and confirmed demand. The consumption-oriented replenishment triggers are based upon the monitoring of stocking locations – and triggered when the stocking location falls below a preset level.

  1. Forecasts: This is unconfirmed demand. It is what the company thinks it will sell.
  2. Sales Orders: This is confirmed demand.
  3. Reorder Point: This is a trigger based on the stock level. If the stock level or the projected stock level (some supply planning systems will trigger a replenishment based upon a projected stock level rather than a current stock level) is below the order point, then a new replenishment order is created.

Execution Replenishment Triggers

Supply chain management can be segmented into planning and execution areas. Planning looks into the more distant future and attempts to make decisions that put the supply chain in the best possible position to meet demand given certain restrictions. Execution triggers exist in both ERP systems and warehouse management or WM systems.

CPFR

It can be difficult even for supply chain people to understand how replenishment, is different from normal inventory and procurement management. Part of it is that replenishment is a general term meaning to simply restock or refill. Replenishment is highly connected to a concept called CPFR – Collaborative Planning, Forecasting, and Replenishment.

This is not to say that replenishment cannot occur without it, only that it is a driving concept behind replenishment and replenishment functionality in SAP.

We have included a definition of CPFR from Wikipedia below:

“CPFR seeks cooperative management of inventory through joint visibility and replenishment of products throughout the supply chain. Information shared between suppliers and retailers aids in planning and satisfying customer demands through a supportive system of shared information.”Wikipedia

Case Study of CPFR

The case study always mentioned in both CPFR and replenishment is Wal-Mart. Wal-Mart essentially collaborated very strongly with some of its largest suppliers to share information so that inventory balances in stores were known and possibly even controlled by inventory management at the supplier.

Applicability of the Wal-Mart Case Study To a Automatic Replenishment System Generally

While Wal-Mart is known for a high in-stock position and low-cost replenishment, a few problems are attempting to generalize the CPFR experience to other accounts.

  • Wal-Mart is the largest retailer by a wide margin in the world, and this means they had and have the leverage to push through CPFR, smaller retailers do not have this same bargaining power
  • Wal-Mart is known for very effective IT investment and has been a leader in this field for some time, including satellite uplinks at its stores. Not every retailer has the scale economies to benefit from this type of IT investment
  • Wal-Mart is strongly operationally and industrial engineering oriented. However, many retailers are not. The fashion retailers – The Limited, etc.., are run by merchants, not industrial engineers, so they lack the orientation and capability of Wal-Mart in IT or operations

Where is Replenishment Found in SAP?

Replenishment functionality in SAP exists in the following areas:

  • SAP IS Retail
  • SAP PP
  • SAP SCM F&R
  • SAP SCM SNC

SAP IS Retail

Can be run in two different ways

  • Replenishment for site (or internal replenishment)
  • Replenishment for external customers (the CPFR model)

SAP PP

Production planning has some replenishment strategies that are for internal production planning, that is quite a ways from our discussion on this topic, but we did want to note that it does exist in PP as well.

SAP F&R

This is a mystery module, and we have never heard of it implemented. We discuss this module at this article.

SAP SNC

SAP Supplier Network Collaboration supports some different procurement methods, of which replenishment collaboration is one. This is covered at this article.

Conclusion

The terms…

  • Inventory Replenishment
  • Stock Replenishment
  • Replenishment Stock
  • Replenish Stock
  • Inventory Replenishment Methods
  • Inventory Replenishment System
  • Retail Replenishment
  • Replenishment Planning
  • Automatic Replenishment System
  • Auto Replenishment
  • Continuous Replenishment Program

…are all used in supply chain management.

They all relate to what is the primary objective of supply planning, which is to move stock into the system at the right place and the right time.

The concept of what is referred to as “automatic replenishment system” really just means the computerization of replenishment. At one time there was a term called periodic ordering. This is really a term applied in the pre-computerized period where groups of product locations were placed upon a schedule for recalculation, because they need to be calculated by hand.

Considering an Automatic Replenishment System Versus a Correct Replenishment System

However, just because it is an automatic replenishment system, does not mean that it is ordering the right amounts or making the right outcomes. A major issue is that while supply planning applications have been around for decades (both MRP and more advanced external supply planning systems) the problems with these systems is they are still complicated to manage. These systems more often than not overwhelm the ability of companies to properly manage them.

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References

Replenishment Triggers Book

Replenishment Triggers

Getting the Terminology Right

The terms make to order and make to stock roll quickly off of people’s tongues regardless of their knowledge of other supply chain conditions. Many executives speak about “moving to make to order environment.” For most companies, this simply is not realistic. And many businesses that say they do make to order/configure to order/engineer to order are doing assemble to order planning.

The Universality of The Manufacturing Environment Type

These terms are specific types of manufacturing environments. They are embedded in almost all supply planning applications ranging from the most basic ERP to the most sophisticated advanced planning system. However, each manufacturing environment leads to some implications, implications that are most often not completely understood.

Getting Clear on Requirements Strategies

Requirements strategies are what control what drives the replenishment of supply in systems. In most cases, the need strategies control whether the forecast or the sales order triggers replenishment.

This book cuts down the amount of time that is required for people in companies to understand the relationship between manufacturing environments (the business) and requirements strategies (the technology setting in the supply planning application).

By reading this book you will learn:

  • What are the major manufacturing environments and what determines which manufacturing environment a company follows?
  • How do the different manufacturing environments impact how inventory is carried?
  • How are the various production environments configured in software?
  • What is mass customization, and how accurate is useful is this concept in real life?
  • What is the interaction between variant configuration and the manufacturing environment and the bill of materials?

Chapters

Chapter 1: Introduction
Chapter 2: The Different Manufacturing Environments
Chapter 3: Triggering Replenishment
Chapter 4: Requirements Strategies
Chapter 5: The Make to Order Illusion
Chapter 6: The Limitations to the Concept of Mass Customization
Chapter 7: Forecast Consumption
Chapter 8: Variant Configuration in SAP ERP
Chapter 9: Conclusion

What If You Paid Nothing for SAP Software: Supply Planning

What This Article Covers

  • Background and Motivation for the Research in SAP TCO.
  • The Basis for the Estimation.
  • The Scope of the SAP TCO Analysis.
  • Why the Best of Breed Comparison Vendor is not Named.
  • Why SAP License Costs are Set to Zero.
  • Analysis Assumptions.
  • Why Integration is Overrated as a Cost.
  • ROI Implications of this Analysis.
  • Outsourced Support to Reduce SAP TCO?

Background and Motivation for the SAP TCO Research

When I am often told about the reasons for decisions to go with software that I am familiar with, the logic often does not seem to make sense.

The main comparison points of enterprise software are the TCO and the application’s functionality. However, companies primarily look for solutions from vendors that they are already working with and then allow the issue of integration to play a primary decision-making role. Therefore, they essentially ignore TCO (most tend to make decisions without knowing the estimated TCO), focusing more on initial software acquisition cost, and de-emphasize the functionality comparison between applications

The Basis for Estimation

I visit clients often post go-live on SAP APO and have developed a good sample of companies. I know the typical length of an APO implementation, as well the costs of maintaining APO. I also work with some best-of-breed vendors. Because I had access to information from several important sources and was able to make times estimations based on personal experience, I decided to perform a total cost analysis between SNP and a best of breed supply planning vendor.

The Scope of the Analysis

This analysis is limited to the major planning applications. I have developed estimates for costs of APO modules versus best-of-breed applications for the areas which I have first-hand knowledge, which is demand planning, supply planning, service parts planning and production planning and scheduling.

Why SAP License Costs are Set to Zero

SAP license costs are difficult to determine. There is little doubt they have some of the highest average license costs in the enterprise market, but their application pricing dramatically fluctuates. Additionally, the pricing ‘s hard to determine for one application because it may be bundled with other software. Regarding publicly available rates, SAP has a government price sheet. However, the price sheet is based on an arcane point system that is designed not to allow anyone to calculate a price independently, but at the same time meeting the US government requirement that they have a price sheet. I worked with this sheet for around an hour and a half, and then realized, it was not meant to be deciphered.

SAP license costs are shrouded in mystery. However, when I performed the analysis, even without SAP license costs, I found SAP TCO costs to be so high that even without any license costs or SAP support costs (which are based upon the license costs) the best of breed vendors were still easily beating SAP TCO in all the application areas.

Secondly, any article which does not rank SAP as #1 in whatever it is being compared with is open to immediate criticism. (In fact, the easiest way to have a soft life in IT is to skip any analysis and declare SAP the victor. In doing this, you are not required to provide any evidence, but simply say something like “SAP supports best practices.”) On the other hand, one can denigrate best of breed applications on the most feeble grounds and receive glowing reviews. However, criticize SAP, and you can expect criticism in return. Therefore, to counteract this concern with bias, I decided to tilt the playing field in SAP’s direction by making all of the license costs free. So this analysis assumes you never had to pay anything for SAP’s software or their support. Doing this does one other thing, it emphasizes the point that the license cost should not be the primary focus of the comparison and that other costs predominated in the TCO. Therefore, free software can end up being not the best decision.

Analysis Assumptions

There are some assumptions in this analysis. One of the most important is the duration of the implementation. This is one of the trickier things to set. Software companies tend to deemphasize this number, which is why I had to use my experience to adjust the results to what I have seen. SAP implementations take the longest of any enterprise vendor, and there are excellent reasons for this, which I get into later in this article.

However, for both SAP and the best-of-breed vendor, I have included a range and the estimated TCO for each regarding implementation is based upon an average. There is no perfect analysis of this type that can be created because of all the different variables. However, not being able to attain perfection should not get in the way of attempting estimation. This is logically correct, but also one way or another, these types of analyses must be performed, and I always think it’s better to take a shot at estimation rather than to throw one’s hands up and say its unknowable.

The TCO Analysis

This TCO analysis has been permanently moved to this link

According to this estimate, the SAP TCO is higher than the best of breed application I compared it against. Having worked in SAP as long as I have, I intuitively I knew the SAP TCO would be higher, but even I was surprised by how much higher it was. Here are some of the reasons.

SAP’s Implementations take Significantly Longer than Best of Breed Implementations

  1. SAP’s software is tough to understand and is highly encapsulated. SAP has so many settings which allow the system to behave in different ways that extensive time must be spent in both learning the settings and understanding the interactions between the configuration. The statement that SAP is filled with “best practices,” is incorrect, because a best practice approach prescribes that the system defines specific ways of doing things, when in fact, SAP follows the “comprehensive approach.” This includes a seemingly unlimited number of ways of configuring the system.
  2.  SAP’s marketing and product management strategy are to cover functionality as broadly as possible so they can always say “we have it.” This same development approach spans across applications, as I observe the same thing in different product lines such as SAP BW. This is one reason SAP’s TCO is probably headed even higher in the future. What will eventually bring SAP down is when it becomes so complicated that their applications are no longer maintainable, or when a major technology shift, such as SaaS, impacts the enterprise software market that undermines SAP’s natural monopolistic advantages. However, the long story short on this topic is that product management is writing checks that development cannot cash. Testing each area of functionality to ensure (part of what I do by the way) imposes more work and more time on the implementation.
  3. The large consulting companies have built their business model around SAP and extended the time of SAP implementations to maximizes their billing hours. SAP made a strategic decision quite some time ago to let the consulting companies control the speed of implementation to be recommended by the major consulting firms, regardless of the fit between the application and the client need.

SAP Resources Are More Expensive

  1. There is nothing controversial about this statement; it is well-known in IT circles.

SAP Has a Higher Manpower Support Requirement

  1. Getting back to the topic of application complexity and fragility, SAP only takes more resources to maintain. Something I recently had to work with was one method which was part of the functionality that did work but stopped working as of the release SCM 7.0. First, the problem that cropped up due to this needed to be diagnosed and explained (we did not find out about the broken functionality but perceived it through system problems. Once discovered, this functionality had to be changed to a method that did work, and the business had to invest time creating a new policy to work with the changed functionality. This was course expensive and time-consuming.

Integration is Overrated as a Cost

The cost differences between SAP and a best of breed application are quite large, and the frequently used argument, that the company wants an integrated solution, cannot reasonably be used to justify a decision to select SAP. I have not broken out the integration separately, as it is built into the consulting costs, but an adapter of even a few hundred thousand dollars would not tip the TCO in SAP favor. Also, the maintenance of the SAP CIF (the middleware that connects R/3 to APO) is vastly underrated. My experience and with developing custom adapters for connecting best of breed planning applications to SAP, I have become firmly convinced that the cost of maintaining the CIF is more than the cost of developing and maintaining a custom adapter. The CIF, which connects up APO to SAP ERP is unacceptably problematic.

Implication for ROI

According to most publicly available studies, around 1/2 of projects have a positive return on investment. However, this greatly depends upon the TCO of the solution and the functionality of the application that can be leveraged. SAP planning modules are so expensive compared to alternative solutions, and deliver a lower functionality level than the best-of-breed solution, that as a natural consequence they have a lower ROI and a lower percentage of positive ROI projects. However, the incorrect perception in the industry is just the opposite; that SAP is the safe vendor to choose.

Outsourced Support to Reduce Costs?

Companies now often outsource a portion of their support to India, so one might imagine that the support costs listed here could be reduced.

This is another frequently held assumption but does not prove out in reality. A good rule of thumb is that while the India-based resource is about 1/4rth as expensive, it takes more than twice as many individuals to get close to the same amount of support work done. Secondly, there must always be at least one in the country resource. Thirdly, this is a mess to manage. There are not only language and time barriers, but it appears some of the companies providing these resources are double booked the same resource on multiple clients. I have been dealing with this issue for several years now, and I end up having to read notes from the support team which is not spelled properly because of language barriers.

Outsource operations lack good professional management, and the client resources end up having to take over support organization tasks. I am not sure outsourced support works for any area very well, but it particularly unsuited to complex systems such as planning applications. When support is outsourced, the quality of support drops precipitously, and anyone in IT knows this. I provide a full treatment of the pitfalls in outsourcing SAP APO support in this article.

Implications of the Analysis

Indeed, other analysis with different assumptions will have different results. However, the TCO differential is so high between SAP and a best of breed solution, that it ‘s hard for me to envision any analysis where SAP has close to the same TCO as a best of breed solution. This means that SAP’s planning products cannot be justified by TCO and that companies must be able to obtain something from SAP that they cannot obtain from a best of breed application. Companies should be cognizant of the significant premium they are paying for SAP TCO.

Conclusion

If you confront SAP and large consulting firms and ask for a proper SAP TCO analysis, be prepared for a dispute on the true cost of their software and time required to go live. It is critical to make your decisions based on actual observations at multiple accounts. As I have in this article, and not based on hypothetically sales estimates from their sales team on how fast a solution can be brought live.

I have done the best job I could to bring the real world data to my estimates, and I even stacked the deck for SAP by removing all license costs, but the SAP TCO is still higher. By the way, this was also true in the other application areas I analyzed. The real world data shows across the board that SAP TCO is significantly higher than best-of-breed solutions.

Remote Supply Planning Consulting

  • Want Help with Supply Planning?

    It is difficult for most companies to make improvements in supply planning without outside advice. And it is close to impossible to get knowledgeable supply planning advice from large consulting companies. We offer remote unbiased multi-dimension supply planning support.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

References

I cover TCO in detail in the following book.

TCO Book

TCO3
Enterprise Software TCO: Calculating and Using Total Cost of Ownership for Decision Making

Getting to the Detail of TCO

One aspect of making a software purchasing decision is to compare the Total Cost of Ownership, or TCO, of the applications under consideration: what will the software cost you over its lifespan? But most companies don’t understand what dollar amounts to include in the TCO analysis or where to source these figures, or, if using TCO studies produced by consulting and IT analyst firms, how the TCO amounts were calculated and how to compare TCO across applications.

The Mechanics of TCO

Not only will this book help you appreciate the mechanics of TCO, but you will also gain insight as to the importance of TCO and understand how to strip away the biases and outside influences to make a real TCO comparison between applications.
By reading this book you will:
  • Understand why you need to look at TCO and not just ROI when making your purchasing decision.
  • Discover how an application, which at first glance may seem inexpensive when compared to its competition, could end up being more costly in the long run.
  • Gain an in-depth understanding of the cost, categories to include in an accurate and complete TCO analysis.
  • Learn why ERP systems are not a significant investment, based on their TCO.
  • Find out how to recognize and avoid superficial, incomplete or incorrect TCO analyses that could negatively impact your software purchase decision.
  • Appreciate the importance and cost-effectiveness of a TCO audit.
  • Learn how SCM Focus can provide you with unbiased and well-researched TCO analyses to assist you in your software selection.
Chapters
  • Chapter 1:  Introduction
  • Chapter 2:  The Basics of TCO
  • Chapter 3:  The State of Enterprise TCO
  • Chapter 4:  ERP: The Multi-Billion Dollar TCO Analysis Failure
  • Chapter 5:  The TCO Method Used by Software Decisions
  • Chapter 6:  Using TCO for Better Decision Making