Advanced planning systems

Increase the revenue of your ERP investment

Many companies do not obtain sufficient value from their ERP investment

The complexity and the effort combined with having the company’s business processes and transactions reflected and supported by the ERP system is often so large, the energy to expand with advanced planning systems is simply not there. It is understandable but it is also a shame.

Increase the revenue of your ERP investment

Often, a further investment of 20% yields 80% more return on investment value on the systems. The reason for this is the fact that the companies act in a world with increasing complexity in the supply chains.

A large number of products, often with far shorter life and planning in several locations and in many cases in different countries, increase the need for efficient management tools and appurtenant decision support tools. In addition, there are new production methods, e.g. based on the Lean philosophy where e.g. the requirements for flow in the production, order production and minimisation of waste is extremely demanding of the optimisation of the company’s supply chain.

In this article, we focus on which effects can be expected from the implementation of Advanced Planning Systems (APS) as well as the empirical pitfalls. The article takes its starting point in the APS system Advanced Planner and Optimizer (APO), which is delivered by the German software house SAP, who also produces the ERP system SAP R/3. The most significant considerations and general experiences are presented as they can be transferred to implementation of other APS systems, which in their structure and principles are similar to APO.

Traditional ERP systems’s insufficiencies ERP – Enterprise Resource Planning – covers a number of activities, which help a company control its business, including product planning, stock management and supplier conditions, etc. In SAP R/3, one of the greatest advantages is that there is a transparency and connection between all activities in a company – from logistics processes to financial management.

Planning in SAP R/3 is, however, subject to preconditions, which causes the calculated plans to be unrealistic. Below we have listed the areas, which are empirically the most central:

  • Infinite production capacity is presupposed
  • Raw materials and semimanufacture on the next level of inventory list is always available
  • All requirements are equally important, i.e. there is no distinguishing between refilling for safety stock and production for a customer order
  • Focus is on planning per factory and not for the entire supply chain
  • Missing opportunities for decision support through what if simulations

Often, small companies will be forced to include buffers and increase safety stock in order to ensure ability to deliver and level of service in order to compensate for the above disadvantages. Thereby, the total lead time and stock binding is increased. These costs and the potential improvements in the service level justify investments in supplementing the ERP system with an APS system.

Possible effects of implementing APO

In the introduction, we mentioned that many companies have not yet taken home the full profit of the ERP investments. It is therefore essential for a successful implementation of an APS system that the implementation meets the expectations of effect on the bottom line. We take our starting point in the below solution concept which we are not going to discuss in detail in this article. The effects of following this concept are e.g. the following:

  • Improvement of the forecast quality with a derived effect on the service level as a result
  • Reduction of safety stock with a basis in forecast uncertainty
  • Reduction of total logistics costs
  • Increase of customer service level through a valid plan which can be carried out due to a better overview of shortages
  • Time saving at the planner as reaction is only needed in case of deviations
  • Reduction of production costs through reduction of changeover times and efficient use of capacity in order to produce the right goods
  • Fewer transportation costs
  • Stock reduction by only distributing what is sold for the coming days

These effects do not happen by themselves, which is why we wish to emphasise the following:

  • How to set up objectives for the expected effect
  • Which experiences are made from APS/APO implementation in relation to taking home the expected effect
  • The results are created through changes in the management concept and the processes

First of all, we recommend that the company devises a business case in connection with the preliminary analysis in order to ensure and document that the IT investment gives the necessary yield on the bottom line. It is important to hold on to the effects objectives of the business case throughout the entire implementation. In this connection, optimisation of the supply chain is about the usual elements:

  • Minimising costs and
  • Improved earning possibilities
Preben Holst Nielsen
Preben Holst Nielsen
+45 5138 7401

Minimising costs

Administrative time: Experience tells us that time saving (and thus employees) is not the effect focus when implementing the APO system. Better and faster plans and solutions are procured, but it also requires an effort to control parameters and evaluate the results. Therefore, you have to be careful when including the employee cost reductions in your income for year 1 but instead focus on other areas of effect.

Stock binding:The common elements are simpler, however. As often, the primary focus is on stock binding, when shifting from functional division to the entire supply chain.

Waste: Is a considerable cost in many businesses but what is the potential of waste? It is often difficult to obtain data because the cost account can cover expiry date (large stock), production and handling scrapping. Assumptions may be necessary unless the company has the detailed information about the cause of waste.

In general: It takes a considerable effort and a very detailed knowledge of own cost structure to compare the parameters, especially because you should not focus on the positive effects alone but also at the same time include the derived negative effects.

One example is that the APO implementation builds on an improved possibility of optimising a large part of the supply chain. The overall objective of the project is therefore to decrease stock by pulling the stock further back in the chain and only distribute what is sold in the next couple of days from central stock to distribution centres.

Globalisation is an agenda which the companies have to relate to on the highest management level. Not least in relation to Supply Chain Management and optimisation of the supply chain. Development of the infrastructure must therefore reflect and support a holistic view of the planning works rather than a partial.

The effect is

Safety stock for covering uncertainties at many distribution centres can be brought down, as the uncertainty lies with the central stock. Negative effect on the transportation costs involving filling up trucks – in cases where the requirements are not big enough to fill whole trucks.

Improved earning opportunities

An improved service level can be difficult to convert directly to the bottom line unless it is assumed that it hits the bottom line in the form of non-lost sales. More assumptions must be made in connection with setting up effect objectives because actual data is not available. How many companies know of lost sale if they can not deliver? Does the customer buy other products from us? Or is the sale really lost to the competitors?

Assumption

If we can improve the service level with 5%, we can improve the sale with 2%. Although it is hard to quantify the business case it can be done despite the implied uncertain factors. If we fail, the APO implementation can not be measured and the company does not manage to steer the project towards the effect.

Experiences and pitfalls connected to APS implementations

Experience with implementing APS systems has shown that there are currently a number of special conditions apart from those of other ERP implementations. It shall not be seen as a comprehensive implementation method but more as a way of avoiding the pitfalls which can be found in traditional implementations of ERP systems and other IT systems.

First of all, it is important to start with a description of the future management concept and business processes so that the APS system supports this in the best possible way. However, the processes must be adjusted later compared to the functionality of the APS system.

Secondly, it is easy to get carried away by the possibilities provided by an APS system. Therefore, it is necessary to start at the same stage as the company. In this case, a maturity analysis is a good starting point for uncovering the company’s readiness for a transformation from functional planning to network planning. It will usually result in a pre-project and then a phase division of the implementation.

E.g. start with Demand Planner – then Network Planning, etc. It then takes a considerable effort to implement an APS system which has organisational consequences in connection with the transfer of significant areas of responsibility and the creation of a common plan for the entire supply chain which replaces the local plans.

Five important focus areas in an APS implementation

In closing, we will summarise five focus areas that are important in a successful implementation of an APS system:

  1. Development of a business case in order to set up clear objectives for the effect of the implementation.
  2. Management concept (on both a tactical and an operational level) and changed processes should be roughly designed before the APS system is implemented.
  3. The changed processes and the implementation of APS systems make demands for organisational changes.
  4. The APS system is to support the management concept and the new processes as well as maintaining change
  5. Planning in an APS system make demands for the planners being oriented towards the entire supply chain.