Hello, this is Ken Titmuss again with the 4th in the DDMRP podcast series, this time discussing Demand Driven Planning. To recap, in previous podcasts we have discussed the first 3 of the 5 components of DDMRP, namely Strategic Inventory Positioning, Buffer Sizing and Buffer Profiles and Buffer Dynamic Adjustment. These three components set up your Demand Driven Operating Model (DDOM) that needs to be continuously improved to increase service levels, reduce inventories and shorten lead times. This continuous improvement process we will discuss in a future podcast.
With these three components of DDMRP in place we can start using the fourth component which is Demand Driven Planning. In this section we are going to look at some of the part planning designators and talk about the planning process for stocked parts.
In the DDMRP methodology we really only teach two new unique concepts that are not already included in the traditional planning body of knowledge. The first we covered in an earlier podcast, which was the Decoupled Lead Time (DLT) and the second is the planning Net Flow equation, which is also unique to DDMRP.
Supply order generation in each of the buffers is determined by the use of the Net Flow equation. Net Flow is calculated by taking the buffers current On-Hand balance, adding to this any actual supply orders coming into the buffer, that could be Purchase Orders or Manufacturing Orders, depending on the SKU and then subtracting the qualified Sales Order demand for the buffer. Qualified Sales Order Demand is determined by, what do I need to ship today and in the past, if I have back orders, plus any spikes I might see in demand into the future. The spike threshold is regarded as any order or combination of orders that are greater than 50% of the red zone out to a horizon of the parts lead time. So, if total demand for an SKU on any particular day in the future lead time is greater than 50% of the Red Zone we include the whole quantity of the spike in the equation. Of course, many of you may not see these spikes as your customers give you an order today for deliver tomorrow. That’s OK, but if you can see spike it does improve planning and reduce variability in the supply chain and hence reduces the size of the buffers.
So, now in DDMRP planning we are moving away from replenishing items based on inaccurate forecasts to replenishing buffers based on accurate orders or actual demand. Replenishment of the buffer happens when the quantity calculated by the Net Flow equation descends into the yellow zone, the rule is then to order a replenishment quantity to the top of the Green Zone, with a required date based on the lead time for that item.
Let’s try and work through an example, you might want to write these number down so can get a better idea of how this works. Imagine we have a buffer with the Top of Yellow at 335 and the Top of Green at 455. For this item we currently have 105 in stock, when we look at the order files, we see we have 240 on a supply order. Today we have to ship 20 on a demand order out of the buffer. So, doing the Net Flow calculation it will be 105 + 240 – 20 which equates to 325. This number puts us below the Top of Yellow at 335 and so the system would recommend a replenishment order to Top of Green, so Top of Green at 455 minus Net Flow at 325 gives us a recommended order size of 130. If the Net flow equation would have put us any higher than the Top of Yellow at 335 there would have been no order recommendation.
The Net Flow equation is performed on every item in your database, every day, those items that have a Net flow in the yellow, or red in a worst-case scenario, will have recommended replenishment orders. So, not all items will be ordered every day.
There are a few other calculations we can perform on the buffer to provide us with some useful information. It is possible to determine the average inventory in each of the buffers, if this is then multiplied by the value of the item it is possible to determine the average total value of the inventory in a warehouse. The average inventory in a buffer is calculated by taking the top Red Zone and adding on half of the size of the Green Zone. So, if the Top of the Red Zone is 100 and the size of the Green Zone is 60, then the average inventory in the buffer will be 100 + (60/2) which equals 130. The ideal range in which the on-hand inventory should fluctuate in a buffer is determined between Top of Red plus the whole of the size of the Green Zone. In the case of our example that would be between 100 and 160.
We can also determine the average re-order frequency and average re-order quantity in a buffer. The average order frequency will be the size of the Green Zone divide by the ADU. In the example we used previously, if the Green Zone is 60 and the ADU is 10, this means that the buffer will be replenished on average about every 6 days, that is 60 divided by the ADU of 10. The average order size is generally the size of the Green Zone, which in this case is 60 units.
At this point in the Demand Driven Planner course we set up a buffer and run through a 21-day simulation to see how the buffer performs. In addition, we throw in unexpected orders within the order lead time as well as a quality hold problem with incoming material and the buffer is resilient enough to take these problems in its stride and still maintain a 100% customer service level with no stock outs. In addition, we see the actual demand on the buffer was almost 25% higher than that for what is was built. We must not underestimate the resilience of the buffer to act as a shock absorber in the supply chain, that is their job.
At this point in the course we discuss the concept of the De-Couple Materials Requirements Planning (MRP) explosion. If, in our Bills of Materials, we have buffered certain manufactured components, sub-assemblies or purchased parts then the MRP generation will work in a slightly different way than in traditional MRP although the same basic MRP algorithms, developed back in the 1960’s, are still used.
When a DDMRP De-Coupled explosion takes place it also starts with a demand for the top-level parent item and MRP explodes down the BOM until it reaches a buffered item and the explosion then stops. MRP then waits until this buffered item’s Net Flow moves into the Yellow Zone, the De-Coupled MRP will then start up again, based on the replenishment quantity, and explode down to the next buffered position in the BOM and stop again, or explode to a purchased part that is not buffered, in which case the buyer would get a planned purchase order generated by the MRP system for action.
The last subject we talk about in this section of the DDP course is related to distribution and what we call prioritized share. There are a few examples of this methodology we can discuss.
Let us say a vendor supply’s several components or raw materials to you. If they are going to send a truck, or consignment to you, by looking at the buffer status of the items they supply, it is possible to make up a consignment based those items with Net Flow in the yellow Zone and their replacement quantities. If there is still space on the truck and one wants to make a Full Truck Load, then some items where the Net Flow is close to the bottom of the Green Zone could be included in the consignment.
A similar situation might arise when you are sending a truck to a distribution centre. The first items to be loaded would be those with Net Flow in the Yellow Zone based on buffer status and again filling any extra truck space with items with Net Flow close to the bottom of the Green Zone.
Occasionally we might want to deploy all the stock at the sourcing unit out to the distribution centres. In this case there could be two scenarios. We might have more than is required to top buffers up, as far as Net Flow is concerned, to the Top of Green, or the reverse could be true in that there isn’t sufficient to top up every buffer to the top of Green, as far as Net Flow is concerned. In both these cases the system will deploy stock to the distribution buffers in a prioritised share such that all buffers, for that SKU, will be at a similar percentage either below or above the Top of Green after deployment.
This concludes this podcast on Demand Driven planning, however the DDP courses goes into this subject in a lot more depth and detail. Next time we will examine the 5th component of DDMRP which is Visible Collaboration and Execution. Remember also that the 3rd Edition of Carol and Chad’s book Demand Driven MRP also gives you a more in depth look into these podcast subjects. So, until next time continue with your research into this very important Supply Chain subject of DDMRP. I am Ken Titmuss and you can contact me at email@example.com or go to the DDI website at www.demanddriveninstitute.com.