SAP APO Overview

By
V K Agnihotri
 SNP Process Flow
Planning Area Administration

APO Master Data Setup

Model/Version Creation

Supply Chain Model Setup

Release of Demand Plan to SNP

Planning Method Determination &

Profile Settings
Supply Network
Transport Load Building
Planning Run
Simulation

Deployment Run Interactive Planning

Management by
Exception

Conversion into Release of SNP

PP/DS orders Plan to DP
PP/DS Planning

2
 SNP Run Using Optimization
Contents:

Introduction to Optimization
Optimization in SNP
Configuration for Using the SNP Optimizer

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 SNP Run Using Optimization:
Unit Objectives
At the conclusion of this unit, you will be able to:
Explain the concept of Optimization
Explain how the SNP run is carried out using the SNP Optimizer
Define the relevant costs that are used by the SNP Optimizer to generate
a supply plan
Identify where the costs are maintained
Describe how the costs influence the optimization result
Explain the what-if process in SNP Optimizer

4
Introduction to
Optimization
Models
 Optimization-Based Planning
Models
In constraint-based planning, production processes can
be represented as optimization models.
A production model based on optimization consists of
Objective Function(s), Decision Variables, and
constraints based on market conditions, physical
processes, and resources/capacity.
These kinds of models are usually called mathematical
programs.

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 Decision Variables
Decisions variable are the independent variables of the
problem. Typically, decisions take the form of Production
lot sizes, Transport lot sizes, Purchase of additional
capacities and so on.
Examples of Decisions Variables:
How much do we invest in new machines?

How much do we spend in labor?

How many units to make?

Repair or replace?

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 Objective Functions
The Objective Function is the single benchmark for
evaluating all combinations of decisions that satisfy the
constraints. It usually represents a quantifiable goal
Examples of Objective Functions:
Minimize total production costs

Minimize total material costs

Maximize total sales revenue

Minimize total inventory costs

Minimize total lead time

F(x,y2)=

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 Constraints
Constraints represent limitations on which decision can be made
and how decisions can be made. For example, the production
capacity is 5000 Units/day.
Constraints are also used to apply business rules when solving a
problem. For example, all inventory must be non-negative.
Other examples of constraints:
Market conditions/demand

Material/supplies

Capacity/resources

Transportation/logistics

Policy/managerial

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 Steps for Constructing a
Planning Model
Typically, a simplified production model of the existing
production process that we want to model.

What are the decisions variables?

What are the constraints?

What is the objective function?

F(x,y2)
=
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 Linear and Integer
Programming Models

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 Introduction to Linear Programming
A Linear Programming model seeks to
maximize or minimize a linear function,
subject to a set of linear constraints.
The linear model consists of the following
components:
A set of decision variables.
An objective function.
A set of constraints.

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 Introduction to Linear Programming
The Importance of Linear Programming
Many real world problems lend themselves to linear
programming modeling.
Many real world problems can be approximated by
linear models.
There are well-known successful applications in:
Manufacturing
Marketing
Finance (investment)
Advertising
Agriculture

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 Introduction to Linear Programming
The Importance of Linear Programming
There are efficient solution techniques that solve
linear programming models.
The output generated from linear programming
packages provides useful what if analysis.

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 Introduction to Linear Programming
Assumptions of the linear programming
model
The parameter values are known with
certainty.
The objective function and constraints
exhibit constant returns to scale.
There are no interactions between the
decision variables (the additivity
assumption).
The Continuity assumption: Variables can 15
 The Galaxy Industries Production
Problem
A Prototype Example
Galaxy manufactures two toy doll
models:
Space Ray.
Zapper.
Resources are limited to
1000 pounds of special plastic.
40 hours of production time per week.
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 The Galaxy Industries Production
Problem
A Prototype Example
Marketing requirement
Total production cannot exceed 700 dozens.

Number of dozens of Space Rays cannot exceed

number of dozens of Zappers by more than 350.
Technological input
Space Rays requires 2 pounds of plastic and
3 minutes of labor per dozen.
Zappers requires 1 pound of plastic and
4 minutes of labor per dozen.
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 The Galaxy Industries Production
Problem
A Prototype Example
The current production plan calls for:
Producing as much as possible of the more profitable product,

Space Ray ($8 profit per dozen).

Use resources left over to produce Zappers ($5 profit

per dozen), while remaining within the marketing guidelines.

The current production plan consists of:

8*(450) + 5*(100)
Space Rays = 450 dozen
Zapper = 100 dozen
Profit = $4100 per week

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Management is seeking
a production schedule
that will increase the
companys profit.

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A linear programming model
can provide an insight and an
intelligent solution to this problem

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The Galaxy Linear Programming Model

Decisions variables:
X1 = Weekly production level of Space Rays
(in dozens)
X2 = Weekly production level of Zappers (in
dozens).

Objective Function:
Weekly profit, to be maximized 21
The Galaxy Linear Programming Model

Max 8X1 + 5X2 (Weekly profit)

subject to
2X1 + 1X2 1000 (Plastic)
3X1 + 4X2 2400 (Production Time)
X1 + X2 700 (Total production)
X1 - X2 350 (Mix)
Xj> = 0, j = 1,2 (Nonnegativity)
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2.3 The Graphical Analysis of
Linear Programming

The set of all points that

satisfy all the constraints of
the model is called
a
FEASIBLE REGION

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Using a graphical presentation
we can represent all the
constraints,
the objective function, and the
three
types of feasible points.
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Graphical Analysis the Feasible
Region
X2

The non-negativity constraints

X1

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 Graphical Analysis the Feasible
Region
X2

1000 The Plastic constraint

2X1+X2 1000
700 Total production constraint:
X1+X2 700 (redundant)
500

Infeasible
Production Feasible
Time
3X1+4X2 2400 X1
500 700

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 Graphical Analysis the Feasible
Region
X2
1000 The Plastic constraint
2X1+X2 1000
700 Total production constraint:
X1+X2 700 (redundant)
500
Infeasible
Production mix
constraint:
Production Feasible X1-X2 350
Time
3X1+4X2 2400
X1
500 700
Boundary points.
Interior points. Extreme points.
There are three types of feasible 27
Solving Graphically for an
Optimal Solution

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The search for an optimal solution

Start
X2 at some arbitrary profit, say profit = $2,000...
1000 Then increase the profit, if possible...
...and continue until it becomes infeasible

700 Profit
500
=$4360

X1
29
500
 Summary of the optimal solution
Space Rays = 320 dozen
Zappers = 360 dozen
Profit = $4360
This solution utilizes all the plastic and all the
production hours.

Total production is only 680 (not 700).

Space Rays production exceeds Zappers production
by only 40 dozens.

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 Objective Functions, Decision
Variables, Constraints in APO

Objectives Decision Constraints

Variables
Lateness, Lateness Production Capacities
SNP, Storage Costs, Production Lot Sizes Transportation Capacities
Transportation Costs, Transportation Lot Sizes Handling Capacity
Distribution Production Costs, Purchase of Additional Due Dates
Purchase of additional Capacities Capacities Safety Stock
& PP Production Resources, Discrete Values
Transportation (Fleets) Production Lot Size,
Products Transportation Lot Size,
Extra Shifts

Lateness Resource Allocation Time Constraints (maximal due

DS Makespan (Alternative date, shelf life Minimal
Setup Costs Machines/Storage) production stages, campaign)
Start Dates Due Dates
NOT Lot Sizes or Setup Times,
Alternative Recipes Productivity
Resource network
Calendar
Shifts,
Effectivity of receipts

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SNP Run Using Optimization:
Business Scenario
A company uses the SNP optimizer run , to
obtain an optimal solution of their mid-range
product flow and to create the production and
transportation plan.
The Optimizer finds a feasible solution that will
take all production and transportation
capacities into account while determining a
least cost solution.

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 SNP Optimization

One time period (bucket)

Demand at a location

Dependent demand at a location

Processing flow

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 SNP Optimization
The SNP optimizer makes sourcing decisions based on optimization based
planning. This means that it uses cost as a basis for deciding the following:

Which products are to be produced, transported, procured, stored, and delivered

and in which quantities (product mix)
Which resources and which production process models (PPMs) or production
data structures (PDSs) to use (technology mix)
The dates and times for production, transportation, procurement, storage, and
Delivery
The locations for production, procurement, storage, and delivery and the source
and destination locations for transportation

APO-SNP uses linear programming concepts to determine the cost optimization

model.
Linear programming (LP, or linear optimization) is a mathematical method for
determining a way to achieve the best outcome (such as maximum profit or lowest
cost) in a given mathematical model for some list of requirements represented as
linear relationships.
Linear programming is a technique for optimizing linear objective functions, subject
to linear equality and linear inequality constraints.
 SNP Optimization

There are three parts, or elements, of the optimization problem, which are
managed in linear programming:

Objective function
This is the business goal that the decision maker is trying to achieve (e.g.,
minimize total cost or maximize profit). A question that might be asked is: What is
the SNP optimizer trying to achieve? This might translate, for example, into a
simple mathematical equation; Maximize {Revenue Transportation Costs
Inventory Holding Costs Penalties}

Decision variables
These are the unknowns that would affect the outcome (e.g., production date and
quantity). What does the SNP optimizer control? Some examples are which plant
we manufacture and ship the products to, lot size, and lead time parameters.
 SNP Optimization

Constraints
Constraints are physical and logical limitations (e.g., demand, material
availability,
and resource capacity). A question that the decision maker might ask is:
What will constitute an acceptable optimizer solution? One example is work
center capacities. The defined constraints can be hard or soft. Hard constraints
are restrictions that are difficult to change (for example, resource capacity), while
soft constraints offer flexibility (for example, safety stock). Violations of these
constraints are translated into cost penalties.
 SNP Optimization Steps
From a technical perspective, SNP optimization happens in three steps:

1. Data collection
Master and transactional data are read from the SAP APO database and SAP
liveCache and formatted into an input file. The input file is sent to the
optimizer server.

2. Optimization
The SNP optimizer runs a C++ mathematical program that runs on the
optimization server. The output from the optimization is formatted into the
output file.

3. Results created in SAP liveCache The result of the optimization planning

run is created in SAP liveCache. The transaction for accessing the SNP
optimizer explanation log is Transaction /SAPAPO/SNPOPLOG.
 Optimization Methods
Linear Programming
Continuous Linear Optimization Problems

Primal Simplex Method

Dual Simplex Method

Interior Point Method

Discrete Linear Optimization Problems

Mixed Integer Linear Programming

Prioritization
Decomposition
Vertical Aggregated Planning
Horizontal Aggregated Planning

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 Optimization Methods

Discretization

Discretization until a certain date

Detailed Discretization for different restrictions
for daily, weekly, or monthly buckets
Maintain discretization in PPM or transportation
lane individually

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Differences between Heuristics and Optimizers

While designing SNP optimizer, it is important to

understand the difference between heuristics and the
optimizer.

The simplest SNP algorithm, SNP heuristics, uses lot

sizing and lead time calculation and yields an
unconstraint plan.

On the other hand, the SNP optimizer creates a finite

plan but requires extensive master data maintenance.
 Optimization Parameters
Decision Variables
Production lot sizes
Constraints
Production capacities
Transportation lot sizes
Transportation capacities
Capacity increase
Handling capacity
Due dates (demands)
Objectives Safety stock
Lateness Discrete Values
Storage costs Production Lot Size

Transportation costs Transportation Lot Size

Production costs
Penalty for increasing
capacity
Penalty cost for not maintaining
safety stock*
Penalty cost for late or non delivery*

Unit11: Optimization |
2005 41
 SNP Optimizer Constraints
During the SNP optimization run, the system considers hard and soft
constraints. The planning run searches through all feasible plans to find the
most optimal and cost-effective plan.

The feasibility of a solution will involve due date constraint violations or

safety stock constraint violations to find the optimal plan. Due dates and
safety stock are soft constraints, which are restrictions that to which you
can assign violation costs.

Hard constraints, in turn, reflect the actual capacity constraint, which we

cannot change. An example of a hard constraint is production or resource
capacity limits per day.
 The optimizer profile determines the constraints considered for
a certain optimization. If you switch off a certain constraint,
the system checks againt unlimited capacity, but the costs are
still considered

Transport Capacity Storage Capacity

Determines A B
which constraints are C
A D
considered
Safety Stock Violation
Handling Capacity

Other
Constraints

Production Capacity
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 SNP Optimizer Costs
During supply chain modeling of a network, an organization need to determine
various supply chain cost factors to which will lead to determine the optimization
objective.

The defined costs can be either control costs (for example, production costs
for computer servers) or penalty costs (for example, not achieving the
delivery date promised to the customer)

The overall goal of the optimizer is to minimize costs, taking into

consideration the various defined priorities (for example, demand typesales
orders versus forecast). The company may like to prioritize sales orders first
and then the forecast.
 Costs in the APO Environment (I)
Model considers the following costs:
Higher non-delivery cost results in: forced production

Higher relative storage cost results in: moving products

from one location to another ahead of requirement

Transportation cost used to: prioritize source location

To reduce stock Increase the storage costs

Costs are Interdependent!

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 Costs in the APO Environment (II)

To specify a site manufacturing priority:

Production cost in preferred site

Transportation cost from preferred site

To influence inventory storage location:

Relative storage costs between sites

To ensure meeting inventory targets:

Safety stock violation penalties

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 Costs in the APO
Environment (III)
To meet delivery date early/late
Meet Early:

Storage Cost
Meet Late:

Maximum Delay Allowed

Storage Cost
To use stock before build
Storage Cost

To prioritize a site for downstream supply

Vary Transportation Cost

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 Unsatisfied Demand or Delay
We need to define cost penalties in SAP APO for not satisfying or delaying
customer demand

There are two defined parameters that can be maintained to be either global-
or location-dependent. The latter takes precedent if both are maintained. The
cost parameters that are maintained for unsatisfied demand or delay are as
follows:

The minimum cost parameter for demand required by the optimizer is

penalty for non-delivery (ND), which is the cost per base unit of demand
not satisfied. If this parameter is set to zero, the optimizer will not satisfy
any demand.

The delay penalty is another cost parameter, which is defined as the cost
per day that a unit of demand is delivered late. If the APO-SNP planning
run is performed in buckets, the system calculates the cost per day in
buckets. In the master data, we maintain the maximum number of allowed
delay days along with the delay penalty field.

The master data is maintained in the SNP1 tab in product master data
Transaction /SAPAPO/MAT1.
Profiles Used by the SNP Optimizer
The SNP optimizer result is heavily influenced by the various profile
definitions.

The profiles with further control parameters dictate how the optimizer will
perform the optimization run. The main profile definitions used by the
optimizer during the optimization run.

The two most important profiles used are the optimizer profile and cost
profile
 Optimizer Profile
In the optimizer profile, we define the optimization method in the form
of linear programming.

The optimizer profile has many tabs

The General tab is where we define the supply chain constraints to
be considered. Any changes made to the optimizer profile need to be
saved before executing the optimizer run.

There are three primary methods for solving continuous linear

optimization problems with the optimizer:
Primal simplex method
Dual simplex method
Interior point method

All three methods arrive at the same optimal solution. The main difference in
the application of these methods is the runtime. The method selection is
defined in the Solution Method tab in the optimizer.
 Basics of the Supply Network Optimiser
The basic idea of the SNP optimizer is to plan the entire supply chain
distribution, production and procurement at optimal costs by modeling the
complete supply chain as linear equations and solve them by linear
programming (LP) or mixed integer linear programming (MILP). The difference
between the two lies in the consideration of discrete decisions, as lot size
intervals.

The equations have the structure displayed in the following lines. As a

simplification the time dependency is neglected. The objective function is
Min { Product [(D S) * Penalty + S * SupplyChainCost]} ------- (10.1)

where D represents the total demand quantity, S the total supply quantity
and all entries are product and partially location dependent. The supply
chain costs contain costs for production, procurement, transport, storage
and handling, the penalties are costs for lateness, non delivery and safety
stock violation.
The constraints for the plan are the limited quantities that can be produced in
the plants
 Optimiser Set-Up and Scope
SNP optimisation is either accessed from the SNP planning book or which is
the more usual way defined as a background planning task in transaction
/SAPAPO/SNPOP.
 Optimiser Set-Up and Scope
Scope & Horizon
The scope for optimisation is selected by products and locations. If a location
product is missing e.g. the input component of a PPM the optimizer
assumes its availability. Neither constraints nor costs result from excluded
Location products. Orders are only created within the optimisation horizon.

Master Data
Additionally to the maintenance of many costs in multiple master data objects
the usage of the SNP optimizer requires some other master data settings as
listed in table
 Optimiser Set-Up and Scope
Costs and Constraints

The costs for procurement, safety stock, storage and handling, which are
maintained in the product master, relate to the base unit of the product,
 SNP Decisions
What? Where ? How ? When ?
Decision Products to To source a To produce? To produce a
plan. product from in the - Which process product
given network - Which components
Key Priority for - Total production Total cost of production Cost of missed
drivers planning cost per location: process: due date:
each - Transportation - Components - Late penalty
product cost - Process - Storage costs if
- Available produced
capacity early
- Available
capacity
Data Demand - Production cost - PPM - Demand
priority (PPM) - Storage cost priority
- Customer - Transportation - Resource Capacity - Delay cost
orders cost - Resource costs - Max delay
- Forecast - Resource - Non-delivery
- Safety available cost
stock capacity - Storage cost

Unit11: Optimization |
2005 55
Optimization Total Costs
Total Cost (Sum Total) Source of cost data
Production PPM
Storage Resource
Storage expansion Resource
Penalty cost for safety stock Cost Profile
Transport cost Resource
Handling capacity expansion Resource
Transport capacity expansion Resource
Production resource expansion Resource
Penalty for non-delivery Master data
Delay Penalty Master data
Procurement costs Master data

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 Relevant Costs for the Optimizer

Production
Transport
Storage
Handling

Additional costs
PPM-header: Variable costs
Safety stock: Penalty (cost profile)
Material priority: Late delivery (penalty)
Non delivery (penalty)

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Running the SNP Optimizer with Constraints

After the constraints are formulated, you run the SNP

optimizer to produce the optimal solution. The optimizer
utilizes its underlying logic to reveal the best
combination of results based on the constraints to
produce the optimal solution.

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 Input Parameters for SNP
Optimization Run
Planning Version
Level ID
Product and Location
Planning Book and Data View
Planning Start and End Date
Optimizer and Cost Profile
Optimizer Bound Profile

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 SNP Optimization Run Results
Distribution Plan
Production Plan
SNP Resulting Costs
Alerts

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 SNP Run Using Optimization: Unit
Summary
You are now able to:

Explain how the SNP run is carried out using the SNP
Optimizer
Define the relevant costs that are used by the SNP
Optimizer to generate a supply plan
Identify where the costs are maintained
Describe how the costs influence the optimization result
Explain the what-if process in SNP

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 Model
In our example we look at a single-stage production problem with external
sourcing partners. As simple as it might look, the problem is a good starting
point for experimenting with the SAP APO optimizer and still provides quick
results. The objective function of the (MI)LP model is designed to reduce
inventory, optimize production quantities, and optimize procurement of
components while maximizing the customer service level.

Technically, the objective is to create a least cost production plan considering

the demands, the constraints, and the costs for:
production
non-delivery (penalty costs)
storage
 The Supply Chain Structure
Let us assume a company selling three main products, P1, P2, and P3. P1
is the high-grade and expensive product, P2 and P3 are mid-grade and low-
grade products, respectively.

The company has three customer regions C1, C2, and C3 in the system (one
might think of DCs, retailers, or large industrial key customers).

All three products are made in the factory F1 which has one production line
represented by resource R1. As producing any of the products consumes a
certain amount of capacity on the production resource R1 all three products
compete for available R1 capacity.

Figure-1 below shows the structure of this example supply chain we want to
implement in SAP APO demonstrating the SNP optimizer setup. the material
flow is from left to right along the arrows representing the permissible goods
movements, modeled as transportation lanes The customers C1, C2, and C3 can
order any of the products P1, P2, and P3. The optimizer decide whether to
source it from S1 or S2.
The Supply Chain Structure
Raw Material at Vendor & Plant

Raw material procurement costs in the supply chain example in

currency units per piece. The high costs for procurement directly in the
factory are an easy way to prevent the optimizer from circumventing
the suppliers in the model
 FG Costs

Location independent costs in the supply chain example. Delay

and no delivery penalties only apply to customer locations where
demand is created
Resource Capacity
R1 8 hrs/day

Production process data in the supply chain example.

The values refer to a product base quantity of 1000
pieces, e.g., it takes six hours of R1 capacity to make
1000 pieces of P1
Screen clipping taken: 17/07/2013, 4:32 PM