SAP is About to Change Its Inventory Optimization Story

by Shaun Snapp on April 6, 2011

What This Article Covers

  • What has SAP’s story on inventory optimization been? 
  • What is SAP’s pattern with respect to partnering with vendors? 
  • Does SAP have a good chance at being good at inventory optimization and multi echelon? 

Background

I was recently doing research on SAP’s APO Add-In related to inventory optimization. I was surprised to read what appeared to be the beginnings of an inventory optimization product in one of the add-ins. (I discuss the add-in in detail in this post.)

SAP’s Old Story on Inventory Optimization

I sat in a combined SmartOps and SAP presentation to a client over a year ago where SAP declared that it was not at the time and had no interest in developing an inventory optimization product in the future. However, its unmistakable from this documentation that SAP now has a “product” that can be added to APO to enable some type of inventory optimization functionality. What this means is that SAP is about to change its story on inventory optimization and is going to be a vendor in the MEIO space. This follows an algorithm that I have observed by SAP with respect to their software partnerships which I have traced back to the 1990s.

The steps are as follows:

  1. Initiate a partnership with companies that will accept their onerous terms
  2. Declare whoever they select as the best of breed (this is important, because their presentation of the quality of the selected vendor changes in later stages of this algorithm).
  3. Market a rudimentary adapter to the application, but make the partnering vendor do most the work and provide most the funding for this initiative.
  4. Declare no intent to develop a competitive product to the partner vendor and to prospects.
  5. Immediately begin developing a competitive product using inside information gleaned from the partner vendor. This is enabled by making the vendor sign a legal document declaring that the prospective partner must declare all IP to SAP, and anything undeclared to SAP is essentially free game to SAP to borrow.
  6. After a few years, sever the relationship and declare that the intent was always to have an “open” system that could connect to any best of breed application. Change the story regarding how good the one partner’s product is, now that an SAP competitive product exists. (I witnessed this 180 degree turn firsthand with MCA Solutions. At the beginning of the MCA Solutions-SAP relationship, SAP spoke of MCA in glowing terms as the best service parts planning applications on the market. However, after the relationship with MCA ended, SAP was extremely coy when discussing MCA, and declared that they always had built their adapter to any service parts planning application. They clearly wanted to change the topic of the conversation, and they wanted to minimize their previous partnership with MCA.)

Will SAP be a Force in Inventory Optimization?

This question has two components. The first is “Will SAP convince some clients to buy its MEIO product?” The answer here is undoubtedly yes. It will be part of the APO product, so after the product passes through its add-in stage (where it is charged for separately), it will eventually just become part of the APO suite and available to anyone who upgrades to the version of APO which has MEIO. SAP will have no problem getting consultants to invest time in learning it. As an APO consultant, I will readily invest in learning their MEIO as I frequently work in SNP, which is where SAP MEIO will be located.

The second component of the question is “Will SAP will ever build an effective and competitive MEIO product.” I would bet quite a lot of money against it. My reasoning falls into two categories, one being my exposure to the best of breed MEIO vendors, and the second being my direct experience with SAP in cost optimization. The best of breed MEIO vendors tend to be very knowledgeable and extremely passionate about both the technology and the desire to continually improve that technology. Secondly, the lesson from the history of SAP in cost optimization is indicative of where SAP will be in the future with MEIO.

The feedback I consistently receive from clients who use the SNP or PP/DS cost optimizer is that SAP provides no thought leadership on how to use their product. SAP, with all their resources, has really added very little value to cost optimization either in technology or in explaining how to use it since they added the cost optimizer to their product over ten years ago. The recent realization of this fact has given me the idea of creating a cost optimizer simulator to be used to simply provide some transparency into what the optimizer is doing, and to simulate changes in an external system rather than using SAP’s opaque and technologically flawed simulation versions in APO.

http://www.scmfocus.com/sapprojectmanagement/2011/04/using-an-external-system-to-check-optimization-results/

The fact that I any SAP optimization account I visit I find a poorly explained product speaks to the SAP’s capabilities with deep applications. However, MEIO is a deep application as well.

SAP’s Sweet Spot?

Cost optimization was never a good fit for SAP because it is requires deep subject matter expertise in a technical area of supply chain planning, and this is not their sweet spot. SAP’s sweet spot is proving basic technology in a way that is perceived as low risk by corporate IT buyers. SAP seems to hide their weakness of their understanding of cost optimization by either discussing the proprietary nature of their optimization (and thus details cannot be shared), or by saying that anything related to methodology is “client specific.” However, those arguments are ridiculous. SAP has a large number of cost optimization clients, especially if you include the cost optimization clients that quit the cost optimizer, however they do nothing to mine that database to explain what works and what does not work to their new clients. This experience with SAP in cost optimization applies to three different APO modules. These are SNP (supply planning), PP/DS (product planning), and TP/VP (transportation planning), all of which have cost optimizers. Because of this experience with the same approach shown in multiple APO modules with cost optimizers, I expect them to take the same approach to inventory optimization, with lots of talk about how all MEIO best practices are in the product, but then with very little explanation of how it works to their clients.

The Lack of Passion That Comes with Stenography

When a company copies a concept simply for market reasons to steer people away from best of breed solutions, it’s simply a defensive move for that company. I predict this same result for SAP in inventory optimization that occurred to SAP in cost optimization. They will get APO customers to adopt SAP MEIO, but will only in special cases, where the client requirements are very basic, will they be able to pull off the implementation. From the product management perspective, it will also divert development resources from the rest of SCM-APO, a set of ten modules that had such enormous scope creep that it requires years of concentrated development to bring the vast storehouse of functionality up to par. Some modules such as SPP and EWM require large development efforts to simply be made functional and capable of supporting an account in production. The SAP marketing machine has taken these unfinished products as far as they can go, now the code has to be completed. There is much more to say about this issue, but the long and short of it is that SAP already has its hands full with its planning products without venturing off again into virgin territory.

Conclusion

SAP’s story on MEIO is going to change in the future. The add-in discussed above is a start, but they will eventually have a MEIO “product.” My best guess is that it will be in the next version of SCM-APO. However, I am not sure on this, because I can’t determine SAP’s directions on add-ins as they are so new. Either way, it will be a significant event for the industry because with APO’s large installed base, and with so many companies with such a high preference for SAP products regardless of their objective rating in functionality, technology or usability comparisons, it will mean that many companies will now have access to MEIO technology in some form without going out to a best of breed solution. All of the major consulting companies will get solidly behind the product. This is because instead of with a best of breed application, they will be able to staff and control the project, which was one of their major concerns with MEIO and why they would recommend heuristics, allocation or cost optimization on many supply planning accounts that would be been more appropriate for MEIO. Gartner will begin to rate SAP MEIO higher than it should be, because of SAP pays more to Gartner every year than any of the best of breed vendors. For best of breed vendors, this will mean a smaller piece of the SAP market. It also means that the best of breed vendors will need to spend some time differentiating their product from SAP’s product. This should combine tightening up some of the messaging around specific benefits of their product in relationship to APO MEIO, which will mean understanding the SAP MEIO and gaining exposure to the product.

Questions or Comments? 

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Shaun Snapp

Shaun Snapp is a long time supply chain planning software consultant, author & as well as the Managing Editor at SCM Focus. He focuses on both SAP APO as well as best of breed applications for demand, supply and production planning.

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{ 1 comment… read it below or add one }

Jeffrey Patrick Hipp May 6, 2011 at 8:16 am

Hi Shaun,

Let me share another possible future outcome / path of SAP’s MEIO that I have seen with other former SAP “partners” as well:

1.) SAP selects one solution (in this case SmartOps’ MEIO) as the most preferable and grants the “Endorsed Business Partnership”.
2.) The partner solution proves to be commercially successful – so SAP extends the partnership to list the solution on the SAP price list.
3.) The partner solution achieves even more commercial success with the extra marketing out of 2.) – and at that point SAP acquires the partner and integrates it into SAP.
4.) Looking at what happens next in this scenario is more related to the question whether SAP decides to really enhance their SCM suite with the acquired solution or not. I have seen some solutions SAP took over that were presented to consultants after the take-over, but failed to survive for longer than 3 months once they are a part of SAP. On the other hand there have been acquisitions that SAP fully integrated (potentially adjusted in the one ot other corner) into their solution suite.

If you ask me which of the two scenarios are more likely to get real – I would doubt that SAP is really up to develop something on their own. They would have to heavily invest into the algorithms and optimisation approaches in the background (the “black box”) of an own SAP MEIO solution. And I doubt that they have the right type of knowledge currently on board / assigned to that topic to succeed.

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