Becoming Demand Driven in your Supply Chain

Last month we discussed a technique used in materials management that is 101 years old and asked the question "Is it still relevant?" Today we are going to introduce you to a new materials planning and execution technique that is probably less than 101 weeks old and is rapidly gaining acceptance around the world in supply chain circles.

Many companies are experiencing problems with their historical MRP planning systems in what is becoming to be known as a VUCA World – our environment has become more Volatile, Uncertain, Complex and Ambiguous than it was when MRP was first introduced to the manufacturing industry in the 1970s.

In the 3rd edition of Orlicky’s Materials Requirements Planning (2011), first published in 1975, Ptak and Smith lay out their vision for a demand driven materials requirements planning (DDMRP) methodology which is a complete supply chain planning and execution system for the modern VUCA world. Much of this variability in our supply chains is being generated by the bullwhip effect rippling up and down the supply chain from demand and supply variability as well as internal nervousness in our MRP systems cause by management and operational variation. In addition, many companies have found that stock balances tend to be bi-modal, in other words they either have too little or too much, rarely do we have just the right amount.

Over the last couple of years many companies have adopted this DDMRP methodology with exceptional results in reducing lead-time, improving customer service and reducing Return on Capital Employed (ROCE). This methodology moves us from the traditional "Push and Promote" scenario, to a "Position and Pull" environment. Historically the important issue for materials planning was "What, How Many and When," DDMRP first asks the question "Where" should we position inventory to achieve these three objectives:

1. Reduce lead-times to the customer

2. Reduce the bull-whip effect by absorbing variation from both supply and demand

3. Increase the Return on Capital employed (ROCE)

DDMRP achieves these objects by first determining where to place buffers which can be one of three types:

1. Stock buffer

2. Time buffer

3. Capacity buffer

The concept of DDMRP has taken the best of our traditional MRP systems (that make everything dependant), Lean systems (that make everything independent), Theory of Constraints (that introduced us to the concept of buffers) and Six Sigma (where we seek to reduce variation). These concepts, plus some innovation, have been merged into a new concept that helps us to become more actual demand, rather than forecast, driven in the short to medium term.

So what does being demand driven mean? What it doesn’t mean is making everything to order, simple pull or inventory everywhere. What it does mean is sensing changing customer demand, then adapting planning and production while pulling from suppliers – all in real time!

Being demand driven requires a five step process:

• Modelling and Re-Modelling the Environment

1. Strategic Inventory Positioning

2. Setting Buffer Profiles and Levels

3. Dynamic Adjustment of the Buffers to Match Demand

• Planning

4. Planning Inventory Replenishment

• Execution

5. Visible and Collaborative Execution

Failure to properly position inventory is a huge source of waste for most manufacturing and supply chain companies. When strategically positioning inventory we need to consider the following:

1. Customer Tolerance Time - The amount of time potential customers are willing to wait for the delivery of a good or service.

2. Market Potential Lead Time - The lead time that will allow an increase of price or the capture of additional business either through existing or new customer channels.

3. Demand Variability - The potential for swings and spikes in demand that could overwhelm resources (capacity, stock, cash, etc.).

4. Supply Variability - The potential for disruptions in sources of supply and/or specific suppliers. This can also be referred to as supply continuity variability.

5. Inventory Leverage & Flexibility - The places in the integrated BOM structure (the Matrix BOM) or the distribution network that leaves a company with the most available options as well as the best lead time compression to meet the business needs.

6. Critical Operation Protection - The minimization of disruption passed to control points, pace-setters or drums.

Traditionally inventory replenishment systems have used either manufacturing lead time (which is often understated) or cumulative lead time (that is generally overstated) in its calculations. DDMRP uses a new concept of lead time called ASR Lead Time (Actively Synchronised Replenishment) which is defined as a qualified cumulative lead time – specifically the longest unprotected/coupled planning chain in the product structure. The concept does not appear in any of the conventional Lean, TOC or MRP/ERP literature. Using ASR Lead Time and an old concept of matrix Bills of Materials it is possible to determine to best points to position inventory to compress lead times and achieve the above objectives.

Once inventory has been strategically positioned in the supply chain, the buffers and the zones that comprise them, can then be sized correctly based on the Average Daily Usage (ADU), ASR Lead Time as well as Lead Time, Demand and Supply variability. For SKUs with high seasonality and events, these buffers are dynamically flexed with Planned Adjustment Factors (PAF).

This process uses a new concept of an Available Stock calculation. Supply order recommendation and generation is based on the "Available Stock" position against the buffer. The Available Stock equation is calculated daily and incorporates actual demand (not forecasts), any past due demand, qualified order spikes during ASR lead time, open supply orders and on-hand balances. Replenishment orders are released when the available stock falls below a threshhold called the "yellow zone." 

When it comes to execution, buffers are reviewed daily, compared to on-hand balances and decisions can be made to expedite already released supply orders, if necessary. Thus DDMRP encourages priority by buffer status as opposed to the conventional priority based on due dates.

In summary, DDMRP is a proven, complete planning and execution supply chain methodology that absorbs variability, reduces lead times and increases ROCE. DDMRP leverages TOC, Lean, Six Sigma with a unique approach to strategic buffers for managing supply, production and distribution flows of inventory. It is integrated with the S&OP process of risk management. It uses the process to determine visually how to make the best use of the resources of the company to protect the flows of material, information and cash against the negative effects of variability, especially that due to the bullwhip effect.

DDMRP is an adaptive system that replaces historical MRP, as well as it making short term and detailed forecasts and the traditional MPS process of frozen schedules irrelevant.

In essence DDMRP determines "What can and will be sold" as opposed to traditional MRP/MPS systems that determine "What can and will be made."  Surely, knowing what can be sold is far superior to knowing what can be made!

To learn more, come and listen to Carol Ptak at the SAPICS Regional Conference on the 19^th August at the Lord Charles Hotel, Somerset West.  Call 011-023-6701 for more details and conference registration. In addition, we will be running a 2½ day DDMRP CDDP (Certified Demand Driven Planner) workshop in Cape Town on 16-18^th September 2014.  Don’t miss out.

DDMRP comes with a warning... to quote a current user of DDMRP in the USA... "You better hope your competitors don't implement this before you do."

Ken Titmuss  CFPIM, CSCP, CPF, SCOR-P, PLS, CS&OP, CDDP

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