by Venkata Ramana Nethi CSCP, CPIM.; Business Process Lead - Operations, Schlumberger Organizational inventory policy drives the threshold values and guidelines on how individual material should be managed in manufacturing or procurement processes. Putting the right information in the hands of the right people at the right time can save millions of dollars for companies. In this article you will learn how to implement SAP's MRP monitor, which can help to classify the materials into ABC/XYZ/LMN/EFG/UVW categories based on value, consumption, volume or weight, replenishment lead time and prices as per the organizational definitions explained in Part I of this series. This will allow you to provide data-driven systematic reports to effectively manage inventory at the aggregate level, which in turn will drive material master settings such as lot sizing, lead times, safety stock levels, and customer service levels. In this article you will also learn how to:

• Apply a methodical approach to analyze materials, including cost, consumption, dead stock, and much more on a periodic basis at plant/division level and at group level
• Understand the results which guide tactical planners to manage item-level inventory management, such as lot sizing rules, forecasting, safety stock, and service levels
• Review ABC/XYZ/LMN/EFG/UVW classification using MRP monitor at the plant/division level and be able to update material masters with the appropriate values on supply chain management (SCM) consulting solutions tab
• Review dashboards, periodic comparison, and hit list using inventory controlling cockpit
• Implement SAP's MRP monitor with tips and tricks during variants set up for both business and IT teams

Basic Overview of Inventory Types

The overall objective of inventory management is primarily concerned with the financial impact of inventories and the need to support organizational strategy and operations, as shown in Figure 1. Figure 1— Inventory Management Objectives From an organizational perspective, inventory is those stocks or items used to support production (i.e., raw materials and work-in-process items), supporting activities (i.e., maintenance, repair, and operating supplies), and customer service (i.e., finished goods and spare parts).

Types of Inventory

Inventory can be broadly categorized into the following types.

• Raw materials inventory: Includes purchased parts and materials that have been acquired but have not yet entered production.
• Work-in-process (WIP) inventory: Goods in various stages of completion throughout the plant. WIP can also include subassemblies for a bill of material (BOM) that are held in inventory.
• Finished goods inventory: Includes the finished, ready-to-use products waiting to be purchased by the customer.
• maintenance/repair/operating (MRO) supplies inventory: Includes spare parts, lubricants, hand tools, and cleaning supplies. Because of this, MRO is expensed.

Organizations should carefully categorize these types by value (ABC), consumption (XYZ), volume or weight (LMN), replenishment lead time (EFG) and item prices (UVW) in order to get the realistic big picture relevant to revenue recognition.

Case Study

The case study detailed in Part I of this series is relevant to this article as well. There the methodology to implement material document aggregation is explained, which is a pre-requisite step. Here you learn the approach and process to implement SAP MRP monitor to complete system-based solution.

MRP Monitor Objectives and Transactions Involved

The MRP monitor is an integral component of the SCM consulting solution and serves as an add-on program to the SAP ERP system. The MRP monitor allows you to run an ABC/XYZ/LMN/EFG/UVW analysis. As such, the MRP monitor is also an instrument for monitoring master data and key performance metrics during day-to-day material requirements planning. Objectives to achieve include the following:

• Classify materials based on business methods, for example, ABC/XYZ analysis (via orders received, consumption, and forecasts).
• The MRP monitor is also an instrument for monitoring master data and key performance metrics.

Transactions Involved

Transactions for executing the MRP monitor are listed in Figure 2.

• /SAPLOM/MRP_D – Display-Transaction
• /SAPLOM/MRP_L – Light-Transaction
• /SAPLOM/MRP – Creation of analysis

Figure 2 — Transactions for MRP Monitor

Implementing MRP Monitor

In this section you will learn how to set up variants on MRP monitor transaction /n/SAPLOM/MRM and schedule as batch jobs on a monthly basis. The MRP selection screen is divided into several logical tabs. Each tab has significance. Let's understand how to configure the tool to support organizational goals.

Data Basis Tab

Figure 3 shows “data basis” tab page which defines the data to be used in an ABC/XYZ analysis. Define the range of materials and the corresponding data source to be used in the analysis on this tab page. Figure 3 — MRP Monitor Tabs

Period for Analysis

You can select various periods in this section. For example, the analysis can be run for monthly and weekly values. You can also analyze posting periods (“periods in booking”) providing that these differ from the calendar months in the company and corresponding fiscal year variants have been defined. If you select the “periods in booking” option, the previously grayed-out “fiscal year variant” field becomes active (Figure 4). Figure 4 — Periods of Analysis

Level of Analysis and Data Source

In the “Level of Analysis” section, you set which analysis you want to run (Figure 5). This is also dependent on the data source. As with the procedure for periods, it is counter-productive to run an analysis for a specific level (such as the storage location) while selecting a data source in which the corresponding data is not maintained for this analysis level. (For example, the material consumption table [MVER], in which consumption is updated at plant level.) Figure 5 — Level of Analysis and Data Source A plant analysis is the same as the classic ABC/XYZ analysis for SAP ERP data. The plant analyzed depends on the entry in the analysis section. The following data sources are possible for the plant analysis, as shown in Figure 5.

• The material consumption table [Table MVER] — The analysis is only possible with the period for which the update was activated. To ensure the analysis runs correctly, this period must be the same for all selected materials and should not be changed in the analysis period; otherwise data inconsistencies may occur.
• Material documents — An analysis based on this data source is only possible if the material documents are first aggregated for the period set in the “Periods of Analysis” section. For these purposes you must use the Material Documents Aggregation Tool which is delivered with the MRP Monitor. To use it call transaction /SAPLOM/MDA.
• Output control — The appearance of the output results is controlled here. Each ABC/XYZ classification combination can be displayed in a different color in the result list to make it easy to identify materials with the same classification (Figure 6). To activate this function, you need to select the “Color in result list” checkbox (Figure 7).

Figure 6 — ABC-XYZ Classification Figure 7 — Output Control

Area of Analysis

In this section, the parameters you select will be considered to generate the reports so it is recommended to include one or more plants and exclude material types which should not be considered during the classification examples MRO type materials, TOOL type materials, and any miscellaneous categories which does not make sense to generate aggregate reports (Figure 8). Figure 8 — Area of Analysis

Strategy 1 Tab

On the Strategy 1 tab page, you should select the classifications applicable to your products and pick one of the options for each type of classification and specify the values to use in classifying the materials. The values must be aligned to the inventory policy mentioned in the case study.

Strategy for ABC classification

The ABC analysis is a business analysis procedure that classifies the specified material range by importance. Using the relevant basis, the MRP monitor determines the importance of a material by classifying the material in one of three groups (by default). Group A represents the materials with the highest importance, group B represents materials of medium importance, and group C represents materials of low importance (Figure 9). The criterion for forming the groups can be specified on the strategy 1 tab along with the basic settings for the data source. Four different procedures can be selected, as shown in the strategy 1 tab continuation shown in Figure 9. Figure 9 — Strategy 1 Tab

Strategy for XYZ Classification

The XYZ analysis is a procedure which classifies based on variation coefficient for a range of materials by its regularity. Like ABC analysis, consumptions, sales orders, billing documents, or planned independent requirements can be used as data sources, analysis options can be seen similarly to the ABC analysis. Note: XYZ analysis percentage classification of materials in accordance with variation coefficient.

Strategy for LMN Classification

LMN analysis classifies material by its volume or weight, similar to ABC. This can be useful if you want to determine an optimum storage location for a material. Note: If, in the selection, the materials that do not have volumes maintained in the material master should be specially identified, you must set the following flag. The MRP monitor enables a relative classification of material referring to the highest variation coefficient. Therefore, first the highest variance coefficient of all selected materials is determined. This value is then referenced as 100%. All other variance coefficient values refer to it.

Example to Showcase the Calculations

An example is shown below: In Figure 10, “Variance in % steps” is activated and specified for category X, 70%, for category Y, 20%, and for category Z, 10%.

• The sum of the percentages must always equal 100%.
• The highest variance coefficient of all material is 6. This value equals 100%.
• The variance coefficient of material with title “EX-100” is 1.2.
• First, calculate the X and Y values: 6*70% = 4.2
• Then, calculate the Z value: 6*(70%+20%) = 5.4

Step 1: Categorize material to X when variance coefficient is lower or equal to 4.2 (<= 70%) Step 2: Categorize material to Y when variance coefficient is equal to or greater than 4.2 (> =70%) Step 3: Categorize material to Z when variance coefficient is greater than 5.5 (> 90%) Result: Since 1.2 <= 4.2, material “EX -100” will be categorized to X Figure 10 — Variance in Percentage Steps on XYZ, Consumption Based

Outlier Correction

In the MRP Monitor, you can decide whether the median or mean value is used as the expected value to calculate the standard deviation and coefficient of variation. Previously, this selection option was not available, and the mean value was generally used (Figure 11). Figure 11 — XYZ Usage-Based Analysis by Using Average, Recommended to Begin With

Strategy for the EFG Analysis

The materials are sorted according to their replenishment lead time and then classified (Figure 12). Figure 12 — EFG Analysis It is recommended to always upgrade to the latest version of MRP monitor and Inventory Controlling cockpit. As of release in 2012, the replenishment lead time can be determined in different ways. On selection screen "Strategy1" of the MRP monitor, the user can select which calculation rules to apply:

• Replenishment lead time from material master record MRP 3 view
• Calculated replenishment lead time in working days
• Calculated replenishment lead time in calendar days
• Replenishment lead time calculated for externally procured materials in calendar days for in-house produced materials in working days

Calculated replenishment lead time means: For externally procured materials

• (Planned delivery time) + (purchasing processing time) + (goods receipt processing time)

For in-house produced materials, if an in-house production time is maintained

• (In-house production time) + (goods receipt processing time)

If an in-house production time is not maintained

• (Setup time) + (transition time) + (processing time) + (goods receipt processing time)

Strategy for the UVW Analysis

With the UVW analysis, the materials are sorted according to their unit price and then classified (Figure 13). Figure 13 — UVW Analysis

The Life-Cycle Analysis (LRODI Analysis)

The life-cycle analysis divides the materials into phases in the life cycle. The following conditions apply:

• If a material is flagged for deletion, it is given the status I (for inactive).
• If a material is set to N for new, it is given the status L (for launch).
• If the condition SMI 3 (slow-moving item) is met, it is given the status D (for dying).
• If the condition SMI 1 (slow-moving item) is met, it is given the status O (for obsolete).
• If none of the conditions are met and the material is not normal, the status E (for exception) is set. This is an option that is determined customer-specifically in customizing. (This case can, for example, occur if the material has no consumption but the SMI conditions are not met, because consumption is negative due to returns).

Strategy 2 Tab

On the Strategy 2 tab page, you can define various procedures, such as how the MRP Monitor should respond when providing information or key figures that are important in selecting forecast models (Figure 14). The MRP Monitor contains various calculation procedures for each day’s supply. Figure 14 — Strategy 2 Tab Note: Basic formula for calculation is current valuated stock/average usage per day.

Inventory Turnover

For inventory turnover you can choose between two computation approaches: In this context the MRP Monitor distinguishes between computation with relation to the whole analysis period and computation pertaining to individual periods (Figure 15). Figure 15 — Inventory Turnover, Use Total Usage

Slow-Moving Items

Another option on this tab allows slow-moving items to be divided into three different categories to differentiate materials that are currently, and could in the future, develop into potential slow-moving items, and materials that are already classified as slow-moving items (Figure 16). Figure 16 — Slow Moving items

Currency / Conversions

Define the currency you want to include in the analysis as well as the price on which the analysis is based in this section (Figure 17). Figure 17 — Define Currency Prices, Recommended for Multi-National Companies

Special Stocks Tab

These settings are required to include make-to-order (MTO) consumption postings. If your product does not fit into MTO planning strategies with special stock postings on material document postings then this is not required. Select the radio button as shown in Figure 18 and activate all the check boxes. Figure 18 — Special Stocks, Applicable for MTO Consumption Postings with Special Stock Indicators

MRP Monitor – Procedure to Display Results

You can display the results of classification in two ways:

1. Display the output results on the screen.
2. Save output results in the relevant MRP Monitor database table. Data of an analysis is identified using an internally determined key (Figure 19).

Figure 19 — Result Tab Initial Screen, Recommended Selections Note: To run in batch mode, the display result option must be selected.  Depending on how the customizing settings for saving classification data has been configured, the data is saved in a 2-character or 6-character append field or the SCM tab.

MRP Monitor – Explanation Display Results

On a periodic basis (recommended is monthly) MRP planners and inventory specialists need to review the results. The screen is divided into four sections (Figure 20):

1. Preset filters — Overview of quantitative composition of material groups
2. Classification — Summary of ABCD/XYZN matrix (plus LMN matrix)
3. Graph area
4. Tool list — detailed material data list

Note: In the first three sections, the data is displayed according to the following key figures: number of materials of the corresponding group, total consumption values in the corresponding group, total stock values in the corresponding group, and average range of coverage. Figure 20 — Results Screen Display with Filters It is recommended that you update the classifications on material master’s “SCM Con. Sol.” tab, which can be viewed via transaction MM03 (Figure 21). Figure 21 — Material Master SCM Con.Sol Tab, Updated via MRP Monitor

Inventory Controlling Cockpit – Explanation Display Results

Inventory controlling cockpit should be accesses via transaction code /n/SAPLOM/IOC with the same data source (material document aggregation) of MRP monitor with ability to review reports into four options like table view, dashboard, periodic comparisons, and hit list. This is primarily used to review aggregate Inventory level reporting to analyze results in pictorial formats like pie chart, bar graph and data of ABC/XYZ, consumption situations, dead stock can be compared on selected periodic basis. Most commonly used to get the hit list of top 10 to 25 material with highest impact on inventory management.

Dashboard Review

Generally used by mid- to top-level management to review the data using graphical analysis options like pie chart or bar graph (Figure 22). Figure 22 — Inventory Controlling Cockpit Dashboard Tab

Hist List

Always it is recommended to get top 10 or 25 materials, which are indicated in hit lists which have huge monetary value impact. Adjusting or managing these materials can save huge value. The below example represents an organization which produces high-complexity and low-volume products (Figure 23). Figure 23 — Inventory Controlling Cockpit Hitlist Tab

Benefits

Figure 24 shows how the business rules are updated on SAP material masters.

• Materials classified based on business rules defined
• Classifying materials into ABC/XYZ/LMZ ensures control over the expensive items
• Minimize investment on storage expenses
• Ensures proper resource allocation
• Cut down cost of carrying, minimize obsolesce and boost profits
• Monitor and redefine lot sizing, safety stock values on material master for projected orders

Figure 24 — Material Master Scm Con.Sol Tab Updated with Classification According to Inventory Policy This conclude the process of implementing the strategic inventory policy guidelines (mentioned in business scenario section Table 1) on the SAP material master. These values are the guidelines for determining the stocking strategies via material master MRP tab parameters lot size, reorder point, service level, safety stock values which in turn drive MRP run results with planned orders.

What Does This Mean for SAPinsiders?

Categorization of material is first step to assess the inventory management. Organizations must categorize the materials which are most important, moderately important, and least important so that the material management teams can focus their energy and also understand what percentage of materials fall into ABC/XYZ classifications. With this input the costs of ordering, storage, and risk of obsolescence can be assessed on a periodic basis. Look into the benefits for the organization to achieve. During implementation you may need to go through a series of discussions and demos to align on the results with a small set of data. It is recommended that your company specifics are considered before using material document aggregation settings. Evaluate special stocks inclusion as applicable to the product nature. During this process, pay attention to the following points:

• What is the aim of the analysis?
• What will be derived from the results?
• Specific customizing settings for movements
• Posting behavior in your company:
  • Which movement types are used and in what way?
  • Are there person-specific or area-specific variations?
  • Is the same business event handled differently by different people in different areas?

Focus only on the classification which make sense to the business model. Not all classifications may be required. Prioritize which suit your product-lines to meet the following:

• ABC – based on usage value based
• XYZ – based on usage variation
• EFG – based on replenishment lead time
• LMN – based on volume
• UVW – based on unit price
• LRODI – Life-Cycle Analysis
• Inventory turnover, slow moving

Inventory optimization should be the final goal. Classification of materials is vital to optimize inventory management; here you learned how the inputs from the organization’s strategic inventory policy system can be cascaded into the SAP Material Master and identify the groups of materials on a periodic basis for maintenance of MRP parameters, such as safety stock and lot sizing. Finally, these classifications should help to understand the future projections of inventory to keep in hand vs implement processes like VMI (Vendor managed inventory) and consignment to minimize inventory related risks.