Demand Driven Material Requirements Planning (DDMRP), Version 2. Carol Ptak
distribution. Thus the bimodal distribution starts with the use of planned orders based on that forward-looking forecast.
FIGURE 3-2 Average forecast accuracy across industries
Rohan Asardohkar, August 22, 2012, http://www.forecastingblog.com/?p=423
This is a known and accepted routine in most industries despite the waste and performance erosion associated with it. Why would industry intentionally sabotage performance by using an input with known inaccuracy to drive activity and commitments when there is an obvious alternative? Why not just use only sales orders?
The most accurate form of demand input is a sales order. A sales order is a stated intention and commitment to buy from an actual customer in terms of both quantity and time. It is essentially an uncashed check. In this way it is a highly accurate and relevant piece of information. There should be no debate that sales orders are an order of magnitude more accurate than planned orders. So why don’t companies simply load only sales orders into MRP?
Using MRP with only sales orders, however, assumes something that does not exist in today’s New Normal—enough time. A basic attribute of MRP is to net to zero across the entire network of dependencies. This means that MRP by definition makes all activities dependent on each other. Thus, in order for MRP to be that perfect JIT system, there must be sufficient time to procure and make everything to the stated demand—called “cumulative lead time” (the longest stated chain of time in the bill of material including purchasing lead time).
This means that customer tolerance time would have to be equal to or greater than the cumulative lead time. Today’s supply chains, however, are characterized by shorter and shorter customer tolerance times and extended, elongated, and increasingly complex supply chains. There simply is not sufficient visibility to sales orders soon enough to properly plan for them using conventional MRP. Figure 3-3 conceptually shows the disparity between when companies gain visibility to sales orders (actual demand) versus the time that it takes to procure and produce the product (the time frame in which MRP makes it calculations).
FIGURE 3-3 Manufacturing and procurement times versus sales order visibility
FIGURE 3-4 Planning horizon depiction
With MRP’s characteristic of making everything dependent, the only way to find enough time is to attempt to predict what actual demand will look like so that an organization can attempt to ensure that the necessary materials are available in quantity and time as the market places its sales orders. A “planning horizon” extends into the future far enough to cover the cumulative procurement and manufacturing cycle. Figure 3-4 shows the planning horizon covering the cumulative procurement and manufacturing cycle in the example.
This explains the need to load MRP with demand that is largely derived from a forecast and then to make adjustments close in as sales orders become visible. Planned orders for end items are launched at the beginning of the planning horizon. The longer the procurement and manufacturing cycle, the longer the planning horizon must be. The longer the planning horizon, the less accurate the planned orders will be. The less accurate the planned orders, the more course corrections are required. This constant set of corrections brings us to another inherent trait of MRP called “nervousness.”
MRP’s nature of making everything dependent creates nervousness. Nervousness is the characteristic in an MRP system related to changes in parent demand transferring down and across bills of material. The APICS Dictionary defines nervousness as:
The characteristic in an MRP system when minor changes in higher level (e.g. level 0 or 1) records or the master production schedule cause significant timing or quantity changes in lower level (e.g. 5 or 6) schedules or orders. (p. 86)
Figure 3-5 illustrates the concept of nervousness. The figure illustrates the product structure for an end item called FPA. A timing or quantity change in FPA ripples down through the entire product structure, causing timing and quantity changes at every component position as the system constantly strives to net to zero. The dotted curved arrows depict that change. This creates a constant series of action messages for planners and buyers to review and interpret.
The challenge of system nervousness has been known since the earliest days of MRP. However, the system nervousness was manageable since plans were done once per month. Concepts like firm planned orders, the demand time fence, and the master production schedule were developed to manage the nervousness. But the complex and volatile environment characterized by the New Normal makes the issue a bigger challenge. Given the nature of MRP to make everything dependent, the only way to stop nervousness is to make no changes. Yet that would mean significant service challenges, as the forecasted orders will vary (many times dramatically) from what the market will really desire. What can be done to limit the impact of nervousness? MRP users are forced into compromises in order to slow down the rate of changes.
FIGURE 3-5 Nervousness illustrated
In most conventional environments, planning occurs in weekly buckets. This is a direct effect of the nervousness discussed above—nervousness that is directly related to the use of planned orders with MRP. Planning organizations know that if they ran MRP daily, or worse yet in real time, the resulting nervousness would create chaos. The amount of action flags and messages on the planning screens would be overwhelming.
Instead, a weekly interval is typically used to calm the waters on a daily level. This, however, comes at a price. First, it forces the planning horizon to extend even further (one week). This has a direct correlation to the level of signal inaccuracy at the end of the horizon. Second, it creates a latency that almost guarantees that the level of change between MRP runs will be dramatically larger. Instead of lots of little changes on a daily basis, there are massive changes (and signal distortions) on a weekly basis.
Figure 3-6 depicts the differences in net change impact between daily and weekly MRP runs. The upper left hand bar chart depicts MRP run each day. The level of each change is relatively small but each change ripples through all lower dependencies. The bar chart in the upper right portion of the graphic depicts a weekly MRP run. Days 1–7 are stable (no change) yet Day 8 introduces a significant change (40) that will ripple through the environment. The relative difference in changes is depicted in the chart in the lower left corner of the graphic.
Planning organizations are stuck between these two hard places because of MRP’s hardcoded trait of making everything dependent.
Flattening the Bill of Material
Another way to combat nervousness is to reduce the number of connections that MRP sees and calculates against. One way to accomplish this is to “flatten” the bill of material of a product. MRP from a planning and synchronization perspective then becomes blind to intermediate components. Figure 3-7 illustrates the difference between a full product structure (on the left) and a flattened one