The pharmaceutical industry has become extremely competitive due to the rise of the generic drug market. This market also has become complex due to global supply chains. The rising costs of research and development and the declining profit margin of generic drugs makers have led some specialty branded drug-making companies to improve their bottom line by looking at opportunities to optimize their operational costs. One such opportunity is to outsource noncore supply chain operations such as the in-house distribution center to third parties. However, outsourcing of in-house distribution center (IHDC) operations to a third-party logistics (3PL) service provider requires a design change in ERP and SCM systems. The change can vary in each case as the system landscapes of companies vary.

I describe a scenario in which, because of a design and business requirement, a new code 3PL was created to represent a third-party logistics service provider. The existing code IHDC, representing the in-house distribution center, was removed from planning in the manufacturer’s ERP system. The code 3PL in the manufacturer’s ERP system represented all operational transactions, such as sales order, purchase order, and inventory movements, at the third-party logistics service provider’s warehouse. The third party’s ERP system was integrated with the manufacturer’s ERP system via electronic data interchange (EDI) to send and receive the transactional data (Figure 1).

Figure 1

The integrated system landscape

The Supply Chain Challenge During Business Cutover

The business process to close in-house distribution center operations and go live with the third-party logistics service provider spanned a period of approximately two months from October to December. During this period, all the customer sales orders that were already received were to be shipped out of the in-house distribution center, and excess stock was transferred from IHDC to 3PL. Considering the lead time for completion of the stock transfer, stock was in transit status until the stock was received into the 3PL. In effect, during the cutover period, inventory and receipts were available at two locations for a given product. During the cutover, the manufacturer faced the following business challenges:

• The upstream supply sites’ production plans should not be disrupted and should get a demand signal after netting stock or stock in transit considering both the locations IHDC and 3PL.
• The ability to deploy stock on hand or receipts for forward visibility and dispatch the shipment of available stock into 3PL as well as IHDC. Figure 2 shows various deployment scenarios based on supply site and replenishment lead time. The constraint is that stock and receipts within replenishment lead time can’t be deployed into IHDC and therefore should be deployed into 3PL.
• Transfer stock from IHDC to 3PL without the loss of sales or stockouts during the cutover period.

Figure 2

Deployment scenarios based on supply site and replenishment lead time

Abbreviations Used in the Document

The AS IS Supply Chain Network

Figure 3 is a diagram of the supply chain network created using a purchase information record (PIR) and special procurement keys (SPKs).

Figure 3

A supply chain network created from a PIR and SPKs

The supply chain network shown in Figure 3 was created using the transportation lane setup shown in Table 2.

Figure 4 shows how a transportation lane can be displayed using transaction code  /n/sapapo/tl1. In my example I specify the Model Name as 000, the Start Location as B02_1402 (the NA supply site), and the Dest Location (destination) as B02_7301 (the IHDC customer location). After entering these values, click the Display button.

Figure 4

Display a transportation lane

Figure 5 shows the details of the transportation lane created after integrating a PIR from SAP ERP Central Component (ECC) to SAP APO using the CIF model between supply site NA and IHDC. This transportation lane uses data shown in the second row of Table 2.

Figure 5

Transportation lane details

To create a transportation lane between IHDC and RWH using an SPK, execute transaction code n/sapapo/tl1. This action returns you to the screen shown in Figure 4. Enter 000 in the Model Name field, B02_7301 in the Start Location field, and B02_7313 in the Dest Location field. After you click the Display button, you can view the transportation lane details in the screen shown in Figure 6. 

Figure 6

A manual transportation lane in SAP APO

The Supply Chain Network During Business Cutover 

Figure 7 shows a planning scenario from October 2013. In this scenario, note that the demand signal to the supply site before 3PL go-live was sent to supply sites directly from the IHDC. The demand signal in the planning horizon beyond the go-live date was sent from the IHDC to supply sites NA via the 3PL to give forward visibility to supply sites that post go-live shipments which need to be sent to the 3PL.

Figure 7

Supply networks during cutover

Figure 8 shows a supply chain network created using the following transportation lane setup during business cutover period:

The key points are:

• The same PIR was extended to two distribution center codes: 3PL (new) and IHDC (old), creating two transportation lanes in APO after integration via CIF.
• Manually created transportation from 3PL to IHDC to send the demand signal to supply site NA so that stock or receipts at 3PL as well as IHDC are netted.
• Manually created blocked transportation lane from IHDC to 3PL to account for in-transit inventory associated with stock transfer order created in ECC to send the stock from IHDC to 3PL. The stock transfer order on integration with APO created DistReceipt truck load builder (TLB) Confirmed (Distribution Demand Orders) at 3PL and DistDemand TLB Confirmed (Distribution Demand Orders) at IHDC. The transportation was blocked to eliminate the cyclic relationship between IHDC and 3PL during low-level code generation.
• The demand plan was dropped to IHDC until go-live. After go-live it was dropped to the 3PL.

Figure 8

Supply chain network during cutover period

Table 3 lists data used for a transportation setup during cutover.

Master Data

Three key master data records were created: a PIR, manual transportation lanes, and quota arrangement.

PIR

Figure 9

Create a PIR in the ECC system

Figure 10

PIR extended to two receiving locations: IHDC and 3PL

Figure 10 shows that one PIR has been extended to two plant codes (IHDC and 3PL) that are for one vendor supplying two destination locations. This setup is required for enabling the supply sites to send stock to both IHDC and 3PL during the cutover phase.

Transportation Lanes 

To send the demand signal upstream to supply site NA from IHDC via 3PL, you need to create a transportation lane manually in the SAP APO system. To do this process, execute
transaction code /n/sapapo/tl1.  

Figure 11 shows the fields required and steps to follow for creation of a manual transportation lane for a product. Populate the Model Name, Start Location (3PL), and Dest Location (IHDC) fields as shown in Figure 11.

Figure 11

Create a transportation lane

Click the Create button to open the screen shown in Figure 12.

Figure 12

Create a manual product-specific transportation lane

In this screen, click the create icon (the arrow points to this icon in Figure 12). This action opens a new screen on the right as shown in Figure 13. 

Figure 13

Enter product-specific details for the transportation lane

In Figure 13, enter the product code for which the transportation lane is being created in the Product field. In the Validity section, enter values in the Start Date and End Date fields. After entering this data, click the enter icon (the green check mark). This action opens the screen shown in Figure 14.

Figure 14

Maintain a product-specific transportation entry

Click the create icon to create the means of transport.After you click the create icon, a new subscreen opens to the right as shown in Figure 15. In the subscreen, specify a code for the means of transport in the Means of Trans. field and populate the Start Date and End Date fields. In the Control Indicator section, leave the default parameters selected as shown in Figure 15.

Figure 15

Enter details to create the means of transport

In the Parameters section, enter a value for a transportation duration in the Trsp. Duration field. Click the enter icon. This action displays the details of the means of transport created as shown in Figure 16.

Figure 16

Create a means of transport in the transportation lane

The transportation lane also is created in SAP APO system after sending a PIR from the ECC system. Figure 17 shows the transportation lane between NA and 3PL created after integrating the PIR in ECC. The means of transport (MOT) was set as effective on 22.10.2013 (the date before the cutover date of December 1 of the last shipment from NA to IHDC) so that the supply site can deploy into 3PL if all the demand from IHDC within the horizon before the go-live date of December 7 has been deployed by the supply site. In Figure 17, note also that the PIR number is the same for the lane NA to IHDC.

Figure 17

Create the transportation lane with integration of a PIR

Figure 18 shows the transportation lane manual created in APO with a blocked status. This lane was created to receive manually created stock transfer orders in ECC to ship stock from IHDC to 3PL. Although the lane was locked, it still allowed STO to come from ECC without any error.

Figure 18

A manually created transportation lane between IHDC and 3PL

Inbound Quota Arrangement

The inbound quota arrangement was used to define the validity period for the source of supply. The quota arrangement shown in Figure 19 was created using the setup shown in Table 4.

The quota was set for IHDC to source from NA until 06.12.2013 using external procurement relationship/PIR. The quota  was set with a validity date effective 07.12.2013  to 31.12.9999 for IHDC to source from 3PL so that the demand signal goes to NA via 3PL. The purpose was that supply sites would know that stock should be sent to the new ship to address of 3PL after  December 7. The cutover date in the second row and the From date in the fifth row in Table 4 can be seen in Figure 19 and were used in the solution design.

Figure 19

Quota arrangement setup

To create a quota arrangement, execute transaction code /sapapo/scc_tq1. In the Quota Arrangement section of the screen that appears (Figure 20), specify the Model as 000 and the Location as B02_7301 (the IHDC). In the Version section, select the Version Independent button, and in the Quota Arrangement Direction section, select Inbound Quota Arrangements.

Figure 20

Choose the quota arrangement type and location

After entering these values, click the Change  button to create the quota arrangement. This action opens a new screen (Figure 21).

Figure 21

A quota arrangement header with a validity period before the 3PL go-live

In Figure 21, click the create icon   to create a quota arrangement header record. After you click this icon, a subscreen opens to the right. In this subscreen, enter the product code in the Product field, and in the Validity Period section, enter values for the Start Date and End Date of the quota. Click the enter icon to create the first quota header record for the period 24.10.2013 to 06.12.2013.

To create another header record for the source supply after the 3PL planned go-live date, click the create icon again. This action opens the subscreen on the right (Figure 22). Enter the values as shown in Figure 22 and then click the enter icon.

Figure 22

A quota arrangement header with a validity period after the 3PL go-live

Figure 23

Assign 3PL as the source of supply for post 3PL go-live period

Similar to the steps discussed in Figure 23, select the first quota arrangement header record and then click the create icon in the lower half of the screen. This action opens the subscreen to the right. In the subscreen, select the radio button Quota Arrangements for Ext. Proc. Rel. and then click the shuffler icon  . This action opens a subscreen called Selection of a Source of Supply. In this screen, select the external procurement relationship  of  B02_1402 (the NA supplier) as the source of supply created using the PIR and then click the enter icon (Figure 24).

Figure 24

Select B02_1402 (the NA supplier) as the source of supply for before the go-live period

In the next screen (Figure 25), click the enter icon again. This action opens the screen shown in Figure 26.

Figure 25

Select B02_1402 (the NA supplier) as the source of supply for before the go-live period

Figure 26

Enter a quota arrangement quantity

In Figure 26, in the field under the Quota Arr. column, enter a quota arrangement quantity  of 100 so that 100 percent of the requirements at the IHDC are sourced from the NA supplier. Click the save icon. 

SNP Heuristics Results

After master data setup is complete, execute SNP heuristics to generate the supply plan in the network. To execute SNP heuristics, use transaction code /n/sapapo/sdp94. In the screen that appears (Figure 27), click the shuffler icon to load the product and location in the planning book.

Figure 27

How to load product and location in SNP planning book

The NA supply site received a demand signal from the IHDC before Dec 7, 2013. Figure 28 shows the planning results after an SNP heuristics run.

Figure 28

Planning results after an SNP heuristics run

Figure 29

SNP heuristics results

Figure 30 shows that demand on 30.12.2013 is passed from the IHDC via the 3PL to the NA supplier. 

Figure 30

SNP heuristics results

Deployment Heuristics Results 

After a supply plan is generated  by running heuristics, deployment is executed to confirm the supply against demand. Deployment can be executed interactively using transaction code /sapapo/sdp94 or run in background mode using report /SAPAPO/RMSDPDEP. Figure 31 shows that on an interactive and background deployment run, the system deployed stock to the IHDC for demand before 06.12.2013 and generated receipts confirmed elements with a destination as the IHDC.

Figure 31

Stock deployed before the 3PL planned go-live date from the NA supplier to the IHDC

Figure 32 shows that the deployment run deployed stock to the 3PL demand after 06.12.2013 instead of the IHDC and generated receipts confirmed elements with a destination as the 3PL.

Figure 32

Stock deployed to the 3PL instead of the IHDC

Figure 33

Manual deployment from the 3PL to the IHDC to avoid double demand

Truck Load Builder Purchase Order Creation

The truck load builder (TLB) transaction is used to create a stock tranport order or purchase order (PO) from the customer site to the supply site. The transaction code /SAPAPO/SNPTLB or report /SAPAPO/RMSDPTLB can be used to schedule a TLB run in the background.

Figure 34 shows the deployment confirmed receipts  in the TLB transaction. Deployment confirmed receipts can be converted to a purchase order after selecting the deployment receipts and clicking the TLB button.

Figure 34

Deployment stock transfer to IHDC

Figure 35

TLB shipment to IHDC

Figure 36 shows the confirmed receipts for transferring stock from the NA supplier to the 3PL after the planned 3PL go-live.

Figure 36

Deployment of stock transfers to the 3PL

Figure 37

TLB shipments to 3PL

The Supply Chain Network after 3PL Business Go-Live

After go-live in December, location code IHDC was removed from the supply network in APO and replaced with 3PL. The lanes pointing from supply sites into 3PL created during cutover using a PIR were continued and lanes connecting 3PL to the regional warehouse (RWH 01, RWH 02, RWH 03 were created assigning new SPKs in ECC material master and re-integration of these materials to APO using the core interface.

Table 5 lists the data used for a transportation lane setup to model a new supply chain. The PIR in the second row of Table 5 was used to establish the network between supply site NA/B02_1402 and B02_7303 after go-live. This PIR can also be seen in Figure 10.

Figure 38 shows the supply chain networks that were established and used beyond 3PL go-live throughout the planning horizon. The network between supply sites and 3PL was created using a PIR. The network between the regional warehouse and 3PL was created using an SPK.

Figure 38

Supply chain network after 3PL go-live

Supply Chain Scope Outsourced Successfully

Leveraging SAP APO standard functionalities such as transportation lanes, quota arrangement heuristics, deployment, and TLB, the company successfully outsourced IHDC operations to 3PL with the following highlights:

•    Supply chains for 38 brands with 150 SKUs managed by approximately 50 users across the 10 supply sites located in different parts of the globe were integrated into 3PL without any customer impact and no stockouts at IHDC or 3PL.  
•    More than 250 stock transfers for 1.5 million units of inventory were transferred over a two-month period using APO to net out the stock levels between the two plants to send the right demand signal back to the supply site.
•    No inventory build was required for this transition due to the seamless transition from the old DC to the new DC in APO.