A less nervous MRP

From the April 2019 print edition

Supply chain professionals now have myriad tools at their disposal to plan and manage inventories and

Roberta McPhail is the owner of McPhail Enterprises. Reach her at [email protected]

manufacturing. These tools include ERP, MRP, Lean, demand forecasting and 6 Sigma. So how have these tools kept up with today’s complex and volatile business conditions? Let’s explore this in more detail.

MRP and the land of forecasts
We’ll first review the industry standard model from APICS\ASCM based on MRP. Demand is created through a forecast that’s passed through a master schedule, into an MRP calculator and, from there, planned work orders (WO) or purchase orders (PO) are firmed up. Safety stock is applied to protect against variation. A sales and operations planning process may exist at a family level to provide a longer planning horizon. Such a process also provides an operations plan output to give some stability to the manufacturing operations. This is sometimes referred to as a “push system.”

MRP has also had the added issue of nervousness, with a dependent demand item connected via a bill of material. A symptom of this nervousness is the proliferation of Excel spreadsheets as the primary planning mechanism. Planners need to keep an Excel copy to snapshot and plan independently from MRP. Or, companies have defaulted to a simpler planning reorder point method or min-max method.

The end result of this tends to be a mismatch of inventory to demand and supply—we call this the bimodal effect, meaning there is too much or too little. The ERP/MRP software industry has embraced these methods and it’s now the default standard for most planning systems.

Lean and pull and the Japanese invasion
The Toyota Production System (TPS), or Lean in North America, was very much based on a demand-pull system. Using kanbans or supermarkets with synchronized flow, Lean attempts through-waste reduction by improving the flow of a system. Lean’s focus on waste and one-piece flow is designed to have products available only as needed. Pull makes total sense, however the Lean world has not played well with the MRP world and vice versa. How do we use our ERP tools with this? Kanbans are perhaps too simple for most manufactures and certainly too simple to use in complex, mixed-mode manufacturing.

Theory of constraints and The Goal
Certainly, The Goal by Eliahu M. Goldratt has been recognized as one the bestselling management books of all time. The book discusses how to create throughput while recognizing constraints in a business. Cost accounting is considered an evil in decision making and the first drum buffer rope scheduling systems—a planning and scheduling solution derived from the theory of constraints—evolved from this. It uses an excellent approach to business as a system. It’s well-established in the consulting community but has never been fully embraced by industry. Again, this method optimizes flow and throughput.

Demand Management – Forecasting – Impossible Dream
In the recent history of planning systems this topic has gained a major focus. In summary, the concept is that if we can fix the forecast we fix the problem. The basics of stabilizing demand are valid. Most larger companies focus software and processes to this issue. Big data, Industry 4.0 and artificial intelligence (AI) have started to blend into these processes to fix the demand issue. To what effect have we fixed the inventory issue?

Introducing Demand Driven Materials Requirement Planning (DDMRP)
Developed by the Demand Driven Institute, DDMRP is the global standard for demand driven planning, scheduling and execution of the entire supply network—from end users and distribution centers to manufacturing and multi-tiered suppliers. DDMRP is a multi-echelon material and inventory planning and execution system that enables a company to become demand driven, dynamically sizing and adapting supply networks and production systems through sensing changes in demand patterns and the responsiveness of supply.

DDMRP and its Demand Driven Operating Model provide the methodology to decouple the entire supply network at strategic inventory locations, creating independence between supply and demand. Through structured mathematical design, decoupled strategic inventory buffers can absorb demand volatilities and supply disruption, fully dampening the Bullwhip Effect and restricting its transfer through the supply network. Demand signals between consuming and producing nodes of the supply network are then stabilized with inventory availability being significantly improved. Even if a supplier is late or there is a demand spike, the mathematical design of the buffer will enable these inherent variations to be absorbed.

Forecasts are still used to size and adjust buffer sizes, but they’re not used for supply order generation.

As an introduction to the process, below is the DDMRP five-step implementation approach.

Step 1: Strategic Decoupling: In this stage, we answer the question ofwhere to place our buffer inventory. We use a series of logic factors such as customer tolerance time and where the is major variability. Ultimately, we build a conceptional model of where to place buffer stock.

Step 2: Buffer Profiles: Using data parameters such as lead time and average daily usage we construct a red, yellow and green buffer profile. Each of the color zones has a different purpose. Green represents order quantity and frequency of ordering; yellow is the coverage over the lead time. Red represents safety coverage related to lead time and demand/supply variability.

Step 3: Unlike most planning systems with static inventory levels, buffers adjust to demand over history. This is a critical and differing element to most MRP systems.

Step 4: Planning signals use a simplified net flow calculation of on-hand+on-order – qualified demand. If this net flow signal is in the yellow zone or lower, then we replenish up to the top of green.

Step 5: Manufacturing and PO priorities are now set by the planning and on-hand penetration into each part’s respective color zone. The higher the penetrations, the higher the priority of the WO or PO.

Many companies globally have now embraced this new methodology. Known names such as British Telecom, Shell Lubricates, Michelin and Louis Vuitton have started their demand-driven journeys. In Canada, we have Stemcell and Ballard fuel cells. Many others have started along a similar path. Typical results are in at least 20 per cent inventory reductions with 95 per cent service level attainment.

The good news is that software is now available to support the DDMRP process. Software is certified by the Demand Driven Institute and many ERP now have native or seamless bolt-ons. SAP, Dynamics, Syspro—to name but a few—provide DDMRP modules. Consulting firms are also available to help. Many companies start their own pilots via taking a two-day demand driven planner class. Software and demand driven affiliates lists can be found on the demand driven site: www.demanddriveninstitute.com. Text books, case study videos and hundreds of training events are now available globally through the demand driven site.

Now is an exciting time for supply chain professionals. I encourage those at all levels of management to check out this very valuable new methodology. For more info on DDMRP in Canada please do contact me at [email protected] I am more than happy to direct you to free resources.