Demand Driven Material Requirements Planning (DDMRP), Version 2. Carol Ptak
simultaneously.
This bimodal distribution is rampant throughout industry. It can be very simply described as “too much of the wrong and too little of the right” at any point in time and “too much in total” over time. In the same survey noted earlier, taken between 2011 and 2014 by the Demand Driven Institute, 88 percent of companies reported that they experienced this bimodal inventory pattern. The sample set included over 500 organizations around the world.
Three primary effects of the bimodal distribution are evident in most companies:
1. High inventories. The distribution can be disproportionate, as many planners and buyers will tend to err on the side of too much. This results in slow-moving or obsolete inventory, additional space requirements, squandered capacity and materials, and even lower margin performance as discounts are frequently required to clear out the obsolete and slow-moving items.
2. Chronic and frequent shortages. The lack of availability of just a few parts can be devastating to many manufacturing environments, especially those that have assembly operations and common material or components. The lack of any one part will block any assembly. The lack of common material or components will block the manufacture of all parent items calling for that common item. This means an accumulation of delays in manufacturing, late deliveries, and missed sales.
3. High bimodal-related expenses. This effect tends to be undermeasured and underappreciated. It is the additional amount of money that an organization must spend in order to compensate for the bimodal distribution. When inventory is too high, third-party storage space may be required. When inventory is too low, premium and fast freight are frequently used to expedite material. Overtime is then used to push late orders through the plant. Partial shipments are made to get the customers some of what they ordered but with significantly increasing freight expenses.
Why the bimodal distribution occurs is explained in Chapter 3. It is a combination of basic MRP traits, the type of demand signal that is typically used in conjunction with MRP, and the complex volatile supply chain environment within which companies now must operate.
Experienced planning and purchasing personnel know that if they simply follow what MRP recommends, they will be in big trouble. Shortages will increase. Excess inventory will increase. Expedites will increase. Intuitively, planners understand that materials and inventory management, under conventional practices, places them in a no-win situation. What happened to the promise of MRP as verbalized by Joe Orlicky in the beginning of this chapter? The answer is exceedingly simple: the world changed and MRP did not.
The circumstances under which Orlicky and his cadre developed the rules behind MRP have dramatically changed. Customer tolerance times have shrunk dramatically, driven by low information and transactional friction largely due to the Internet. Customers can now easily find what they want at a price they are willing to pay and get it in a short period of time.
Ironically, the planning complexity is largely self-induced in the face of these shorter customer tolerance times. Most companies have made strategic decisions that have directly made it much harder to do business. Product variety has risen dramatically. Supply chains have extended around the world driven by low-cost sourcing. Product complexity has risen. Outsourcing is more prevalent. Product life and development cycles have been reduced.
Add on top of this an increased amount of regulatory requirements for consumer safety and environmental protection, and there are simply more complex planning and supply scenarios than ever before. The complexity comes from multiple directions: ownership, the market, engineering and sales, and the supply base. While this complexity has risen, the potential of technology has progressed and accelerated. The lack of significant financial return on technology investments would strongly suggest that this potential, up to this point, has largely been squandered.
Figure 1-4 is taken from Demand Driven Performance: Using Smart Metrics by Debra Smith and Chad Smith. The figure shows the tremendous difference in supply chain circumstances between 1965 and 2015.
FIGURE 1-4 Changing supply chain circumstances
From Debra Smith and Chad Smith, Demand Driven Performance: Using Smart Metrics, McGraw-Hill, 2013, p. 9.
We appear to have come full circle as MRP, according to observable, prevailing, and widespread effects across the world, now appears to be guilty of the same deficiencies as the techniques that preceded it. Software is simply a tool that translates and reinforces rules into a routine. If the rules behind the software are inappropriate and outdated, then the rules must change before the tools can change. In recent years, however, industry and software providers have attempted to combat increasing complexity with more sophisticated software applications, applications with the old rules still embedded at their core. The net effect is that we have improved the efficiency of doing the wrong or inappropriate things. Money and energy spent to optimize antiquated rules with increasingly sophisticated tools are wasteful, distractive, and counterproductive. Given the current world of increased variability and volatility, conventional planning logic now requires a fundamental overhaul. The authors think Joe Orlicky would agree.
The authors’ self-imposed mission was to stand on the shoulders of Joe Orlicky’s incredible vision in order to see further. This book proposes elegant and intuitive alternative planning rule sets to address the volatile twenty-first-century landscape. Complexity cannot be combated with more complexity. Effective and simplified rules and subsequent tools are necessary for a company’s resources to work more closely in alignment with the market, enabling a demand driven world. There can be no more lip service to small incremental changes that may or may not improve a company’s performance; concrete and proven tactics are required that drive sustainable bottom-line results. Where to start?
To understand why precise high-powered tools like MRP are not living up to their potential as well as the direction for a potential solution, let’s start at a fundamental level. All for-profit entities have the same objective: to drive shareholder equity. Thus the rules and tools within a for-profit entity must be aligned to that objective. There is in fact a fundamental principle that aligns business rules and tools to that objective.
Manufacturing comprises a bewildering and distracting variety of products, materials, technology, machines, and people skills that obscure the underlying elegance and simplicity of it as a process. The essence of manufacturing (and supply chain in general) is the flow of materials from suppliers, through plants, through distribution channels, to customers; the flow of information to all parties about what is planned and required, what is happening, what has happened, and what should happen next; and the flow of cash.
An appreciation of this elegance and simplicity brings us to what George Plossl (a founding father of MRP and author of the second edition of Orlicky’s Material Requirements Planning) articulated as the first law of manufacturing:
All benefits will be directly related to the speed of flow of information and materials.
“All benefits” is quite an encompassing phrase. It can be broken down into components that most companies measure and emphasize. All benefits encompass: