For some time SAP has been promoting its product lifecycle management (PLM) solution. We should say at the outset that we don’t find the term PLM very useful. Yes there are lifecycle implications to the software, however this category of software could more accurately be described as bill of material management software. However, there is no fighting city hall, so PLM it will continue to be known as.

Analyzing SAP PLM

When we did an analysis of SAP PLM for a client, we learned that PLM was not an actual product, but was in fact a “solution.” What his means is that various pre-existing modules have been Jerry-rigged around the material master in order to meet PLM requirements. This is much like SAP’s non-existent digital asset management solution – where digital media are entered as materials into SAP. Actually digital asset management and PLM have a lot in common because both solutions require a lot of functionality in terms of multi-media files. For PLM these files take the form of images and schematics, while in digital asset management the files take the form of images, music and video. However, the material master functionality in SAP is not designed to manage these files, or make them easy to find or reference. There is no big surprise why. The material management functionality was first and foremost designed to hold textural data on products for the purposes of accounting and supply chain management. Changing this functionality around to meet the needs of asset and document management is no easy task.

Lifecycle Planning in SCM

SAP lifecycle planning exists in the supply chain planning suite offered by SAP. For instance, in Demand Planner, which is the forecasting module of SAP SCM, lifecycle planning exists. DP allows you to introduce an existing product at a different location – using profiles to base historical data from current locations. Phase in profiles allows the reduction of the forecast for the period of introduction. We describe this more fully here:

http://sapplanning.wordpress.com/2009/04/21/plm-and-lifecycle-planning-in-scm-dp/

However, this capability in DP, and the product interchangeability functionality that is available in other modules of the SCM suite (notably SNP, CTM, PPDS and GATP) is quite a bit different from the integrated PLM solution that SAP pitches to clients. Again, this gets back to the problem we have with the term “PLM.” PLM functionality can exist in different areas of supply chain applications, however, it does not mean that the solution is offering advanced bill of material management functionality which includes:

• Multimedia file management
• Document management
• Engineering change management
• Collaboration management (between marketing, engineering and production)

SAP Has Had Its Shot in PLM

SAP PLM has not taken off, and it does not appear to be an area they have or intend to put real development effort behind. However, they still make their white papers available on the topic, but the white papers and literature ring a bit hollow at this late date. SAP entry into the PLM market’s main effect has been to discourage companies from implementing real PLM solutions and hurting PLM’s image more generally.

Here you can see one of the main graphics for SAP PLM (listed under Life-Cycle Data Management at the top). However the flaw in this diagram is apparent. PLM is based upon document management, but SAP does not have any serious document management capability. The best evidence of this is the state of SAP Solution Manager that is causing project heartburn on SAP projects globally as we write this. We have first hand experience with Solution Manager and consider only Microsoft SharePoint to be a worse document management solution. (see this link for details)

http://infoknowledge.wordpress.com/2008/12/17/why-sharepoint-for-rss/

This is a market SAP would be wise to cede to other vendors and strengthen their core offerings which more development attention. Our recommendations for how to do this are listed here.

http://sapplanning.wordpress.com/2009/04/10/sap-should-stabalize-functionality-focus-on-quality/

PLM and Service Parts

PLM is of course extremely important for service parts. Many of the service parts planning applications have built in control fields in the form of things like shelf life; and of course supersession is a manifestation of product life cycle needs (out with the old – in with the new). While doing some research on PLM for service parts we came upon a company called Arena Solutions and we have tested their software extensively. We think its time many other companies gave it a try. It is extremely easy to use, offers hosted solutions and just has tons of PLM functionality.

SAP’s Approach

As for SAP PLM, its time to give up on it if you have significant PLM needs. It is dysfunctional for these different software verticals for SAP to use marketing literature and personal relationships with executives and major consulting companies to push their way into software areas for which you really have either no product, or a vastly inferior product to offer. Our view is if many companies had adopted Arena Solutions several years ago they would be way ahead of the game and would have a real solution for their BOM management and life-cycle issues. If these companies are concerned about integration issues with SAP ERP, it is most definitely worth the extra effort given all of the functionality your gain.

For more details on Arena Solutions see this post.

http://spplan.wordpress.com/2008/12/12/arena-solutions-and-where-used-view/

References

http://www.amazon.com/Sales-Inventory-Planning-SAP-APO/dp/1592291236

Lets start off by discussing what we originally intended to do in this post. We thought we would do some Internet research and easily find some of the best service parts management companies and describe what they were doing that set them apart. However, because of the lack of data we were not able to do this. Thus we have another topic to discuss; namely, where are the listings for service parts management or at least service management?

History of Business Ratings

Lets discuss the history of business ratings. The concept of rating a business’s performance in a formalized manner is while not that new, still not all that widely practiced. The pre-eminent rater of products in the US is Consumer Union, which publishes Consumer Reports.

Consumer Reports provides initial ratings or reviews of products and services. This in itself is not that rare except for the fact that Consumer Reports has set itself apart from other rating companies (such as Epinions and JD Power and Associates) for buffering itself form company influence. The way this is done is by being subscriber supported and not accepting advertising or allowing the use of Consumer Reports results to be used in advertising. Another thing that is relatively unique to Consumer Reports is their tracking of long term reliability of automobiles and the brand reliability of things like washers and dryers and computers. These ratings influence purchases and were and continue to be critical of lower quality products. Before this rating system existed every car company could claim to make a high quality product, but the ratings showed otherwise. The Consumer Reports rating system in addition to word of mouth was instrumental in bringing down the US car industry, which was and continues to make inferior products, and promoting the Japanese car industry for the opposite reason.

The Consumer Reports reliability rating for a Saab.

Service Ratings

Manufacturing ratings are relatively common, as any search on Google will demonstrate. IndustryWeek maintains a prominent one here..

http://www.industryweek.com/articles/the_iw_50_best_manufacturing_companies_corporate_gold_mines_16355.aspx?SectionID=42

However, we did not find a rating for excellent service parts firms. Recently JD Power and Associates has begun tracking excellent service organizations, a list of which was recently published in Business Week. However, if you look at the list, only seven are manufacturing operations.

• Cadillac
• Toyota
• Porche
• Apple
• Lexus
• Buick
• Lincoln

The majority are services (i.e. banking, hotels) which do not have service parts operations. And of the top list in customer service, Buick, Porsche and Cadillac do not make reliable cars according to Consumer Reports, so the rating must be for the customer experience in sales and service. Alternatively, these three care makers may excel at service parts management. However, because the rating is so broad, it is difficult to tell. This is not to say the ratings looks illegitimate. In fact, we have had personal experience with many of the companies on the list and the ratings check out with our personal experiences. One final point is that the ratings are all consumer brands, however what about industrial brands like John Deere, we see no industrial brands on the list. Industrial brands should be pitted head to head against consumer brands. In our optimal rating system, Raytheon would be on the same list, and competing against Acura.

A Service Parts Management Rating Index

What is really needed is a service management index, which would include service parts. Tracking this would go a long way towards bringing more focus on the topic. Things like initial price are easy to compare, but without a service management rating, products with a low initial cost, but high long -term maintenance cost can become more popular. This gives companies less of an incentive to build serviceable items, and to invest in their service infrastructure. This is the present situation that many US firms find themselves. One of the great positives of the Japanese culture is that it focuses on quality and assumes good things will flow from this. US culture is different. We will produce quality if we believe we can earn an ROI on it. This is a very different approach.

Measuring ROI From Quality

However, measuring ROI on quality is not something that is a very well developed capability. However, this brings up a topic that we can’t resist discussing, although it is a slight digression. In the 1980’s Japanese manufacturing was all the rage, and a number of books came out and consultants supported the notion that conventional inventory management formulas were incorrect. This was because, they said, the benefits of inventory decreases did not show in the numbers. Therefore inventory should essentially be slashed willy-nilly and then good things would follow. This proved to be completely false, yet companies to this day are obsessed with inventory reduction.  However, the formulas for inventory management were correct and company after company that we see carries too little inventory, which negatively affects their service fill and their manufacturing efficiency. However, the relationship between quality and ROI exists, it is difficult to measure. This is because of the existence of monopoly power. Microsoft has terrible software quality. However, their monopoly position protects them from the effects of poor quality. What is interesting is the message that was really taken from Japan was its low inventory levels (also a consequence of having manufacturers and suppliers close to one another, which is not the case in the US) even though there was zero evidence the inventory formulas were calculating excess inventory. However, this message was appealing because it meant less investment – at least in the short term, which is what executives want to hear. Quality requires more investment up-front, and provides long term benefits which executives are less interested in because of how US executives are compensated with stock options. What this case study indicates is that some messages, while false, become popular, because they dovetail with organizational and personal incentives. Other messages, which while true, fall on deaf ears, because they do not dovetail with incentives.

When selling concepts to US executives, the truthfulness of a course of action takes a back seat to the personal incentives of the individual.

Benefits of a Ranking System

So US industry needs to be put on the spot – or exposed through a ranking system – in order to have the proper incentive to invest in service. There is an old saying that goes something to the effect of “there is no reason to improve something if no one is measuring it.”

In our previous post we discussed the different vendors and services offered for reliability testing and prediction. One of the important issues with relation to MTBF management is the product structure. The product structure is the hierarchy (or at least at first glance) of materials that make up an overall product. This has different names depending upon the application. In SAP ECC it is referred to as a Material BOM or an Equipment BOM. In MCA it is referred to as the product indenture network.

BOM and PLM Software

Being able to deal with the BOM in a flexible and distributed manner is increasingly a capability with what is referred to as PLM software. We dislike this term and would prefer “BOM management software,” but we don’t make the rules.

Companies like Agile are leaders in this area. Having powerful BOM management software is important for many reasons that include improving the efficiency of product development and building quality into products as well as product costing for contract development. However, it is also important for service parts planning and MTBF. MTBF calculation integrates with the BOM.

ERP for BOM Management

There is increasing evidence that BOM management greatly benefits from specialized software. ERP software manages how the BOM relates to execution and planning, but does not tend to have advanced capabilities with regards to BOM management. (of course Oracle purchased Agile in 2007, a leader in PLM, however, software mergers often kill the aquired company’s innovation and product. Look how little Oracle has done with the PeopleSoft functionality). Here is an interesting quotes regarding ERP for PLM from Arena Solutions.

There is a misconception that Enterprise Resource Planning (ERP) systems can be used to manage all product information after design, including changes and communication. Unfortunately, even though the final production BOMs, the Item Master, and costing information are ultimately loaded into ERP systems, these systems do not have integral processes for ECOs or file management. Therefore they cannot be used to control BOM or item changes or manage associated files. Furthermore, as a tool primarily for internal groups, ERP systems cannot be used by external partners and suppliers to obtain product information. – http://www.arenasolutions.com/images/pdf/rc_docs/whitepapers/Arena_Turning_Great_Designs_Into_Great_Products_Whitepaper.pdf

ERP systems are not designed to be change control or file management tools, and must be manually updated to reflect approved product changes. To update and change product information across electrical and mechanical CAD tools and ERP systems, many companies employ spreadsheet software, such as Microsoft® Excel, to manage part changes, SOPs and BOMs and to communicate them to project teams.” – http://www.arenasolutions.com/images/pdf/rc_docs/whitepapers/Arena_WP_Med_Device_Doc_Control.pdf

Reinforcing this statement is the poor track record of SAP PLM. We personally analyzed this “solution” several times only to find that it did not involve new software as much as simply leveraging the old structures with a few bells and whistles added in.

http://www.sap.com/solutions/business-suite/plm/index.epx

(in the past several years, SAP product management and marketing is increasingly following the Oracle model of presenting vapor or stretching pre-existing functionality to fit new solutions)

Spreadsheets for BOM Management

Exporting BOM information to a spreadsheet and managing it there for MTBF and other purposes is not a very competitive solution with the other alternatives that are present. In fact, even using an on line spreadsheet like Google Spreadsheets, while better than using Excel with its isolated files, is still not really capable of managing the complexity of BOMs. Furthermore with the rise of contract manufacturing and distributed product development and manufacturing, islands of data created by Excel are even less useful. Amazingly PLM software is still lightly implemented out in the marketplace.

Graphic from Arena Solutions – taken from an online webinar – not a formal study.

As far as ERP systems, while ERP systems have BOM functionality, it is not the functionality offered by Arena. Rather ERP BOM management was developed in order to support transaction processing. This is quite a bit different from what specialized BOM management software does.

Arena Solutions

Arena Solutions’ website is quite good and for anyone interested in PLM and BOM management we recommend a visit. It is of course selling a service, however it is also very educational and most the statements made on the site are reinforced by our consulting experiences.

http://www.arenasolutions.com

In one of their white papers we found a very good explanation of the needs of modern BOMs.

“As the design progresses toward production, the part-list-like engineering BOM must transition into a detailed manufacturing BOM that includes all the items required to make sub-assemblies and the final product. During this process, numerous project teams contribute to the BOM and item changes (Figure 2). The resulting manufacturing BOM is highly relational and includes various associated data and files, such as design drawings, software files, item files, costing information, compliance status, specification data, and supplier information.” – http://www.arenasolutions.com/images/pdf/rc_docs/whitepapers/Arena_WP_Beyond_BOM_101.pdf

The Relational Model for BOM Management

One easy way of understanding this is that one sub-component often is part of more than one parent component. Therefore, by using a relational BOM configuration (which is different from a relational database, you can use a relational database, but still follow a restricted hierarchical model in your BOM configuration.), when the sub-component is changed once in one location it affects all parent components immediately. This is the desired end state, that all parent products be instantly updated when a change to a sub-component is rolled out.  This relates to all life-stages of a product’s existence. This updated part data is then sent over the planning system where a flag is changed that tells the planning sytem this part should no longer be planned. Having this data updated is as important as the algorithms you use to produce a forecast.

This complexity really requires a software specialized software solution. Furthermore, this is perfect application for a hosted application. (we increasingly wonder why companies continue to ask for software they have to install and manage, particularly when the application is shared.) With hosted applications, as long as the software provides a standardized feed of some type (such as RSS), application integration can be managed completely on line, so a BOM Management – PLM service provider like Arena could be integrated with an on line version of a transaction processing system and the service parts planning system. To learn more about RSS feeds and their relationship to application integrating see this article in another one of our blogs. (http://semanticwebs.wordpress.com/2008/12/10/rss-and-application-integration/)

Application Screen Shots

Arena has a nice interactive demo on their website, so we decided take a few screen shots. This screen shows the different status of notifications.

Below we have a listing of notifications for particular BOM numbers. We also see the people (users) that have the ability to view or edit or comment on the BOMs.

When we select one of them we get taken into the detail.

Here we can see who is part of the notification distribution list.

Here we have a flowchart of the process status.

Here we can see that suppliers are involved in this process and can log in.

Also, the individual products that make up the BOM are listed as well.

For each product, there is a coding for the items compliance requirements as well whether the prase of the item (if its in production, obsolete, etc..)

If we select the files, we can see all the attachments to each product.

In conclusion, we find this software very compelling. Furthermore they offer a fully hosted solution which they call on-demand. In our consulting experience, Arena is providing answers for a lot of problems that plague BOM management at many a company.

Open Question

One of the questions we do have is where an MTBF value is located. For the purposes of service parts planning, Arena just needs to feed one number per part. Both SAP SPP and MCA can perform their forecasting (if the option is selected) from a simple MTBF value associated with every product record. This is called leading indicator forecasting in SPP and causal forecasting in MCA. At least MCA has some involved ways of calculating the overall service level, and one of the inputs is the MTBF of the underlying items – related to the inventory coverage for each item.This is something that should naturally be maintained in Arena. How this value is obtained is a different topic and is covered here.
http://spplan.wordpress.com/2008/12/09/vendors-and-software-for-determining-mtbf/

However as far as how Arena holds the MTBF, we will update this post when we find out.

References

Wikipedia on PLM
Arena Solutions

Performance Based Logistics is a much discussed concept in the military and among defense contractors. However, this post questions whether it is an authentic trend based upon the incentive structures of the military and their suppliers. PBL as a Trend

PBL has become a strong trend among the management class of companies in the A&D environment PBL. PBL based upon a kernel of truth that may or may not spread from management conferences. This paper discusses PBL and makes some educated guesses as to where PBL might be in 5 years from now.

Basis for PBL is introduced as a way to improve service levels and increase the responsibilities of supplier service parts management and in some cases service part service operations. In this way it may be viewed as a form of outsourcing where the part planning and management is moved from the client to the suppliers. In cases where the military is the customer, it can be seen as a light form of military privatization.

Supporting Case Studies

The outstanding case study for PBL in the A&D environment is Rolls Royce. While not called “PBL,” Rolls’ TotalCare engine service program is in fact a long term service contract where Rolls controls the engine service parts inventory and in a way goes beyond PBL by offering direct guidance and instruction when certain parts are due for maintenance. Rolls actively monitors over 3000 engines aggregating a strong level of service intelligence about engine maintenance. Rolls
has, by most accounts, leveraged this capability to grow its market share, take business from larger competitors and reinforce the premium reputation of its industry leading engines.

Deviations Between the Strong Case Study and Other Projects PBLClients and Environments

It would be a mistake to assume that the success at Rolls can be duplicated to every A&D supplier or can be generalized to other areas outside of engines. By comparison there were certain organization differences between Toyota and US manufacturing firms as well as geographic differences between the locations of the suppliers that make up the supply base in Japan vs. the US that prevented other companies from ever duplicating Toyota’s success with JIT, regardless of decades of attempts across
thousands of factories. What this means is that the case for PBL with Rolls must be observed in terms of how Rolls as a company, and Rolls business is different than other companies that want to implement PBL type programs. Some of differences are listed below:

1. Rolls is only managing a small proportion of the overall service
parts of an airplane. They are providing 100% of the parts for the
engines under the TotalCare program. This means that a 95%
availability actually does mean a 95% availability for the engine as
there are no other suppliers. However, this is not true with companies
that provide the entire airplane. Therefore it must be considered that
Rolls is solving a much more simple problem than a supplier that
supplies the entire airplane would be.
2. Rolls appears to be on the outward edge of competence within the
industry. Secondly, this is not a new philosophy for Rolls. Their
”Power by the Hour” program, which is essentially similar to the
TotalCare program dates at least back to the 1930’s. This means that
Rolls has been organizationally oriented towards service for
generations. This is not necessarily the case for other A&D suppliers.

The Cultural and Business Model Changes Required

We have found several articles on how well this new concept fits into the existing culture of A&D suppliers.  The consensus is that a great deal of cultural change will be required to move A&D suppliers to a PBL environment. However, less discussed is how PBL fits into A&D, and particularly defense contractor’s business models. There is probably good reason for this. The reality of the defense service parts business model would not be very popular if it were generally known. Enough documentation is available to demonstrate a strong and lengthy line of continuity in service parts pricing.

Service parts are priced at the beginning of the program, and in subsequent years the service parts rise terrifically. This is true of so-called unique parts, but is also true of what appear to be commodity items. Many of the oversight bodies for regulating part increases were removed in past 6 years in particular, but have been even before then as the public furor over military contracting overcharging died down from a decade and a half ago. Therefore, the part price escalation continues.

If this is a strategy of defense contractors, and there is good evidence that it is, its difficult to see how they would want to move towards a PBL environment. The PBL contract would certainly be for several years, and if defense contractors intend to continue their price increases, the PBL would need to reflect that year-to-year increase. This would raise flags, so again its not something a defense contractor would want to do.

Power Dynamic

There is a hidden assumption in the discussion of PBL in relation to defense. It presumes the DLA is very powerful vis-à-vis its suppliers. Certainly as a monopsony (one buyer, many sellers) the DLA could be a powerful actor, if it wanted to be. However, there is a good deal of evidence that it does not want to be. The existence of strong relationship ties between the DLA and the defense contractors and the fact that at the decision making level many of the DLA and more broadly the procurement decision making apparatus in the armed forces look to defense contractors for their next job results in the military being less willing to press their claims and hold defense contractors accountable. The evidence for this is the large year to year increases in service parts costs the military accepts, combined with the large cost over-runs in weapons systems they accept, and the well known policy they have for not going back to defense contractors and asking for refunds when parts break far before their stated expected lifetimes. If the military will not confront defense contractors on these more basic issues, its difficult to see how they intend to punish the contractors for missing service level targets that are part of enforcing a PBL contract.

Coming Trends Limiting PBL’s Adoption for Defense

The US is at the high end of a cyclical spending upswing due to a highly pro-military administration and a war with two counties. However, there are a number of bills that are coming due for these wars that have not been fully funded.

There is great evidence that the veterans health care and long term care have been greatly under-funded. Secondly, a large amount of equipment which is neither service-able, nor economically repairable, has not been written off of the books. When these costs become apparent, the US military may move from strategy to having contractors provide “PBL” to continuing to do it themselves (in order to save money). Extended service contract is a luxury good, Rolls is considered an excellent
provider of “PBL” type service, and however it is also widely recognized as expensive. This is to say that the US military may move away from PBL itself when it has less money to spend. For the reasons given above, PBL does not appear to be a trend with any staying power.

References

On the lack of funding for the warhttp://www.cfr.org/publication/13418/cq.html

On the need for procurement reform

http://www.pogo.org/p/defense/do-990920-reform.htm

Service Level in Planning

Service level is much discussed as an important way to plan. However, once you get past the general principle, operationalizing service level planning brings up the following topics that must be answered:

1. Where in the supply chain are service levels being set?
2. Should the service levels be set at the location?
3. Service levels for a product line (say iPods vs. MacBooks) or within product lines (20 GB vs. 40 GB Ipods). Thus is there is a “service matrix” that an organization implicitly or explicitly maintains?
4. Service levels can be set for particular customers and inventory can be planned as separate “pools.” How will this be managed?

The end result of this is there is no “one service level” and companies need to be able to change their service levels based upon item profitability, strategy, growth potential, competitive situation, etc.. The service levels are dynamic across geographic, product and time dimensions, and the technical service infrastructure needs to support this.

Technology Enablement

A planning system can allow you to operationalize these service planning objectives by bringing up its complex service planning functionality. However, the execution system needs to be synchronized to with the service planning system in terms of these different service level objectives.

Planning vs. Execution

One of the difficulties is managing or limiting the discussion of service level management between the planning engine and the execution system. A planning system attempts to set up the correct conditions to maintain a particular service level, however, it is the execution system that is responsible for meeting it, and or course which has great control over whether it is met. For instance, imagine that two customers have a service contract, one of them which is currently over its contractual service level, and the other which is under the level. When a demand comes in from both for the same part, an important question is who gets priority for that part. The execution systems would ideally have the ability to provide this to the customer which is under the agreed upon service level rather than the one which is over the agreed upon service level. However this assumes a number of things:

1. The company has very good metrics on the current service level provided to its service contract customers
2. Authority to issue to part to the correct customer is decentralized to the part manager.

More details to follow on how planning systems and execution systems can be configured to manage matricide service levels.

To find out more about service level planning see this post.

http://spplan.wordpress.com/2008/04/05/service-level-planning/

This article has been moved to my multi-echelon and inventory optimization blog.

http://invoptmultiechelon.com/2008/04/drp-vs-multiechelon-inventory-optimization/

Setting Global Service Levels

One of the most important areas of functionality in several service parts planning applications is the ability to perform “global” service level planning. Global service level planning allows the planner to set the same or different service levels for the locations in the network that results in an overall service or availability level for their supply chain network.

Service Parts Software Providers are Leaders in This Area

When researching for this article we performed Internet searches for “service level planning” and Click Commerce, Servigistics, SAP, Oracle. We were surprised to find that this search only came up with any reliability with two vendors MCA and i2. Both i2 SCP and i2 SPP list “service level planning.” in their product attribute lists.

Service Level Planning and Inventory Optimization

Service level planning is also called inventory optimization. This is a confusing area because unfortunately the terms inventory optimization and inventory management are used interchangeably, which is actually false. See this quote for more details.

During 2003, more than one hundred SCM solution vendors started promoting “Inventory Optimization”, an application solution described by various analysts as a new frontier in Supply Chain Planning. Beyond the strong marketing message, though, a more careful analysis clearly indicates that only a few are providing some functionality that can be called “Inventory Optimization”. The ability to automatically determine the correct stock levels for multiple SKUs in multiple locations, in such a way that fulfills a global service level target and simultaneously optimizes a desired objective function is a very complex task, and requires a sophisticated technology that no more than half a dozen vendors provide. – Recent Trends in Optimization – Tools Goup

A more careful analysis, though, has shown a very interesting, if not disappointing, picture of what really happened. In fact, more than 90% of these vendors haven’t actually added any new functionality at all in this area (neither as “inventory planning”, nor as “inventory management”). Most of them have simply renamed the already existing functions they used to call “inventory management” as “inventory optimization”. Many ERP/SCM suites don’t even use the word “inventory management” any more, inappropriately substituting “inventory optimization.– Recent Trends in Optimization – Tools Group

SAP and Service Level Planning

Being familiar with SAP, we were confident this capability was nowhere in the product. However, after performing research our views changed somewhat. The rundown of SAP with regards to service level planning is as follows:

SAP xApp: SmartOps

SmartOps states that it performs both inventory optimization and multi-echelon inventory optimization. However, we are unsure as to the status of this xApp, furthermore, the xApp concept may be going away as it never really was much more than a sales technique where the smaller vendor received the halo effect of being associated with SAP, while SAP received 40% of the xApp’s license revenue if sold into an SAP account.

SAP ERP

Service level planning at the part level exists on the material master where safety stock can be calculated dynamically. This is a part specific level of availability and does not extend to a broader view of the overall part database service level.

SAP SCM

Implicit Methods

• Capable to Match (CTM) can prioritize requests such that some customers get inventory allocated vs. lower priority customers.
• In Production Planning and Detailed Scheduling (PP/DS), reservations can be defined on the capacity of resources and they can be made on the basis of profitability and service level agreements.
• In SNC, a service fill analysis component is now part of the supplier delivery performance rating
• In Forecast and Replenishment (F&R) the forecast ad estimated safety amounts are based upon both the forecast error and the safety stock.
• In F&R periods with expected similar patterns can be combined, and separate service levels can be assigned to each ABC classification.
• In F&R demand influencing factors (DIFs) which are the primary mechanism of forecasting in the module, service level profiles can be setup for the DIFs.
• Safety stock can be set by service level in the product location master.

Explicit Methods

• In Service Parts Planning (SPP), target service levels can be set at the location or product location level. As of 7.0, targets can be set depending upon whether the location is an entry, intermediate parent or child location. - Of the major methods in SCM, this is the closest to meeting actual service level planning, however strangely it is not strongly proposed by SAP, even though the functionality brings them closer to being on par with the traditional service parts planning leaders. Secondly, there is a strong trend in companies to move towards service level planning. SPP is one of the few areas that actually does it in an explicit manner.

There is a good reason that several service parts planning applications are built around service level planning. The concept is that with service parts, you are providing a service level to a customer and signing a contract to this effect. Therefore, with service parts planning, service level based planning is explicitly necessary in order to meet the contract terms. However, shouldn’t it be just as important for the company to plan its inventory level based upon service levels as well? For instance, knowing what is a profitable vs. unprofitable in stock position allows a company to know how many financial resources to allocate to inventory and at what level to stop holding inventory. The question of when to stop holding inventory could be answered by the rough average profit margin of the company’s products. This concept is fundamentally different whether one is planning service parts or finished goods.

For details on how service level planning interacts with SOP and contract creation and pricing, see this post.

http://spplan.wordpress.com/2009/09/22/service-level-planning-sop-and-planning-group-interactions/

References:

http://www.oracle.com/industries/automotive/learn_mro.pdf

Generally service parts planning differs from final product planning in the following ways:

1. A high number of low volume irregular demand items in the planning database
2. Inapplicability of traditional measures of forecast error (service parts management has much higher month by month forecast error than finished good forecasting. A service part can go many months with no demand at a product/location)
3. A higher necessity to manage many locations as a single inventory “pool” – this means more transshipments between various inventory holding locations
4. More complexity in procurement (end of life, lifetime buy, phased out suppliers) leading to different inventory holding strategies
5. High variability in repair lead times (due to un-serviceable items which require inspection prior to repair lead time estimation)
6. Inapplicability of common high volume forecasting and inventory management techniques (such as high volume forecasting algorithms and EOQ or POQ)
7. Higher emphasis and need to handle obsolescence supersession and substitutability.

PBL and Alternatives

Performance Based Logistics is a strategy for system support. Instead of goods and services a supplier is paid for a guaranteed level of performance and system capability. The supplier often has to guaranty the performance at lesser costs but has more control over all logistics elements. The performance is declared in Performance Based Agreements.”- Wikipedia

Performance Based Logistics can be in the commercial area of A and D or in the government/military. A quote from the 2006 Quadrennial Defense Review Report indicates the orientation of the Department of Defense regarding PBL.

“There is a growing and deep concern in the Department of Defense’s senior leadership and in the Congress about the acquisition processes. This lack of confidence results from an inability to determine accurately the true state of major acquisition programs when measured by cost, schedule and performance. The unpredictable nature of Defense programs can be traced to instabilities in the broader acquisition system. Fundamentally reshaping that system should make the state of the Department’s major acquisition programs more predictable and result in better stewardship of the U.S. tax dollar. ”

PBL has become a strong trend among the management class of companies in the aerospace and defense environment. This paper discusses PBL and makes some educated guesses as to where PBL might be in 5 years from now.

Basis for PBL

PBL is introduced as a way to improve service levels and increase the responsibilities of supplier service parts management and in some cases service part service operations. In this way it may be viewed as a form of outsourcing where the part planning and management is moved from the client to the suppliers. In cases where the military is the customer, it can be seen as a light form of military privatization.

Supporting Case Studies

The outstanding case study for PBL in the aerospace and defense environment is Rolls Royce. While not called “PBL,” Rolls’ TotalCare engine service program is in fact a long term service contract where Rolls controls the engine service parts inventory and in a way goes beyond PBL by offering direct guidance and instruction when certain parts are due for maintenance. Rolls actively monitors over 3000 engines aggregating a strong level of service intelligence about engine maintenance. Rolls has by most accounts leveraged this capability to grow its market share, take business from larger competitors and reinforce the premium reputation of its industry leading engines.

Deviations Between the Strong Case Study and Other Projects PBL Clients and Environments

It would be a mistake to assume that the success at Rolls can be duplicated to every aerospace and defense supplier or can be generalized to other areas outside of engines. By comparison there were certain organization differences between Toyota and US manufacturing firms as well as geographic differences between the location of supplier base in Japan vs. the US that prevented other companies from ever duplicating Toyota’s success with JIT, regardless of decades of attempts across probably thousands of factories. What this means is that the case for PBL with Rolls must be observed in terms of how Rolls as a company, and Rolls business is different than other companies that want to implement PBL type programs. Some of differences are listed below:

1. Rolls is only managing a small proportion of the overall service parts of an airplane. They are providing 100% of the parts for the engines under the TotalCare program. This means that a 95% availability actually does mean a 95% availability for the engine as there are no other suppliers. However, this is not true with companies that provide the entire airplane. Therefore it must be considered that Rolls is solving a much more simple problem than a supplier that supplies the entire airplane would be.
2. Rolls appears to be on the outward edge of competence within the industry. Secondly, this is not a new philosophy for Rolls. Their “Power by the Hour” program, which is essentially similar to the TotalCare program dates at least back to the 1930’s. This means that Rolls has been organizationally oriented towards service for generations. This is not necessarily the case for other A&D suppliers.

The Expertise Required

Developing a PBL contract requires more than the capability to run an advanced service parts planning system like MCA or Servigistics. It also requires a way to cost the PBL contract. This is so the firm can determine the profitability of each contract and can use this information to adjust future contracts. SAP Project Systems is an SAP’s software solution to cost the transactions associated with a contract. The difficulty comes in tying the specific transaction to the specific contract in question. To understand SAP Project Systems more, see this post.

http://sapplanning.wordpress.com/2009/05/03/planning-with-project-systems/

PBL and Alternatives“Performance Based Logistics is a strategy for system support. Instead of goods and services a supplier is paid for a guaranteed level of performance and system capability. The supplier often has to guaranty the performance at lesser costs but has more control over all logistics elements. The performance is declared in Performance Based Agreements.”- Wikipedia

Performance Based Logistics can be in the commercial area of A&D or in the government/military. A quote from the 2006 Quadrennial Defense Review Report indicates the orientation of the Department of Defense regarding PBL.

“There is a growing and deep concern in the Department of Defense’s senior leadership and in the Congress about the acquisition processes. This lack of confidence results from an inability to determine accurately the true state of major acquisition programs when measured by cost, schedule and performance. The unpredictable nature of Defense programs can be traced to instabilities in the broader acquisition system. Fundamentally reshaping that system should
make the state of the Department’s major acquisition programs more predictable and result in better stewardship of the U.S. tax dollar. ”

PBL has become a strong trend among the management class of companies in the A&D environment. This paper discusses PBL and makes some educated guesses as to where PBL might be in 5 years from now.

Basis for PBL

PBL is introduced as a way to improve service levels and increase the responsibilities of supplier service parts management and in some cases service part service operations. In this way it may be viewed as a form of outsourcing where the part planning and management is moved from the client to the suppliers. In cases where the military is the customer, it can be seen as a light form of military privatization.

Supporting Case Studies

The outstanding case study for PBL in the A&D environment is Rolls Royce. While not called “PBL,” Rolls’ TotalCare engine service program is in fact a long term service contract where Rolls controls the engine service parts inventory and in a way goes beyond PBL by offering direct guidance and instruction when certain parts are due for maintenance. Rolls actively monitors over 3000 engines aggregating a strong level of service intelligence about engine maintenance. Rolls has by most accounts leveraged this capability to grow its market share, take business from larger competitors and reinforce the premium reputation of its industry leading engines.

Service Parts Planning and Project Costing

Developing a PBL contract requires more than the capability to run an advanced service parts planning system. It also requires a way to cost the PBL contract. This is so the firm can determine the profitability of each contract and can use this information to adjust future contracts. SAP Project Systems is an excellent way to cost the transactions associated with a contract. The difficulty comes in tying the specific transaction to the specific contract in question. Generally the SAP system must aggregate Stock Transport Orders, Service Orders and Purchase Orders to specific contracts and there are hierarchies to setup on the PS side in order to report properly on the contract.
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