What’s the greatest manufacturing innovation in history? I’ll bet a lot of you immediately thought, “the assembly line.” Introduced by Henry Ford in 1913, the assembly line revolutionized manufacturing, reducing the time it took to build a car from half a day to just over two hours.
The only problem with Ford’s innovation was that it didn’t leave much room for variation. As Ford famously said, “Any customer can have a car painted any color that he wants so long as it is black.” Every variation complicated production, materials planning, and consequently, costs.
MRP Changes Everything
Of course, customers in the first decades of the 20th century were a little less demanding than those in the latter half. Reorder-point replenishment, where buyers procured materials as supplies ran low, worked well enough. Lead times could be an issue, but as with a lack of a choice in color, customers were accustomed to waiting.
Then, in the 1960s, industry innovators developed a concept called material requirements planning or MRP. MRP took a time-phased, forecast-driven approach to inventory replenishment, theoretically allowing manufacturers and distributors to buy just what they needed, when they needed it.
Black & Decker was the first company to implement MRP in 1964, but by 1975, MRP had been implemented in more than 700 companies. Today, MRP has become the de facto standard, and almost every ERP system has MRP functionality built in.
Is Material Availability Making You Nervous?
Like the mass-production innovations of the previous century, MRP has its drawbacks. The greatest flaw is what the industry calls MRP “nervousness.” APICS defines nervousness this way:
Nervousness: 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.
Nervousness is one of the primary factors leading to the bullwhip effect, a supply chain phenomenon that has been widely recognized for decades. The short definition of the bullwhip effect is the bi-directional transference and amplification of variability.
A common analogy that’s often used is the child’s game of telephone. One child whispers a phrase into the next child’s ear. In turn, that child whispers that phrase into the next child’s ear, and so on, down the line. The second child might make a minor error, but errors are amplified by the third child. By the time the 10th child states what he or she heard out loud, the phrase bears little resemblance to the original.
Unfortunately, the amplification of supply chain variability isn’t so hilarious. The more nodes on the supply chain, the worse it gets. So, as supply chains grow more complex, variability has even more of an impact on lead times, service levels, and inventory levels.
A New Model for a New Era
In 2011, Carol Ptak (former president of APICS) and Chad Smith, founded the Demand Driven Institute to champion a concept called Demand Driven Material Requirements Planning, or DDMRP.
DDMRP doesn’t replace MRP. It adapts it for the modern supply chain. Instead of being forecast driven, DDMRP is demand driven. And, DDMRP uses strategic decoupling points to dampen the effect of the demand and supply signal distortion that leads to the bullwhip effect.
While manufacturers and distributors have been challenged to achieve the promised benefits of material requirements planning, DDMRP has produced real results for the hundreds of manufacturers and distributors who have implemented it. Our customers have reduced lead times by as much as 80% and inventories by 35-45% on average.
For example, Haceb, a manufacturer and distributor of kitchen appliances, leveraged our Replenishment+ solution to apply DDMRP to their materials management. As a result, they increased sales by 27% even as they decreased finished goods by 82%.
When we talk with material planners about how Replenishment+ has changed the way they approach materials planning, they almost always mention how they have greater control with less effort. When they were using MRP, they’d start out the day with a plan, but by 9AM, everything was thrown off. They’d spend the rest of the day trying to sort it all out.
Now, with DDMRP, it’s like putting material requirements on autopilot. When flying a jet, a pilot has gauges that tell him or her how critical systems are performing. With a few adjustments, the pilot can correct for any errors. They don’t need to keep a tight grip on the controls at all times. That’s the philosophy behind DDMRP.
To learn more about DDMRP, we highly recommend watching several of the webinars available on the Demand Driven Institute’s website. Here’s one that’ll get you started:
We also offer a no-risk approach that allows you to see how DDMRP can help you. Using your data, we can simulate a DDMRP environment. In a fraction of the time it would take to run a pilot program, you’ll have the data you need to evaluate the business case for DDMRP.