Based on my observations, I developed a four-level inventory maturity model. You can use it as a framework to assess technical and functional prerequisites, identify where your organization currently resides, understand the standard SAP tools and processes you’ll need to succeed at each level, and design an inventory roadmap for your future.

Looking at these capabilities, it is obvious that without level 1 capability, it is difficult to remain in business. Most companies fall in level 2. Maturing to levels 3 and 4 requires a lot of effort. However, at these levels the company’s inventory management capability is a strategic differentiator and no longer just another supply chain process.

Inventory Maturity Model

The inventory management maturity model is a step-by-step method I use to achieve effectiveness and efficiency in the inventory management process. First, try to assess where your organization ranks on this model and then select relevant SAP tools. Once you meet all of the requirements at a particular level, aim for the next level and choose the corresponding tools. Remember, implementing software only is not enough. Each higher maturity level demands more stringent key performance indicators (KPIs), stricter discipline throughout the related SCM processes, and more knowledgeable employees to manage the processes. See the sidebar, “Key Success Factors”.

Some of the benefits of using my proposed model include:

• You establish a clearly defined roadmap for the future. You know where your organization is now, what capabilities you need to target first, and where you want to be down the road.
  
  
• You select SAP tools for implementation in a structured manner, instead of only focusing on inventory optimization when basic transaction processes are not in place.
  
  
• You can perform an audit by yourself. Once you think that you have reached perfection in one level, you can try for the next. This reveals your level of preparedness and foresight. If the results indicate that you are well- prepared, ensure that your implementation time frame is realistic and practical.

To explain the maturity model, let’s first understand the capabilities required for better inventory management. These capabilities are grouped under following headings:

A. Transaction and integration

B. Collaboration

C. Planning

D. Reporting and measures

E. Processes

F. Visibility and exception management

G. Optimization and simulation

H. Benchmarking

You can subdivide some of these capabilities into basic and advanced levels:

A1. Integration capability basic level. Integration of inventory management application with other applications such as Financial Accounting (FI) and Sales and Distribution (SD)

A2. Integration capability advanced level. Integration of inventory management applications with applications of other supply chain partners

B1. Collaboration capability basic level. Supply chain partners share their inventory information

B2. Collaboration capability advanced level. Supply chain partners perform collaborative inventory planning

C1. Planning capability basic level. Consumption-based planning (CBP) models in which the inventory level drives reordering. At this level, they have non-integrated inventory planning tools such as Excel-based minimum-maximum inventory planning. Mastering Material Requirements Planning (MRP) in your system comes before use of advanced planning tools. For example, a company at level C1 might use a simple lot sizing technique, such as lot for lot, which is in the MRP1 tab of the material master.

C2. Planning capability advanced level. MRP-based planning models in which your sales orders or your sales/production plan drive the ordering of trading goods and components. At this level, more advanced MRP capabilities are used. For example, a company at level C2 might use a dynamic lot sizing technique. Item-based planning strategy, using stochastic and probabilistic inventory modeling with concepts such as service level. If the item follows a steady consumption you can use consumption-based planning which is supported in SAP ERP Central Component (ECC). If the item’s consumption changes a lot on a day-to-day basis then dynamic stock planning (also supported in ECC) makes sense. If the safety stock level is based on an item’s service level then you can use advanced safety stock planning (supported in Advanced Planning and Optimization [APO]).

D1. Reporting capability basic level. Reporting on where stock is stored, inventory age analysis, and ABC classification

D2. Reporting capability advanced level. Detailed KPI drill-down analysis to establish cause-and-effect relationships such as why a stock-out happened at a particular distribution center

E1. Process capability basic level. The process of physical stock keeping goods issue, receipt, reservation, handling special stocks, stock replenishment, and physical inventory

E2. Process capability advanced level. Pull-based replenishment, deployment, collaboration, and exception management

F1. Basic visibility and exception management capability. Visibility of inventory at different locations within the organization, visibility of inventory with partners at regular interval, and exception reports for stock-outs.

F2. Advanced visibility and exception management capability. System generated alerts in case of any exception. Alerts trigger automatic workflows, which take preventive actions.

G. Optimization and simulation. Advanced capability (detailed under level 4)

H. Benchmarking. Advanced capability (detailed under level 4)

Level 1 Capabilities

1. Basic transaction and integration capability. The company has an integrated system for doing basic inventory transactions such as goods issue and goods receipt. The inventory system talks to FI, production, and sales systems.

2. Basic visibility capability. The organization has inventory visibility (knowledge of storage locations, items, amount, and condition). The organization gets information from its supply chain partners about inventory on hand or inventory requirements – for example, on the phone or from Microsoft Excel reports once a month.

3. Basic planning capability. The organization performs some basic Excel-based inventory planning

4. Basic reporting capability. The organization performs some basic reporting on inventory visibility (where what stock is) and exception management (stock-out reports). Reporting is done mostly in Excel, with some reporting carried out in an inventory management application.

5. Basic process capability. The organization has processes in place for basic inventory transactions such as physical stock taking, goods issue, goods receipt, and goods reservation

Level 1 Available Tools

Transaction, integration, and process capability: The Inventory Management (IM) sub-module of ECC 6.0’s Materials Management (MM) module can support basic transaction and integration capability. IM processes for goods issue, receipt, and reservation should be modeled.

Planning, reporting, and visibility capability: Mostly done manually at this level or through Excel, without an ERP tool

Level 2 Capabilities

1. Advanced process capability. The organization has in place other critical processes of inventory management such as exception management, stock deployment, and rules (how the factory sends stock to different distribution centers)

2. Inventory measures and reporting capability. The organization has in place some measures for inventory management such as inventory turn and out-of-stock. It does regular data collection for analyzing these measures. The company also does some advanced analytical reporting such as inventory age analysis, fast moving-slow moving inventory analysis, and ABC classification. Reporting is done in Excel or in an inventory application.

3. Matured planning capability. The organization has segregated materials based on inventory planning needs and has identified the planning approach. The company has policies in place for handling different types of inventory, including safety stock, cycle stock, strategic inventory, and build-ahead inventory. One example is CBP. You reorder when the stock falls below a certain level. It is often used for consumables including glue, gloves, and spare parts such as filters, belts, and gaskets. Another example is MRP. With MRP you order materials and components based on planned requirements.

4. Matured visibility capability. The organization has processes in place to get inventory on hand and future stock requirement information at a more regular frequency (e.g., day-end status). This information sharing can happen throughout the day via the Internet, portals, or electronic data interchange (EDI).

5. Basic collaboration capability. The company does a basic level of inventory collaboration. As the inventory falls below a predefined limit, the system sends an alert, based on which a planner creates replenishment orders for the vendor.

Level 2 Available Tools

Planning capability: Planning tools such as MRP are available in the ECC 6.0 Production Planning (PP) module. CBP is available under the ECC 6.0 MM module.

Reporting capability: ECC 6.0 or SAP NetWeaver Business Intelligence (BI) 7.0 can meet the requirement. However, companies at this level mostly use ECC 6.0 for some basic level reporting and most of the reporting is still done in Excel.

Visibility capability: For visibility a variety of SAP tools can be used. This can be exchanging of information through ALE-IDoc technology or SAP NetWeaver Portal.

Collaboration capability: SAP supports a set of collaboration scenarios as part of SAP SCM 5.0. These scenarios are Vendor-Managed Inventory (VMI), Collaborative Planning, Forecasting, and Replenishment (CPFR) and Forecasting and Replenishment (F&R) solutions for Retail. However, many companies at this level mostly have some form of manual collaboration and are not mature enough to use these tools.

Level 3 Capabilities

1. Advanced process capability. The organization has matured in terms of basic inventory management processes and is implementing more advanced processes including pull-based replenishment, collaboration with critical supply chain partners, and establishment of cause-and-effect relationships for all inventory exceptions. Some companies at this level implement Just-In-Time (JIT) systems at their shop floor for inventory reduction, better inventory staging, and quality improvement.

2. Advanced measures and reporting capability. The organization has segregated its operational reports (e.g., daily stock info and stock outs), analytical reports (e.g., ABC, fast and slow moving, and inventory age) and strategic reports (e.g., inventory holding trends, customer service trends, and inventory KPIs). It has developed a storage strategy for each type: in Excel (perhaps daily planning reports), in SAP ERP (most of the operational reports), or in a data warehouse system (perhaps all strategic and some analytical reports). The company also has a strategy for data extraction and presentation.

3. Advanced planning capability. The organization is deciding inventory levels based on service-level requirements. Service levels are established for each type of finished goods and probabilistic or stochastic modeling is used for deciding inventory level. Demand and supply uncertainties are calculated and used as an input for inventory modeling.

4. Advanced collaboration capability. Collaboration is not limited to just sharing information, but is extended to interactive planning. Partners understand each other’s constraints and change the planning numbers (e.g., capacity constraint). Innovative collaboration best practices are implemented such as VMI and CPFR.

5. Exception management capability. System-generated alerts make partners aware of any exception in the supply chain. System-generated workflows define the next course of action.

Level 3 Available Tools

Planning capability: Planning for safety stock based on service level is supported in SAP SCM 5.0 Advanced Safety Stock Planning functionality

Reporting capability: The organization at this level uses data warehousing and reporting tools such as SAP NetWeaver BI 7.0 for strategic and analytical reporting. Daily operational reporting is still done in ECC 6.0.

Collaboration capability: The organization now can choose from a set of collaboration scenarios offered by SAP as part of SAP SCM 5.0 offerings. These include VMI, CPFR, Inventory Collaboration Hub (ICH), and F&R.

Exception management capability: Alert Monitor, part of the supply chain cockpit in SCM 5.0, supports numerous standard planning alerts. You can also develop your own alerts through macros. SCM Event Management (SCM-EM), a part of SCM 5.0, supports logistics-related alerts and corresponding workflow for the next set of actions. You can also develop alerts in SAP NetWeaver BI 7.0. A company at this level can use all three types of alerts or choose one or two depending on the requirement. The decision depends on business needs. For example, the standard alert provided in Alert Monitor may meet a company’s requirements. If the alerts require data from different applications, SAP NetWeaver BI may be the preferred tool. You use SCM-EM when you want to track a shipment and need to report any exceptions in its movement, such as a delay. SCM-EM can generate exceptions across different applications and trigger a set of follow- up actions based on defined business rules.

Level 4 Capabilities

1. Advanced KPI analysis capability. Now the company has cause-and-effect capability in reporting — for example, detailed KPI drill-down analysis to establish why a stock out happened at a particular distribution center

2. Benchmarking capability. The company started benchmarking its measures with leading global players in the industry and started doing a root cause analysis of those differences

3. Extending inventory management processes and best practices to partners. The company has its own house in order and extends key best practices to its partners. It might extend its JIT system to its suppliers, implement basic planning and reporting capability at a supplier’s site, or implement visibility processes for suppliers and the supplier’s supplier.

4. Optimization and simulation capability. These capabilities are required to address complex decisions such as:

Multi-echelon inventory optimization: Does it make sense to hold inventory at a distribution center, a warehouse, or factory based on service level commitment? The decision takes into consideration the total inventory investment budget, constraints such as storage capacities, and lowest cost objective. Lowest cost objective means the total of stock-out costs and inventory carrying costs should be at a minimum level.

Inventory network decision: Can the existing distribution network meet the stated customer service levels at a reasonable cost or does the company need to redesign its inventory stocking network? No longer does the company take the locations of its factory and distribution centers as a given.

Build-ahead decision: Does it make sense to produce inventory ahead of the requirement to take care of future demand? The decision to build is made when probable value of lost sales is much higher than the cost of carrying excess inventory.

Form of inventory: Should the company send finished or semi-finished goods inventory to retailers or distributors?

Level 4 Available Tools

Optimization and simulation capability: Normal optimization and simulation capabilities are offered as part of Supply Network Planning (SNP) in APO. Multi-echelon inventory modeling capabilities are delivered by a set of SAP-certified independent vendors. Inventory network design is supported by a solution from an SAP partner.

KPI analysis capability: Complex KPI analysis is supported in SAP NetWeaver BI 7.0

Rajesh Ray

Rajesh Ray currently leads the SAP SCM product area at IBM Global Business Services. He has worked with SAP SE and SAP India prior to joining IBM. He is the author of two books on ERP and retail supply chain published by McGraw-Hill, and has contributed more than 52 articles in 16 international journals. Rajesh is a frequent speaker at different SCM forums and is an honorary member of the CII Logistics Council, APICS India chapter and the SCOR Society. 

You may contact the author at rajesray@in.ibm.com.

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