Hello, welcome back to the 5th podcast in the DDMRP series. I am Ken Titmuss and today we will be discussing the 5thcomponent of DDMRP, namely Visible and Collaborative Execution. Up to this point we have discussed the first four components of DDMRP, that is Strategic Inventory Positioning, Buffer Sizing and Buffer Profiles, Dynamic Adjustment and last time, Demand Driven Planning.
With traditional planning there is no integrated execution available with the planning systems, with DDMRP we have both integrated planning and execution, which is a huge benefit.
DDMRP execution is divided into two scenarios. Buffer Status Alerts, which look at the current on-hand situation at points of independence, or buffers. And then, Synchronization Alerts that deal with non-buffered points of dependence.
Let’s first look at the Buffer Status Alerts, which are broken down in to two subsections, namely Current On-Hand Alerts and secondly, Projected On-Hand Alerts. It is worth noting here to make things clear that execution is purely looking at on-hand inventory balances and not Net Flow, which is reserved for the planning function. So, buffer status alerts require two perspective changes. One, in the way we determine priority and two, a change in the way we view the colours in the buffer zones. We will cover both these aspects shortly.
First, we will review the Current On-Hand Alerts. Let’s look at a manufacturing example. We could have a number of manufacturing orders to produce in the plant. These will typically have due dates that were determined at the time of generating the shop order. Some of these orders could be make-to-order for customers and others to top up finished goods of make-to-stock SKU buffers. Due dates are determined at the time an order is place, but situations change, and these dates may not be relevant into the future. Also, we may have several jobs due on the same day, how do we know in which priority order to manufacture them, typically we don’t. Sometimes in a plant many orders are past due, again in which order should we manufacture them? Basically, we don’t really know.
With DDMRP execution we can see the status of every make-to-stock buffer and its priority, so we can make the customer orders first and then top up the buffers based on their buffer status.
Traditional default priority is by due date, which is regarded as an antiquated rule. If we ask ourselves the question; ”Would you rather have a supplier deliver on the due date, or, never stock you out?”, the obvious answer, of course, is never stock you out. What does this say? Protecting availability in the buffers is of paramount importance. Priority by due date does not necessarily protect availability, whereas, buffer status always connects to protecting availability.
The second fundamental changed mentioned above is the way we view the colours in the buffers. Up to this point we have viewed the colours in a planning perspective. When the buffer is green with regards to Net Flow, all is good. Yellow and red require action. In execution we are reviewing the on-hand balance. We indicated in the last podcast that the average inventory should be around top of red zone plus half of the green zone, with the ideal on-hand balance range hovering between the top of red and top of red plus the whole of the green zone. This means that the on-hand balance, as far as execution is concerned, is in the yellow, where we would like to see green. So, we change the colours in the buffer for execution. Basically, we make the planning yellow zone green and we make the planning red zone into yellow and red. Typically we make the top half of the red zone yellow and keep the bottom of the red zone red. So, if on-hand balance is in the execution green zone, all is good. If on-hand balance drops into the yellow zone it is a pre warning of a possible problem. If the on-hand balance drops into the red zone then we would receive an expedite warning, meaning that we need to investigate why the inventory is getting low and see if we can do anything to expedite the supply.
So, the Current On-hand Alert indicates which buffer positions are in trouble right now and suggests parts where open orders need to be expedited. The projected on-hand alert takes today’s on-hand balance and projects the on-hand status into the future, day-by-day, by using the ADU or, if available, actual customer orders and their due dates. This action doesn’t generate planned supply orders as would happen in a traditional MRP system; it purely indicates at what point in the future we could run into stock outs, with or without demand, if nothing changes in the system. At this point in the 2-Day DDP course we go through an example to show you how this projected on-hand alert is calculated. Not so easy to do in this podcast.
When it comes to Material Synchronisation Alerts this displays material shortfalls against known demand allocations into the future. A material synchronisation alert is triggered by any current or projected negative on-hand situation. There are three triggers that can produce a synchronisation alert: late material supply, earlier start date commitment for a manufacturing order, or insufficient supply of the required material.
Alerts can be related to each other. For example, a buyer may get a project on-hand alert for a component required in manufacturing. This could result in a material synchronisation alert for a sub assembly in which this component is assembled. This in turn could generate a projected on-hand alert for the planner of the parent Finished Product SKU.
In addition, under synchronisation alerts we also have Lead Time Alerts. A lead time alert is an execution alert for strategic non-buffered parts generally with long lead times. This can be used for components that we only buy when we receive a customer order for a make-to-order finished product. In this case we divide the total lead time into thirds. We then take the last third of the lead time and divide that into thirds. These thirds are then coloured green, yellow and red. As time passed through each of the three coloured zone the system will generate a notification for the buyer to contact the supplier and confirm the delivery of the component is on track and will arrive on time. If they receive an indication that the material will be late and the due date is changed, this will likely generate a material synchronisation alert which will need to be addressed.
So, we can use execution alerts throughout our supply chain. In distribution we can see what buffers are in urgent need of resupply. In the finished goods warehouse, we can see the priority of which products need to be manufactured to maintain stock availability. For intermediate buffered parts in the factory we can see in what priority order they should be replenished. And, in purchased parts we can see the priority of parts that the buyer may need to expedite from the supplier.
This brings us to the end of the section on Visible and Collaborative Execution, but before we finish today, I want to review the 6 strategic buffer criteria and how they compare to the concept of safety stock and re-order points.
The first buffer criteria is that they should decouple the supply chain and provide a clear break in the lead time dependency, which we know they do.
Secondly, there must be a bi-directional benefit test. A buffer provides a benefit on the demand side by protecting availability and on the supply side it generates generally similar sized orders at regular intervals.
Thirdly, is the order independence test. In other words, any stock in the buffer is not there for any specific order, demand requirement or customer. It is available for anybody that legally has a requirement from the buffer.
The primary planning mechanism is the fourth buffer criteria. This means that the buffer is the primary mechanism for determining replenishment, which we know is done using the Net Flow equation.
Fifth, is the relatively priority test. In the system we have the on-hand balance priority as well as the planning priority for ever stocked buffer, so it is easy to determine what needs to be done first and then second. It provides a to-do list for the day as far a planning and execution is concerned.
And lastly, sixth, is the dynamic adjustment test. We know DDMRP buffers are dynamically adjusted on a continuous basis as the environment changes keeping in pace with demand in the marketplace.
If we test the concept of safety stock against these six criteria, we find it only passes the third one, order independence test, which means that any material in the safety stock is available for anybody that can legitimately use it. There are some companies that adjust their safety stock levels occasionally mainly based on their forecast accuracy percentage, but I find this is not very common and safety stock levels are usually maintained at the same level for long periods of time. Although a safety stock system does generate a replenishment order if the on-hand balance reaches or breaches the safety stock level this is not the primary planning mechanism and only a secondary mechanism, at best.
If we compare these six criteria to the re-order point process, it doesn’t fare much better, but it does pass the primary planning test, independence test and it decouples the supply side lead times but fails in the other areas. So, to compare DDMRP buffers as a ‘fancy’ re-order point system with safety stock, is not possible. The two are completely different. Some additional points on order points, they do not take demand into account and don’t use the Net Flow equation, they are therefore subjected to higher variability with increased risk of stock outs requiring increased levels of inventory to compensate.
This brings us to the end of today’s podcast where we discussed DDMRP’s 5th component Visible and Collaborative Execution processes, as well as comparing the extra benefits of DDMRP buffers to reorder point with safety stock systems.
The sixth and last podcast in this series will focus on DDMRP impacts on scheduling and work-in-progress management. We will go on to discuss the Demand Driven Sales and Operations process and how it is used to performance variance analysis on the Demand Driven Operating Model and apply continuous improvement to ensure the operating model is stable, reliable and is giving us high levels of flow. In addition, we will see how the operating model can be projected into the future to identify potential problems into the future which can be addressed with ample time to resolve the situations. We will conclude with the expected benefits that adopters of the DDMRP methodology are achieving and briefly discuss the Demand Driven Adaptive Enterprise (DDAE) bigger picture and a maturity development path to get there.
So, until next time, continue your research and education into becoming Demand Driven. Hopefully some of you have now purchased some of the books written by Carol Ptak and Chad Smith and have looked at the wealth of resources on the DDI website at www.demanddriveninstitute.com. I am Ken Titmuss and you can get hold of me at email@example.com. Until next time, goodbye.