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Strategic Inventory Planning

Hello, this is Ken Titmuss again with the second in the Demand Driven Materials Requirements Planning podcast series. Last time we discussed why we need to change from the traditional way of planning our businesses to the new Demand Driven MRP methodology. I mentioned in that podcast there are 5 components of DDMRP and this session is going to be concerned with the first component: Strategic Inventory Positioning.

But, before we continue with the 5 components of DDMRP I want to start looking at how we initially become Demand Driven. We will look at the difference between traditional MRP and Lean. Establish what Demand Driven really means, and we will introduce the Demand Driven Operating Model as well as Demand Driven Material Requirements Planning.

The breakdown of traditional MRP opened the door for Lean based systems. This has often been referred to as the battle between ‘Push’ MRP systems and ‘Pull’ Lean systems. In essence these two systems have the same objectives of improving flow. We know that materials and processes that flow reliably are easy to plan, manage and produce less waste. There are two very distinct differences between traditional MRP and Lean. In MRP systems all elements of the supply chain are dependent on one another. With Lean everything is independent of each other. In addition, in MRP systems supply order generation is performed at the planning level, whereas with Lean it is performed at the execution level. So, traditional MRP deficiencies do hurt the flow of information and materials and Lean doesn’t have a complete tool set for complex and volatile supply chains.

Therefore, we are looking for a system that promotes and protects the flow of relevant information and materials in the supply chain. It needs to synchronize complex and dynamic environments as well as pacing to actual demand. Finally, it needs to provide a clear replenishment signal for every resource in our supply chain.

So, what does becoming Demand Driven really mean. Well it doesn’t mean making everything to order, or simple Lean pull or placing inventory everywhere. What it does mean is sensing customer demand and adapting planning and production whilst pulling from suppliers all in real time. From the Demand Driven Institute they define Demand Driven MRP as a method to model, plan and manage supply chains to promote the flow of relevant information and materials. DDMRP being the supply order generation and management engine of a Demand Driven Operating Model.

They go on to define a Demand Driven Operating Model as a supply order generation, operational scheduling and execution model utilizing actual demand in combination with strategic decoupling and control points with stock, time and capacity buffers in order to create a predictable and agile system that promotes and protects the flow of relevant information and materials within the operational relevant range which is hourly, daily and weekly.

A Demand Driven Operating Model’s key parameters are set through the Demand Driven Sales & Operations Planning process to meet the stated business and market objectives while minimizing working capital and expedite-related expenses.

This DDS&OP process will be included in the last podcast when we discuss the bigger picture of becoming a Demand Driven Adaptive Enterprise.

Before we get into Strategic Inventory Positioning let’s just take a look at the requirements for a Demand Driven MRP system so far.

  • It should be based on the protection and promotion of the flow of relevant information and materials. This connects it to driving better return on investment.
  • It must allow for decoupling in order to mitigate demand signal and supply continuity variability as well as to compress lead times.
  • It should use the most relevant demand information available – actual demand.
  • It must provide easy to interpret signals for all resources.
  • And finally, it must provide for a way to synchronize complex and dynamic environments.

So, where can DDMRP be applied in the Supply Chain? Well, in raw materials and components, intermediate items and sub-assemblies, finished products and distribution inventories. In fact, it can be applied everywhere in the supply chain from raw material extraction to Retail and including Maintenance, Repair and Operating supplies. So, now we have one methodology to use throughout the supply chain as opposed to traditionally where we have Reorder Point, Periodic Review, MRP and DRP systems as well as Kanbans, depending on the type of inventory and the situation.

But for the time being let’s go back to looking at the five components of DDMRP.

With traditional planning systems we have never really concerned ourselves with where we position inventory in the supply chain but have focused mainly of what, how many and when to place a replenishment order. We mentioned in the previous podcast that to stop the transference of variability in information and materials up and down the supply chain we need to de-couple the supply chain with inventory buffers and where we place these buffers is therefore going to be a strategic decision.

So, before we can look at the other four components of DDMRP we need to determine where we are going to strategically place the Stock Buffers in our supply chain. This is the first process in becoming Demand Driven. Don’t continue without doing this first.

We will discuss three aspects in this first component of DDMRP in the remainder of this podcast. One: the six positioning factors determining where we will consider placing inventory buffers. Two: Identifying a new lead time for manufacturing called Decoupled Lead Time and Third: Using the Decouple Lead Time and the Matrix Bill of Materials to determine correct inventory positioning within a Bill of Materials.

Number one; lets look at the six positioning factors. These are:

  1. Customer tolerance time
  2. Market potential lead time
  3. Sales order visibility horizon
  4. External variability
  5. Inventory leverage and flexibility
  6. Critical operation protection

So, the first one on the list, Customer tolerance time. If you are in the business of Make-to-Stock products, then obviously the customer is not prepared to wait and therefore you need to keep a buffer of these products for your customer. If the customer is prepared to wait a period of time and you are a Make-to-Order company, we need to make sure we have buffers of components, raw materials and intermediate sub-assemblies in order to make the product in the agreed lead time.

Number two on the list is market potential lead time. Let’s say you are a Make-to-Order company and you, and maybe your competitors, are quoting 7 – 10 days lead time to make their products. What if you could reduce this lead-time to say 5 days this could affect your business with increase sales or even a higher price. To do this we might need to see where we could place extra buffers of material in the manufacturing process to achieve this shorter lead time.

Sales order visibility is third on the list. How long in advance do your customers give you orders before they need to be delivered. How can we buffer the supply chain to achieve this lead times?

Number four is external variability. If you have suppliers that are less than reliable with regards to their supply quantities and deliver promises, this is obviously a point where we need to buffer inventory and as we will see in the next podcast, we will need to take account of this variability when sizing the buffers. On the demand side of your business you can also have variability due to erratic or uneven demand from your customers. Here again, it could be a good reason for buffering inventory.

Five is inventory leverage and flexibility. These are the places in the integrated bill of material structure or the distribution network that gives a company the most available options as well as the best lead time compression to meet the business needs.

Lastly, critical operation protection. This come straight out of concept of Theory of Constraints that suggests we keep a buffer of inventory in front of a bottleneck or a point of constrained capacity to ensure it will always continue to function and therefore protect throughput and hence flow.

In the two-day Demand Driven Planner course we go through an example of how these six positioning strategies will be applied in a sample company, which is a little difficult to do in this podcast.

In the traditional past we have used three lead times to define our businesses.

  1. The Purchasing Lead Time, which is the total time to receive, and have available for use, an item after the purchase order has been placed.
  2. The Manufacturing Lead Time is the time to manufacture or assemble an item from the next lower level component items in the Bill of Material. This is often understated as components may not be available when needed and hence the lead time will increase.
  3. The Cumulative Lead Time, this is the longest total lead time required to procure any components or raw materials and for the complete manufacturing process to take place. This lead time is often overstated as we may have components, raw material or sub-assemblies available and we will be able to complete all the tasks quicker.

DDMRP requires a new lead time to be defined. It is called Decoupled Lead Time (DLT) and is defined by the Demand Driven Institute as a qualified cumulative lead time which is the longest unprotected or unbuffered sequence in the Bill of Materials. Anytime a manufactured item has non-buffered components, its Decoupled Lead Time will be greater than it Manufacturing Lead Time.

We use this Decoupled Lead Time in conjunction with the Matrix Bill of Materials to seek opportunities to buffer raw materials, components and sub-assemblies to not only reduce the Lead Time but to reduce the investment in finished product buffers. There is a whole methodology for this to take place which is difficult to describe in this podcast but is well covered in the 2-day DDP course, with a worked example.

In the DDP course we also go through some distribution positioning strategies that are difficult to explain in this podcast without the use of diagrams. They are well documented in the book ‘Demand Driven Material Requirements Planning’ authored by Carol Ptak and Chad Smith. I suggest you look for the 3rd Edition, which is printed in colour, which you will realise is pretty important when we start talking about the red, yellow and green zones in the stock buffers in our next podcast in this series.

So, next time we will start with the second component of DDMRP which is Buffer Profiles and Buffer Sizing. In the meantime I suggest again accessing and review and research the information contained in the website, or you can contact me at Bye until next time.