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.
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:
Customer tolerance time
Market potential lead time
Sales order visibility horizon
Inventory leverage and flexibility
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.
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.
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.
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 www.demanddriveninstitute.com and review and research the information contained in the website, or you can contact me at email@example.com. Bye until next time.
Hello, this is Ken Titmuss again with the third in the DDMRP Podcasts. Today we will be taking a brief look at the second and third components of DDMRP, namely DDMRP Buffers and Buffer Profiles as well Dynamic Buffer Adjustment. I say a brief look as these podcasts can’t really go into the depth of understanding required, but hopefully inspire your curiosity to do further research and maybe take the Demand Driven Institutes Demand Driven Planner course. If you have been looking at the DDI website you will see that there is also a Demand Driven Planner Professional certification exam that you can take, there are plenty of details on the website on how to go about this and what is required.
So, recapping, we have looked at why we need to seriously look at changing the way we have traditionally been planning our businesses and what becoming Demand Driven really means. Last time we went through the first component of DDMRP, Strategic Inventory Positioning and now we will continue with the second component, Buffer Sizing and Buffer Profiles.
In this section we will look at when inventory is regarded as being an asset or a liability, list some of the factors to be considered when constructing DDMRP buffers as well as understanding the logic and purpose of the three difference zones in the buffer.
Firstly, when do we consider an item of inventory to be an asset or a liability? Well, if we have very little inventory or we are out-of-stock, or worse still we have back orders, this is a liability. We miss sales, short deliver or expedite deliveries to replenish the stock. These all cost us money and hence are a liability. At the other end of the scale if we really have too much inventory for our immediate needs then we have spent money on something that is not giving a return in the short term and hence is a liability. Not only that, stock could become obsolete or expire and will have to be destroyed, also a liability.
So, between these too high and too low points, inventory is regarded as an asset. However, as we progress to the zero point or point of too much the return on that investment will diminish. Therefore, at a mid-point between zero and too much we will get the greatest return on our inventory investment.
In practice when we analyse the complete stock in a warehouse, we typically find that too many of the SKU’s have low inventory or are out-of-stock and an equal amount is at a level where there is too much. Generally, we find only a small number of SKU’s sitting in the ideal position for a maximum return on the inventory investment. We also find that, using traditional MRP systems, an item can quickly move from having too much to too little with a requirement to immediately replenish the item due to it violating safety stock levels and hence putting it back into the too much category. So, we end up with what we call Bi-Modal inventory distribution. We need to get to a point where the majority of our SKU’s are sitting in the optimal range for maximum return on investment and those out on the tails being investigated for the reason why and changing their operating model parameters to bring them into line using a process of continuous improvement.
In order for this to happen, we need to create stock buffers at our strategic inventory positions. These stock buffers consist of three zones: Red, Yellow and Green. Each of these zones have a specific purpose in the buffer. Let’s take them one at a time.
The yellow zone is the area in the middle of the buffer. We usually calculate this one first as it is the easiest and is the heart of the demand coverage in the buffer. It is always calculated using the lead time and multiply it by the Average Daily Usage, called ADU. Maybe at this point we need to address the issue of which lead time to use and how do we determine the ADU.
Lead time, in days, is the total length of time it takes for inventory to be replenished in the buffer. For the buffer of a purchased raw material or component it will be the purchasing lead time. If it is a manufactured item, then we would use the Decoupled Lead Time or DLT mentioned in the previous podcast. For an SKU at a distribution centre it will be the transit time to replenish the stock from the supplying location.
With regards to ADU, this can be calculated in three different ways. For most items in a location we would probably use a backward looking ADU. Here we might take the last 90 days of demand and work out the ADU by dividing the total demand over this period by the number of days. For a new item that has no past demand data we would probably use a forward looking ADU, known as an FDU, taking the total of say 90 days of forecast and dividing by the number of days, again. There is another option of a Blended ADU, in this case we take some past data as well as some forecasts to come up with a number. What is best for each SKU at a location will need to be determined by the project implementation team, maybe using some simulation tools.
The top zone of the buffer is the Green zone, which is the heart of the order generation aspect of the buffer. It determines the frequency of reordering and the typical size of the orders. We calculate the size of this zone in three possible ways and typically select the number which is the largest.
The first method of calculating the Green Zone is to see if there is a significant Minimum Order Quantity, or MOQ, when this item is manufacture or purchased. Secondly, we determine if there is a cycle to purchasing or manufacturing the item, so, for example we might want to make an item in the factory every two weeks, or we might want to buy products from a supplier once a month. We then take that cycle in days and multiple it by the ADU and we end up with a number. The third method is to take the size of the yellow zone and multiple it by a Lead Time Factor, or LTF, which we will define shortly. This method again will give us a number. We compare these three numbers and generally take the largest as the size of the Green Zone.
The Lead Time Factor, mentioned previously, is determined by the length of the lead time to replenish the item of inventory. For short Lead Time items, we would use a factor between 0.6 to 1.0, for medium Lead Time SKU’s a factor between 0.4 and 0.6 and for long Lead Time items a factor between 0.2 to 0.4. This is not intuitive as we use a small factor for long lead times and a larger factor for short lead times. The reason is that for long lead time items we want to generate a smaller Green Zone and hence more frequent orders to promote flow, reduce risk in the supply chain and give us better cash flow. The factor you use for your SKU’s again will be determined by you project implementation team.
So, now we have calculated the size of the Yellow and Green Zones, we now need to determine the size of the Red Zone. The Red Zone is the safety in the buffer, but it is not safety stock and doesn’t behave in the same way as safety stock. It is really the ‘shock absorber’ for the demand or supply variability at this point in the supply chain. The Red Zone is broken down into 2 parts; the Red Zone Base and the Red Zone Safety. These parts are calculated separately and then added together to determine the total size of the Red Zone.
The Red Zone Base is calculated as the Lead Time, times the Average Daily Usage, times the Lead Time Factor. In other words, it is the same as the Green Zone if we used the Lead Times Factor option. The Red Zone Safety is calculated by taking the Red Zone Base and multiplying it by the Variability Factor and adding the two portions of the Red Zone together to get a total. The Variability Factor, as opposed to the Lead Time Factor, is intuitive. With high variability we use a high factor of between 0.6 to 1.0, medium variability 0.4 to 0.6 and for low variability 0.2 to 0.4. The variability of each SKU needs to be determined by the implementation team, but one can use a Coefficient of Variability factor to assist in the process. The Coefficient of Variability, or CoV, can be calculated by dividing the SKU’s Demand Standard Deviation by the ADU.
So, now we have the size of the three zones in the DDMRP buffer. In DDMRP ‘speak’ we talk about Top of Red, which is the size of the total Red Zone. Top of Yellow which is the Red Zone plus the size of the Yellow Zone. Top of Green is the Top of Yellow plus the size of the Green Zone. Over this number we talk about Over Top of Green, or OTOG for short.
To make things easier for the system to complete the calculations we need to set up Buffer Profiles to which we will assign each and every SKU. The Buffer Profiles matrix is initial sectioned into major categories of inventory: Purchased, Manufactured, Intermediate/sub-Assemblies, Finished Products and Distributed Items. Within each of these inventory categories we divide the matrix into Long, Medium or Short Lead Times. These Lead Times are then divided into High, Medium or Low variability Categories. This gives us about 45 buffer profiles to which we allocate all our SKU’s, the system then knows how to perform the buffer sizing calculations for each item. So, for example if we have a manufactured item (M) with a short lead time (S) and medium variability (M) it might be allocated the buffer profile code of MSM. In the two-day DDI Demand Driven Planner course we go through a number of exercises to ensure participants are proficient in calculating buffers.
Now we have the buffer profiles and buffer sizing organise, we need to Dynamically Adjust the buffers to take account of constant changes in the external trading and business environment. So, now we will look at the third component of DDMRP, Dynamic Adjustment. Under Dynamic Adjustment there are two issues we need to discuss: Recalculated Adjustments and secondly, Planned Adjustment Factors.
Let’s first discuss Recalculated Adjustments. These adjustments to the buffers are done automatically by the system when any of the key parameters in the part change such as Lead Time, Average Daily Usage, Minimum Order Quantity, Buffer Profile, Lead Time and Variability Factors. So, buffers are keeping up with changes to your business environment virtually in real-time.
Over and above these automatic adjustments to the buffers, we have the ability to apply manual Planned Adjustment Factors for various circumstances. Here we basically have three types of adjustment: Demand Adjustment Factors, Zone Adjustment Factors and Lead Time Adjustment Factors.
Demand Adjustment factors are used mainly for SKU’s that have strong seasonality. In these cases, the Average Daily Usage is multiplied by a seasonal index to increase the size of the buffer into the future to take account of greater sales in the high season. These seasonal indexes are then reduced after the high season to bring the buffers back to the normal low season size.
Demand Adjustment Factors can be used to ramp up demand for a new product or ramped down for products at end of life, or a combination of both for a product transition.
Zone Adjustment Factors can be applied to each of the three zone individually for various reasons. For example, we could adjust the Green Zone to manipulate order sizes and frequency of ordering. The Yellow Zone could be adjusted because of a temporary change in lead time, for various reasons, but not warranting a change in the parts basic planning data. The Red Zone could be adjusted due to a temporary change in variability which could be due to strikes at ports or transportation, or in manufacturing plants, not warranting a permeant changes in buffer profiles.
The Lead Time adjustment factor could be used for single or groups of items where lead times increase, or decrease, due to the season or event. For example, lead times tend to extend during Chinese New Year so for SKU’s coming from this region the buffers should be expanded during this period. The same thing can happen when it is summers holidays in Europe during July and August, business tends to slow down somewhat.
The DDMRP implementation team will need to determine how and when to use these adjustment factors which will vary with different businesses and products within the company.
We have now completed the first three components of DDMRP: One, Strategical Inventory Positioning. Two, Buffer Sizing and Buffer Profiles and Three, Dynamic Buffer Adjustment. In the next podcast we will go through, what I think in the most elegant portion of DDMRP, Demand Driven Planning.
Up to this point we have basically covered the first day of the DDI Demand Driven Planner course. Bearing in mind that these first three podcasts have taken about 40 mins, one can appreciate that there is a lot more to learn and know on the subject. It is therefore important that if you want to start a Demand Driven journey you need to attend the Demand Driven Planner course and ultimately take the Demand Driven Planner Professional certification exam. More information on this course and other Demand Driven education offerings are available on the DDI website: www.demanddriveninstitute.com. If you sign up on this website, it is free, you will get extra Demand Driven material on the OnDemand Tab and don’t forget to look at the case studies and presentations which are available from recent Demand Driven World conferences. You will find a list of global DDI affiliates on the website. Contact one today in your area and see what they have to offer. I am Ken Titmuss and you can get me on firstname.lastname@example.org. Until next time, goodbye.
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.
Hello, welcome back to the 5th podcast in the DDMRP series. I am Ken Titmuss and today we will be discussing the 5th component 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 firstname.lastname@example.org. Until next time, goodbye.
Welcome to the last in this podcast series focusing on Demand Driven MRP. I am Ken Titmuss and today we will be mainly focusing on Demand Driven Sales and Operations Planning and completing the series with a summary of the podcasts.
In the last podcast we completed the 5th and last component of DDMRP, namely Visible and Collaborative Execution. We also spoke about the 6 DDMRP Buffer Criteria and how Re-Order Point systems and Safety Stock don’t provide the same benefits.
Before we get into Demand Driven Sales and Operations Planning, I just want to spend a short time on DDMRP’s impact on scheduling compared to traditional Master Production Scheduling and Shop Floor Scheduling.
With conventional planning we drive the traditional MRP system from a Master Production Schedule which represents what the company plans to produce in specific configurations, quantities and due dates out to the cumulative lead time. This plan, possibly going out 6 months or more, is build based on inaccurate forecasts.
So, what are the assumptions we use when planning our organisation?
Demand signals are known and accurate.
Lead times for order release, receipt and synchronisation are realistic.
Materials and capacity are available on the dates required.
How realistic the schedules are will be determined by the relative validity of these assumptions. The less realistic the schedules become the more likely they are to be disrupted. So, let’s see how realistic these assumptions are in the conventional planning approach.
Looking at assumption 1, demand signals are known an accurate. With conventional MPS/MRP planning, when we tie order release directly to forecasts this means actual demand will vary from demand used for planning. The longer the planning horizon the larger the variance will be between planned and actual. With MRP’s inherent trait of nervousness means demand signals change at each and every MRP run creating a great deal of adjustments. When using a DDMRP system the use of qualified demand means demand signals are much more relevant, accurate and timely.
With assumption 2, lead times for order release, receipt and synchronization are realistic. Using traditional MPS/MRP planning with no de-coupling, delays frequently accumulate affecting when orders can be released with full allocations. We find safety stock is generally not positioned at the intermediate levels in the Bill of Materials to provide even partial supply variability dampening. Traditional MRP then nets inventory positions to zero leaving no margin for error. This means the schedules are much more complex and fragile. Also, with no execution ability built in there is no way to see how potential delays will affect the schedules. There will be little or no visibility of a potential problem until it is encountered. Without de-coupling, synchronization and flow will quickly breakdown.
In DDMRP the use of de-coupling points creates shorter independent planned and managed horizons with less variability being passed through the system. This results in synchronization dates that are more realistic and less important due to the cushioning effect of the buffers. These buffers being correctly sized through the use of the Decoupled Lead Time.
Looking at assumption 3: Materials and capacity are available on the dates required. When synchronization breaks down, material and capacity are frequently not available as planned. Materials arrive late or are diverted to cover shortages elsewhere. Capacity is frequently not available due to slides in the schedules.
With DDMRP, buffers represent a point of stored materials and capacity. The buffers always plan to have material available. DDMRP’s execution facility brings degrees of visibility to open orders that must be expedited to maintain stock integrity and meet synchronization needs.
One of the key differences between a traditional MPS/MRP system is, the MPS gives us a statement of what we can and will build, whereas DDMRP provides a statement of what we can and will sell. A fundamental shift in a company’s capability.
When it comes to DDMRP and shop scheduling works orders for finished products, intermediate sub-assemblies and manufactured components are launched based on buffer Net Flow status. This creates a much clearer schedule based on actual priority. In addition, DDMRP buffers can be seen as a simple finite capacity scheduling system. It we take the green zone in a buffer it indicates the average order frequency and quantity. If we know the quantity and the time required to produce this quantity on any work centre in the plant, we can calculate the average time to produce this average batch size.
Moving onto the main subject for today, which is Demand Driven Sales and Operations Planning, DDS&OP for short. The DDI define the DDS&OP process as the following: –
DDS&OP is a bi-directional tactical reconciliation hub in a Demand Driven Adaptive Enterprise Model between the strategic and operational relevant ranges of decision making. DDS&OP sets key parameters of a Demand Driven Operating Model based on the output of the Adaptive S&OP process.
DDS&OP also projects the Demand Driven Operating Model performance based on the strategic information and requirements and various Demand Driven Operating Model parameter settings. Additionally, DDS&OP uses variance analysis based on past Demand Driven Operating Model performance against critical metrics of reliability, stability and velocity, to adapt the key parameters of the Demand Driven Operating Model and/or recommend strategic changes to the business.
The DDS&OP has two basic functions, one to create the Master Settings for your DD Operating Model and look at variance analysis to see how the Operating Model can be improved. Secondly to project the Operating Model into the future, based on your consensus demand plan, to determine areas of, for example, capacity, space, and investment that need to be addressed in the future due to potential increases or decreases in business.
Let us start with looking at the analytics. Once the design is operational how do we ensure that the flow of relevant information and materials is occurring for the best possible ROI? For this we need to ask the following four questions:
Are the right signals being conveyed without distortion in a timely fashion?
Are the right materials available when needed? Is the inventory in excess?
Is the operating model performing as designed?
How can we make it better?
In the DDI Demand Driven Planner course, at this point we look at some typical reports that determine the answers to the previous four questions. A little difficult to do in this podcast. We look to see if planners are placing orders correctly in a timely fashion, how fast is the model working and are we getting good flow through the business. We look at buffer integrity and determine if the right buffer profiles are being used to ensure availability. Lastly, we analyse the SKU’s that continually either have too much or too little in the buffer and determine how this can be improved. In other words, we set up a continuous improvement program.
Improvement strategies should be in place to ensure reduction of investment in buffers but maintaining or improving customer service levels. These revolve around 3 issues; lead time reduction, MOQ reductions and reductions in variability.
Let’s now look at the second function of DDS&OP, that of projecting the DD Operating Model into the future based on the consensus demand plan. In the Demand Driven planner course we take 4 SKU’s, look at the current ADU and the future ADU in six months, and project the changes in the buffer into the future. This enables us to compare such things as, potential inventory investment increases in the buffer, future warehouse space requirements or maybe capacity requirements in the plant, or whatever you deem critical in your business. This gives us a ‘heads up’ to future problems and gives us time to address them.
This now brings us to the end of the material in this podcast series as found in the DDI Demand Driven Planner course. To summarize, remember there are 5 components of DDMRP, Strategic Inventory Positioning, Buffer Sizing and Buffer Profiles. Thirdly, Dynamic Adjustment and then Demand Driven Planning. The fifth component is Visible and Collaborative Execution.
We have discovered that by applying some innovation to the best aspects of MRP, DRP, Lean, Six Sigma and Theory of Constraints we have developed a multi echelon materials planning and execution solution that can be used anywhere in the supply chain from raw material extract through to retail.
The benefits that DDMRP adopters are enjoying include; improved customer service, lead time compression, right sized inventories together with lower supply chain costs. But the key benefit is an easy to understand and operate intuitive system.
So, finally, the key fundamental principle of DDMRP is Flow. The main fundamental planning changes are using accurate sales orders rather than inaccurate forecasts and decoupling the supply chain with buffers. The key operational equation elements are lead times, buffer status and minimum order quantities. This we find results in higher service levels, lower inventories and fewer expedites without trade-offs. The ultimate effect is a greater return on capital employed, which has to be a major performance metric for any business.
Find out more by reading the books written by Carol Ptak and Chad Smith and attend a 2 Day Demand Driven Planner course which are run publicly around the world. They can also be run in-house at your Company with you team prior to starting a DDMRP implementation. For those of you that are unable to find a public course close to you, the DDI does run an on-line DDP webinar series, find out more on the DDI website at www.demanddriveninstitute.com.
I am Ken Titmuss and if you have any questions or queries you can contact me on email@example.com. Good luck on your DDMRP journey and if we can help, contact us.
Speaker 1:It is time for “In Process: Conversations about Business in the 21st Century with Evelyn Ashley and John Monahon”, presented by Trusted Counsel, a corporate and intellectual property law firm. For more information, visit trust-counsel.com. And now, with “In Process,” here are Evelyn Ashley and John Monahon.
John:Today we are continuing our series of “Pithy Conversations with CEOs,” and we are fortunate to have Erik Bush from Demand-Driven Technologies here with us.
Evelyn:I think this will be a very interesting chat, John, given that Erik spent lots of his work experience in a very, very large company and decided to go into a startup after retirement.
John:Yes, he’s seen a lot of different environments. So I’m very curious to hear his thoughts on working in a large corporation and then going into a smaller fast-paced company, and his different management styles in each. First, a little bit about Demand Driven Technologies: Demand Driven Technologies was founded in 2011 and specializes in cloud-based supply chain software solutions. With over 80 enterprises, Demand Driven Technologies has a global presence and a broad channel partner network.
Erik, welcome to the show.
John:I’ve already talked about the company, but I would love to hear about it from you.
Erik:We are a provider of cloud-based supply chain software. We have clients from all around the world, and we have been very fortunate to catch the wave of a new movement called Demand Driven MRP. It was introduced in 2011, and Demand Driven Technologies was the first to adopt that methodology into our Replenishment solution. We have been able to ride the wave that the Demand Driven Institute created by introducing these new concepts to the market field that has not been updated in nearly 40 years.
MRP, or Material Requirements Planning as it’s known, was invented back in the ’70s, back at a time where my former employer, IBM, was introducing computers for use in the manufacturing market place. They believed that with this MRP logic, they could address the needs of manufacturers to plan their inventories and materials in a timely manner. That logic is still in all the ERP systems and has not been changed in 40 years, yet the world we live in has been evolving dramatically.
So, this Demand Driven MRP concept is about pacing our supplies to what’s being consumed in a market, and not being dependent on forecasts. As a result, we are providing our clients with just much, much better results. There was a little anecdote we found along the way with one of our clients, Michelin, who is in the tire business, obviously. If you got back to mid-70s, there were 10 tire sizes in the US market that made up 90% of the sales volume. By 2010, the top 10 sizes only made up 38% of the market.
Erik:And there are now 700 sizes available overall.
Erik:So if you are trying to operate things in a forecast driven manner, which MRP requires, you can imagine how much easier it would’ve been back in the ’70s than it is now. So clearly the world has changed for all the obvious reasons. This Demand Driven MRP movement has really taken the market by storm. We were the first to adopt the method and have had obviously the largest install base of clients. And probably the big proof in the pudding for us is that it works. Clients get real value out of it and find that they are far less dependent on Excel, which believe it or not many big companies around the world are still using it as their inventory planning tool.
Erik:So that was the genesis of the company. We bootstrapped for several years before raising our first venture funding. But we really gained the support of several smaller consulting firms around the world that you mentioned, channel partners who really led the sales effort for us while we were trying to focus on making the technology as viable, modern and SAS-oriented as possible.
John:You had a really long career at IBM.
John:And a very successful career there. Can you tell us what you did there and what inspired you to join Demand Driven Technologies?
Erik:Sure. I was fortunate. I had actually two careers with IBM. I spent three years with the company before leaving to go out and pursue a music career, which obviously didn’t last. Then I was rehired in 1982, but during that time I was in administrative roles, sales, and later moved into the consulting division which was formed in the early ’90s. And from there I rode that tide as it started rising, and the company really developed a large service business.
So it was exciting to be part of a very big, growing entity inside of IBM. At the same time, when we got into the early 2000 decade, you could see that mass was starting to accumulate and become more difficult to grow. Anybody who’s following IBM knows that they’ve really had a challenge over the last several years. But the pros are that you’ve got the resources, you’ve got market recognition, you’ve got scale, all those things are wonderful.
On the other hand, there are a lot of disadvantages to this. As the company grows, it needs to build an organization. You start getting silos, people work in silos, you’re running through management by objectives, so they focus on what they care about. Now you can’t see the big picture and it’s challenging to get the team to work together. I have the deepest respect for all my colleagues at IBM and everything that we were able to accomplish. But at the same time, the scale of itself has some inherent challenges with it.
John:Absolutely. After you retired from IBM, how did you link up with Demand Driven Technologies, and how did you know this was the company you wanted to spend your time with?
Erik:Yes. When I retired, I thought someday I may do something entrepreneurial because I’ve always had that itch to go out and try my luck at that. But it was just kind of a circumstance, a little bit of serendipity. With a consultant that I had hired to work for our organization when I was at IBM, we were implementing some new concepts around the concept called Theory of Constraints. Anybody who has read the book The Goal in Business School would know what I am talking about.
We were applying those concepts internally at IBM. The author of that whole body of work, Dr. Eliyahu Goldratt, was working with us, so I got the great chance to work with him; he was a well-known supply chain thought leader who passed away a few years ago. He introduced me to Chad Smith who was a consultant working in his institute. Chad taught us the concepts that we applied successfully in IBM.
So I retire, and this is 10 years after Chad and I had worked together. Lo and behold, his consulting company had started writing some software, and then realized that they were not going to be well-suited in a technology business; they are more business consultants.
John:Difficult to develop, yes.
Erik:And “Hey, would you think this might be an opportunity?” And this all happened after I retired. I knew the concepts would work because we had applied them successfully inside of IBM. I just got fascinated with what it could bring to the market and the value it could create for clients. And that’s what was the genesis of the company. And yes, it’s been great since then.
Evelyn:What were your expectations, going into it? Did you have any of what you’d be doing specifically? Or what it was going to be like?
Erik:I knew it was going to be much like a green field. Yes, we had some software assets. There was one gentleman who’d been kind of a customer support person, and he was the only guy that we had left at CMG, Constraints Management Group, my co-founders. He and I started, then one of their consultants joined the team, and that was the beginning of the Demand Driven Technologies.
As you can imagine, you are doing virtually everything. Writing product specs, testing, selling, implementing, learning what this is all about. While I’d spent a lot of time with manufacturers and distributors in my IBM career, I was never this close to the action. I was learning a lot and didn’t really have any clear expectations. But, I knew it would work, and it was so intriguing to see if we could get it to go and make it commercially viable.
I talked to some venture funds at the time, who were very polite and said, “This is all very interesting, Erik…”
Evelyn:This may be a product, yes.
Erik:… you’re selling into a very sticky area. Supply chain people aren’t going to just jump from one lily pad to the next. So, you’ve got a lot of evangelizing to do.” And they were so accurate about that. But they also said, “We absolutely believe there is an opportunity here, and you are just going to need to stick at it, get to the point where there’s market recognition, and you can build some momentum out there in the market to move it forward.”
Evelyn:So did you have the expectation that you would build it into a company as opposed to building a product?
Erik:Absolutely. They wanted to get out of the software business. This kind of filled my itch to do something entrepreneurial. It was a space I knew. It was built and founded on a lot of the Theory of Constraints principles, so there was a lot ticking the box, I get this.
Evelyn:For interest, engagement, and excitement.
Erik:It was very, very similar to what we had done with using those TOC concepts in IBM. We had called it Replenishment for Resource Management. How to gauge, where to move the consulting organization skills based on actual market usage. Not based on the partner’s forecast, right?
Erik:So you think about the year of 2000, when we were doing this, right after Y2K ended, we were going into .com. The ERP was exploding, we had way too many skills in the wrong spot and not enough in the right. Obviously, it was a very challenging transition to get through. We had really done a great job migrating our staff from one place to another through these principles. So in my heart, I knew it would work, I knew it was going to be a tough slog, and the VC were absolutely right about the challenges we would face.
John:You did end up raising venture capital though.
Erik: Eventually, yes we did.
John: Yes. You’ve been quite good at that as well
Erik:Once I figured it out.
John: You got quite effective.
John:What was the thought process of going into that?
Erik:After the first forays, we realized it was too early to go out and raise money. We focused on just bootstrapping and taking all of the profits that we could generate from the software and plowing them back into the technology. Because the most important thing we needed to do was to get it to SAS, in the cloud, the modern browser-based application, and a more robust security perimeter and things alike.
Because we set that as our primary goal, we said, “We’re going to sell through the channel partners, that way we don’t have to pay for building a direct sales force,” and that would’ve been a bad move to make. What happened then was that over the ensuing four to five years, we were growing at a good rate, but you could also see that other solution providers were entering the market on this DDMRP. I didn’t want to be the founder who didn’t act quickly enough. Also, as our client base grew, the mountain of their expectations in terms of features and functions that we needed to add, grew with it.
If you’re in the software business, you know you never run out of things to do. We realized that we had to start raising money. So, in early ’17, we raised a small, convertible note round to help prime the pump. We started trying to raise money, ran into some dead ends, didn’t have the messaging right, really didn’t understand well enough investor expectations. And it was just really through a lot of good fortune that we were able to make some connections with people.
And to me, this is probably one of the most profound aspects of being in a startup here in Atlanta that I’d never really felt with IBM. I was flying all over the world, and I never really knew people because I worked out of my house for a good number of years, even though I had a large organization. We started meeting people. I met a guy, a young man, named Brad Mitchler at the Emory University Raise Forum, it’s a funding kind of exercise. He had supply chain experience with Carter’s OshKosh here in town and was intrigued with what we were doing. So he called me up last spring and said, “Hey, do you have an opportunity?” I said, “Well, I can’t really afford much but can bring you on as an intern for a while and we’ll see where it goes.”
He is a phenomenal resource in our team and he introduced me to a guy named Mike Parham who’s well known here in Atlanta as someone who really helped facilitate growing companies. Mike, with all of his connections, led us to Mosely Venture. Within a couple of weeks of making our pitch to them, we had a term sheet.
John:But it was a long process before that.
Erik:You know, just realizing, “My goodness, are we ever going to get there?” was really challenging and frustrating. But, I’m kind of one of those guys, if I’ve got an objective in mind, I’m going to try to find a way to get there.
Erik: It was really through the good fortune of making those connections that we were able to get to that first round of funding.
John:Yes, it’s always so funny to me how much serendipity plays into it, but also, it’s sort of the classic ‘you make your own luck’ right? You have to go through everything to get that opportunity and then it might happen.
Erik:And I think persistence is important. They say it’s 10% inspiration and 90% perspiration. I do think that it plays a big role in trying to make a success out of anything.
John: Clearly. One of the things I’ve been curious about is that you attracted a lot of large corporates. Some very prominent clients that I think most people would know of. It’s an area where a lot of people hesitate to disrupt. I mean, switching costs on software, especially on something important as the supply chain is, it can be risky for big corporations. It’s very sticky. You have to move out some players and convince people to, as you say, get off their Excel sheets or stop the way they’re doing it.
John: How do you go into that? What’s your angle or your pitch going in?
Erik: The first thing is that the clients are probably aware that there is a problem. Right?
Erik:If you look at the US statistics, manufacturing inventory turnover rates have really not changed in the two primary decades of the ERP deployment. If you go from 1990 to 2000 and then to 2010, our inventory turnovers are roughly flat. Now, there’s a lot of companies out there who started down their SAP journey with, “We’re going to re-engineer our business around this new software”. Yet when you look at the key operating statistics, which in inventory, it’s about turnover rates and things alike, and in service levels, are we filling orders on time? A lot of people get frustrated.
Erik: They acknowledge that there’s an issue. What we have to do is help them see that there is a better way that’s around this Demand Driven MRP concept which I mentioned. So we do that through a lot of education. We use the education that’s available on the market, and also show customers the simulations of their own data, “Here’s how this would be different.” And once they start to realize that, “Hey, we can pace to actual demand in a market, and we’re not going to run out of materials, we’re going to actually improve our service levels or our fill rates,” then they start to warm up.
But, when we started, and even now, most companies that we start up with didn’t enter the year saying, “Oh, we’re going to buy this kind of software this year.” So you have to wait for budget cycles to come through, and you have to build organizational support. The way we do that is through the pilots after we’ve done simulations, proof of concepts. After those companies got enough validation, they have said, “Yes, it works”, and that’s what really helps us grow.
We signed with Michelin to roll out to 70 of their plants, which is a huge contract, obviously. There is a Coca-Cola bottler, the other side of the Atlantic, that we are going to be signing with this month to roll out to 10 countries. So what you’re seeing is that like the VC said, in early days, this is a lot of early adopter, one-on-one, man-on-man combat to win some market share. People now have seen the value, and the market is starting to get closer to that emerging mass market phase.
Evelyn:Start looking for you rather than you having to look for them. A little bit.
Erik:I wish it was a little bit more “looking for us”, Evelyn, but yes, more of that, certainly.
John:What do you say to the people that go, “Well, Erik, I’ve heard it all before. I’ve seen a million solutions come through here, or there’s been a whole line of consultants that have come to the company saying they can fix the problem.” I mean, you must encounter that quite a bit.
Erik:Yes, I think the way we do it is through facts. Right?
Erik:If you can show people objectively, “Here’s how it will work.” Then you have got a fighting chance. If you can’t get them to that point, then fine, “Good luck, I wish you well.” We see great statistics, if we can get to the simulation stage, then there is a high propensity of those clients to go to a proposal, and a very high percentage of them will at least get a pilot project.
We are also very careful not to sell this like a silver bullet because everybody would know that it’s not the case. That doesn’t exist today. It’s used in an appropriate measure within an organization around strategic items and things alike. If they see it as part of the portfolio, then they recognize, “This is part of the toolkit I need to move forward.” Properly applied, the results speak for themselves. So many clients are getting such good improvements in inventory levels, service levels, shorter lead times, and things alike.
John: One of the things that I really like about Demand Driven Technologies is actually you all solve a real-world problem. You raise money to actually solve a real problem. We see a lot of companies that raise money, but they’re more of providing a solution that maybe people would want, or…
Evelyn: Well, sometimes a technologist will develop something because that person thinks, “Yes, this is really going to be great,” without knowing that there’s ever a customer that would actually buy it.
Erik:Yes, we take a lot of pride in delivering value. Even during my IBM career, the thing that I learned first in sales when I started back in Cincinnati was that we have to solve problems for people. If you solve problems for people, the selling gets way easier. I mean, I actually had a client walk out of the office on me who was frustrated that I wasn’t adding value to his day. I sat there for 20 minutes and his secretary finally walks in, he goes, “Jim’s not coming back in.”
And I walked back. No, this is a true story. This is one of those moments in your life-
Evelyn:Those big learning experiences.
Erik:… where you realize, “I think I’m going to go back and get fired.” And I realized I wasn’t helping him, and it just changed my whole mindset about how to approach companies and customers. There are problems everywhere to be solved, just focus on those, right?
John: How is the experience different of going into an organization with IBM versus a company that doesn’t have the same brand recognition, but is a lot more passionate, probably, about the issues?
Erik: Obviously with IBM, you have so much credibility, especially when I was coming up through sales, this is the late ’70s, early ’80s, so the market was there for IBM. There was a lot of credibility. As time passed by, that credibility got somewhat diminished because competitors entered the market. IBM didn’t adapt as well as it could’ve in the story change, but I think the core values of trying to serve clients was still very, very important. And I think the important dimension that I have tried to carry into Demand Driven Technologies is to solve problems for people.
If we do that well, then we are going to win our share of the business that’s out there. At the same time, I’m not trying to bring bureaucracy, I’m trying to just instill the right value system in the company to help us really make sure we’ve got a right compass heading in terms of what’s important.
Evelyn:That you’re a customer driven organization.
Evelyn:And keep that cultural view. So then, are you doing direct sales now, too, or you’re just focusing on channel partners?
Erik: Absolutely. The major piece of the play that emerged with the funding is that we also saw that we needed to start driving our own sales agenda. So we brought on a young man named Sean Banks this year, obviously, supported by the funding that we raised. Sean had experience with SalesForce, QA Symphony, and some other tech startups, and has immediately, within the first three months of being on board, brought a new dimension. So, our pipeline of direct sales is growing at a rapid rate. We have a version of our software that runs Native in NetSuite which is a well-known ERP system. So we are focused on that market, plus kind of mid-market side from a direct sales standpoint, and we think there’s a lot of opportunities out there.
It’s also easier to get to because the decision cycles are much quicker than in the big companies.
John: So, what is the corporate culture like at Demand Driven Technologies?
Erik:I think it’s very healthy. There is a very good buzz in the team. We are, I think, very casual, but at the same time, the whole team is very focused and driven to what we’re trying to accomplish. I think people see that there’s a bigger purpose to what we are doing. It’s not just about having a tech startup and trying to make money that way, it’s that we are helping to solve real problems for companies. I think there’s a sense of pride that you can get out of taking that kind of mindset into what you do every day.
As you would imagine, there’re a lot of challenges in a startup. You have to be very adept at broken field running and figuring out things on the fly, and the key adage or phrase that we’ve been using, you hear it on the floor every day, is “It’s just that easy”. We have no idea how we’re going to fix it yet, but we’re going to keep thinking that it’s just that easy because if we break these challenges up the right way, we’ll figure out the solutions for them, right?
John:Yes. So what is your management style? Are you “hands-on”? Are you “let people run free”?
Erik:I am a little bit dictator. No, I think the biggest thing that is so unique about small companies is that it’s all about growth, right? And growth in itself is a wonderful thing, but at the same time, it’s an incredible challenge. I went from doing all this stuff to trying to carve things off to give to Brad when he came on last year. And now he’s tapped out, way too busy, we need him to start carving off things and giving them to his staff. And so growth is all about pushing down, down, down. You know, what can I delegate? How can I get people at the lower levels of the organization? We’re a very lean organization, not a very large structure at all to delegate and leverage. Because that’s how you can grow the business.
To me, the greatest metaphor is if you watch a skyscraper going up, there’s a crane at the top that they use to bring all the construction materials up to the top floor. Then it keeps going up as the building grows. How do they do that? I’m sure there’s a Discovery Channel episode that will show you how they do that, but it’s a good visualization of as we, the leadership team, continue to try to grow the business, we have to keep building structure underneath us, right? And so the things that I look for in guys like Brad and Sean are people who are very adept at dealing with unstructured environments, who have this all figured out and have “it’s just that easy” kind of spirit to them.
If we can then bring that to the next wave of folks and then the next wave of folks, then we’ve got the right scaffolding to let the company grow. Where you have to push down. Which means inherently, if you are a leader, probably next year you’re going to carve off a big chunk of what you’ve been managing and giving it to somebody else. Try to do that at IBM.
Erik:You know, I’ve got my organization, right? And that’s part of the challenges you run into. People have their principalities and-
Evelyn: Right, their job security sits in their control.
Erik: “This is my space”. Yes. And so trying to really infuse that kind of, “This is how we build the scaffolding to grow the company.”
John:Yes, that’s great.
Evelyn:It’s excellent you’ve got that differing perspective, actually. You learned the one and then now you’ve got the freedom to be able to use the good things.
Erik: Actually, I got a great lesson in this in the tail end of my career. I was responsible for building out our global delivery organization, and this was software maintenance and development resources in India, China, and other developing countries all over the world. And we were able to grow that team from 10,000 range to five times that size in about four or five years.
Erik:And one of the interesting things I learned about that was what it means from a leadership standpoint. If you think about that time span and how fast the organization is growing, if the normal manager needs three to five years to become a middle manager, and another three to five to become an executive leader, then the organization is growing too fast. And you cannot just bring in those people from the outside because they won’t know your culture, how you operate, and thins alike. So it led us to create some leadership development programs to really think about this as a constraint that we had to overcome in order to enable the growth.
So I was very fortunate to have that experience because it really taught me a lot about the challenges that we’re dealing with at DD Tech now.
John:Yes. So what are some of the KPIs that you look at for the company? When you are trying to see what the health is, where things are going, what’s on your radar?
Erik:Sure. I think about it in three basic dimensions. From a selling standpoint, we look at our pipeline. What’s the pipeline of opportunities? That’s pretty basic. Then we look at bookings. What contracts have we signed? There’s a delay between when we sign contracts and when the revenue comes in because of the implementation timelines and things alike. And the third aspect of sales would be annual recurring revenue because that’s really the barometer that the investors are looking at the most. Is the ARR growing at a good rate and how are we proceeding on that front?
From the product to software standpoint, there are two dimensions to that. One is software development, and how we are doing at hitting our roadmap and our milestones. We’ve made great progress on this in the past six months, but before that, it was very difficult. We were only a two or three person software team, so we were constantly getting interrupted with things and whatnot. And the other side of the software front is the operations, as a SAS company now, we are running these systems for roughly 80 companies around the world. We are running a big virtual data center. We use Microsoft’s Azure platform as our hosting environment because they have great scalability and security.
There was a whole learning curve to really knowing how to optimize that. And then obviously, to the client side of that, the most critical thing is whether we are hitting our SLA targets. Are we hitting extremely high availability? How many ninths to the right of the decimal point and have we had great success with that? No major downtimes or things alike. So the KPIs from that space would be release schedules and our service level agreement metrics. And then financially, it’s cash. We are bringing the cash at accelerating rates so that we can scale the company while maintaining that bootstrapping mindset and being very diligent in our use of invested capital. We are doing this in respect to the investors and the commitments they have made and trying to leverage our own equity in the process as well.
John:So do you do strategic planning at all? I mean, do you sit down?
Erik:Not the way we did at IBM.
Erik:It’s about an hour long conversation. No. Versus weeks. We had a very good episode around this. Good question, John, because we had the good fortune of presenting at Venture Atlanta, which is a prominent US Southeast Venture Conference. As a presenting company we were there and got great contacts out of it. But one of the key things that happened at Venture Atlanta was that they had Zach Nelson, who is the former CEO of NetSuite, and saw it grow from roughly a million to several hundred million in revenue and it was, I think, the largest SAS company exit ever on record.
He had some remarks, telling the story about how their evolution was, but the one thing that I really caught on was he talked about the ‘must do’. In their culture, they really had this must do mindset. What are your must-dos? And why do I bring that up? Well, because there is no shortage of things for us to do as a leadership team, and it’s about picking those critical success factors that you absolutely have to do well in order to be able to get to the next milestone, the next point on your journey. And I could feel at times that we were starting to chase too many priorities.
Erik:So in setting up our plan that we presented to the board in December, I asked each member of the team after setting up the global must-dos for the company, to carve out the things that they need to do. We’re going to keep referring back to these each month as a balancing point to make sure that we’re not getting lost in all of the minutiae of things that need to be done, and trying to stay focused on those critical dimensions.
It’s a lighter weight strategy process. It’s one that we will come back to probably in a more formal way as we go forward, but it touched all parts of the organization. Software priorities, sales and marketing, channel development, finance, and operations.
Evelyn:So, do you have any 20/20 hindsight you would like to talk about? You wish you’d known that maybe you would’ve done differently or if you’d known maybe you wouldn’t have done it at all?
Erik:There’s a very important one, Evelyn, that I still refer to. I think it was about a year and a half, two years ago, I read a book by Geoffrey Moore called Crossing the Chasm. It’s about technology adoption.
Erik:And it’s an incredibly useful piece of work because it really talks about the difference between the early adopter stage of the market and then the mass market.
Erik:The whole thesis here is that it’s not a continuum, that there’s a chasm. And if you don’t recognize that chasm, it’s going to be fatal.
Evelyn:You’ll never cross it.
Erik:Right. And the chasm is because the mass market buys on different buying principles than the early adopters do. And what that means is that you’d better finish out and get rid of technical inelegance. You’ve got to make a whole product, as he talks about. And more than anything, you need to focus on target markets, because you’re never going to prove this to everybody until you prove it to somebody, some smaller population in real depth.
Erik: And so we used that kind of thinking to start pivoting a bit. We are still going to take any business that comes our way, but from an outbound marketing standpoint, it’s really about some key industry segments like consumer goods, I mentioned the Coca-Cola bottler that we’re starting up with. Michelin is kind of in that space even though it’s a different flavor of consumer goods, and then a couple of key ERP platforms where we can further integrate our solutions.
So by following those strategies, had we started that earlier, I think we probably would’ve been some steps ahead of where we are at right now. You need to read the book. I’ve read it several times. But I think that’s probably the biggest hindsight I would catch on to.
And then the second one would’ve been a year earlier when we were getting to a point where we could raise funding and that would’ve helped us a lot. I think all of those are great lessons to have learned at the same time, in terms of informing how we go forward from here.
Evelyn: Absolutely, I mean, as long as you take that knowledge and you execute it going forward, right?
Erik:Yes, it’s all about recognizing that you don’t know what you don’t know. And if you’re afraid to learn those things, then you’re never going to get out of the trap, so we really try to bring a dose of humility to all this and recognize those things that we need to do better. I think that’s really starting to work to our advantage now.
Evelyn:Are there any really great surprises that you’ve had in doing DD Tech?
Erik:One is as we started building the global client base, it started feeling like a very tiny little IBM. Because I’m flying all over the world to meet with clients in Australia and Africa and places like that. But that was kind of surprising. I didn’t see that coming. The other thing was the buzz I would get out of being an entrepreneur. Probably the one moment in my career that really stands out is, this was December of 2017, I am flying out on the 7th to meet with my software team. You know, I land in Seattle that morning after a five hour flight, and I open up my phone and I look at all these emails about funding notices and commitments coming in from our investors.
Oh my god, the buzz that it gave me is something I’ll always remember.
Erik:Oh my gosh.
John:That was a great moment, so-
Erik: Well, and I appreciate all the help you guys provided us along the way.
John:Well, you guys are doing all the hard work.
John:It’s been fun, and I have to say, Erik is the hardest working CEO out there. Every time I talk to Erik on the phone, I have to start with, “So, where are you?”
Evelyn:Come on, John, he’s working a 28 hour day, what do you expect?
John:Yes, he’s everywhere. He’s in Seattle one day, South Africa the next day. He’s traveling the world making sales. I guess there’s a global need for this software.
Evelyn:Making it look so glamorous, Erik.
Erik: Oh yes. Quite glamorous to go coach flying a 15-hour flight to South Africa. It’s delightful.
John: Yes, exactly. Well, Erik, it’s been a pleasure. This has been very insightful, we’ve really enjoyed it.
Erik: I appreciate the time.
John:If people want to learn more about Demand Driven Technologies, where should they go?
Erik:Well, they could come to visit us. They can find the information on our website, we have our first America’s User Conference coming up in May down in Miami and if they are in Europe, we have our second European User Conference coming up in Bilbao, Spain at the end of March.
Erik:So that would be one way to learn more. Obviously, there’s a lot of information on our website. We’ve got webinars. We’ve got one coming up on consumer goods, actually talking back on our industry strategies, later this month with Chad Smith. Yes, just reach out. We would love to hear from you and see if we can help out.
John:And what’s the website?
Erik:It’s a long one. We couldn’t get the ddtech.com URL, unfortunately. Give us a couple more years, we’ll try to work that out.
John:All right, well, thank you, Erik. It’s been a pleasure.
Evelyn:Thanks, Erik. This was great.
Erik: Thanks, folks. Really appreciate it.
Speaker 1:This has been In Process: Conversations about Business in the 21st Century with Evelyn Ashley and John Monahon. Presented by Trusted Counsel, a corporate and intellectual property law firm. Are you interested in being a guest on our show? Email our show producers at firstname.lastname@example.org. For more information on Trusted Counsel, please visit trusted-counsel.com.