Hello, my name is Ken Titmuss and for the last 30 years I have run my own consulting and education business, Kent Outsourcing Services, out of Cape Town in South Africa, concentrating on Operations and Supply Chain Management. My activities have not only restricted me to South Africa, but I have completed many assignments in the rest of Africa, the Middle East, Europe, America, India, Australia and Singapore.
For nearly three decades, working with my clients, I have educated and assisted them in implementing the traditional Manufacturing Planning and Control systems incorporating Executive Sales & Operations Planning, Master Production Scheduling, Materials Requirements Planning and Production Activity Control. These systems were conceived in the 1950’s, codified in the 1960’s and commercialized in the 1970’s, and were designed for a totally different world from that in which we live and work today. A world in which the land line telephone and the post office were our only support technology. How things have changed!
My first planning system implementations in the late 1980’s were pretty successful but as the world has become more global and VUCA, volatile, uncertain, complex and ambiguous, the success rate has been diminishing. The prime focus was on improving forecast accuracy to get a better demand signal with which to plan. With supply chain and product proliferation and complexities as well as longer lead times in the world today, it has become more difficult and virtually impossible to improve forecast accuracy to better than 70% at SKU levels, if you are lucky. So, our traditional planning has been based on inaccurate information and hence this has resulted in no improvements in On-Time-In-Full delivery performance, we have out-of-stocks, back orders and too much of the wrong inventory and not enough of the right. We know for a fact that the three rules of forecasts are that they are wrong, the further out into the future the more wrong they are, and the more detail the less accuracy.
In 2011, Carol Ptak and Chad Smith, edited and updated the third edition of ‘Orlickly’s MRP’ book which has been the prime planning text since 1975. In this edition they first documented the new Demand Driven MRP principles that uses accurate actual orders, or demand, to trigger replenishment of raw material, finished goods and distribution inventory buffers. Early adopters of this methodology have gained tremendous advantages in reduced inventories, greater service levels and shorter lead times by using this methodology.
In the last 8 years this methodology has been adopted by many small companies and large corporations globally with equally impressive results on 6 continents and in all categories of manufacturing and distribution industries. There is no doubt that in the next 5 to 10 years this planning and execution methodology will be adopted by pretty well every business globally. The time to get in is now to gain a benefit over your competitors as opposed to playing catch up in the years to come.
As we will discuss later in the podcast series there are 5 components of DDMRP namely, One: Strategic Inventory Positioning. Two: Buffer Profiles and Buffer Sizing. Three: Dynamic Adjustment of the Buffers. Four: Demand Driven Planning and then Five: Demand Driven Execution. It is interesting to note that this DDMRP methodology, compared to the traditional way of planning our businesses, includes both planning and execution whereas with traditional planning there is no integrated execution ability. We will concentrate the next 5 podcasts on these five components of DDMRP. But initial in this podcast let us examine why it is important to consider this new technique for planning.
So, why should we change from the traditional way of planning our business? Well firstly we have to acknowledge we have a problem and we believe there are 3 pieces of evidence to establish this.
- We have figures for the Return of Investment of publicly traded manufacturing companies that indicate that since the introduction of traditional MRP in the 1970’s their Return on Investment has diminished from around 4% to about 1% today despite the introduction of Manufacturing Resource Planning, Enterprise Resource Planning and Advanced Planning Systems all of which promised an improvement in business, but seemingly have not delivered.
- Although we spent millions of dollars on integrated planning systems, we find the majority of day-to-day planning ends up on a spreadsheet as users battle to get their systems to perform for them. These spreadsheets are very personal to the user, not scale-able and are often error prone as they are not generally audited, in any way.
- Lastly, there is the Bi-Modal distribution of inventory in the system. In other words, we end up with too much of the wrong stuff and too little of the right, causing late and missed deliveries. We end up spending more money on inventory investment by trying to buffer our poor planning with larger levels of safety stock. So, the bottom-line effect is chronic shortages, excessive inventories and high expedite costs, as well as waste.
So, what is the major reason for these poor results? Well, the first law of supply chain management is that ‘All benefits in the supply chain will be directly related to the speed of flow of relevant information and relevant materials.’ What are these benefits:
- Increased levels of customer service.
- Increased turnover and hence revenue
- Better quality through small lot sizes and better flow
- Reduced levels of the right inventory
- We find unnecessary expenses will be reduced
- And, ultimately all-important cash flow will improve.
So, why can’t we achieve these benefits with our current systems?
Well, we normally start our planning with a distortion to relevant information flowing up the supply chain by using an inaccurate forecast to plan materials, this results in a distortion to relevant materials flowing down the supply chain. So, the right materials are not available at the right time.
Therefore, in our planning systems we are using signals with known error, often MRP planning systems are only run once a week, so out of date information is used for planning. In addition, to simplify the planning process we have oversimplified our Bill of Materials. With weekly planning buckets and flattened BOMs we have a lot of ‘nervousness’ in the system as adjustments are made when the true demand is know, compared to the planned forecasted demand.
So, with everything having to be dependent in the supply chain supply, variance transference causes supply delays and MRP plans never properly synchronize. This results in the Bi-Modal inventory distribution in which an SKU can quickly move from a position of having too much to having too little, this then breaches the safety stock level, which requires an immediate replenishment of stock, resulting in the item ending up being in a situation of having too much, again.
The overall result is the ‘bullwhip’ effect caused by sending distortions to relevant information up the supply chain resulting in a distortion to relevant material flowing down the supply chain. We have known about these bullwhips for decades but have not really had a solution to stopping them, until now.
The solution is decoupling the supply chain by inserting points of independence in the dependant supply chain. These decoupling points stop dead the transference of variability of information and materials up and down the supply chain. Variability is the number one enemy of relevant flow in the supply chain and is stopped at these decoupling points.
The positioning of these decoupling points is a strategic decision and it will be covered in the next podcast as the first component of the DDMRP process.
In essence, DDMRP is about strategically positioning inventory buffers in the correct locations in the supply chain, protecting these buffered positions with the right levels of inventory. Dynamically adjusting these buffers as changes in demand are detected. Pulling the demand from these positions, and then adapting the positions to the continuously changing supply chain environment, all in real time.
For more information on this methodology we recommend you read the third edition of ‘Demand Driven Materials Requirements Planning’ authored by Carol Ptak and Chad Smith.
In addition, try and attend a 2-day Demand Driven Planner course either in a classroom environment on using the on-line webinar series from the Demand Driven Institute. After attending this course, you have sufficient information to go back to your place of work and apply the principles to a small selection of SKU’s to see how it can work for you. From here you can plan a full implementation.