In my last post, I talked briefly about the benefits of being demand driven using Demand Driven Material Requirements Planning (DDMRP): lower inventory levels and increased service levels.
You may be thinking, “Yeah, Ivan, that all sounds good, but isn’t that what other methodologies like Lean Manufacturing were supposed to do? What’s the difference here?”
If so, you’d be right. DDMRP exploits some of the principles found in other methodologies, but it also modifies them and arranges them into a consistent, organized, and easily executable process. The first key principle, and the one that separates DDMRP from many other approaches, is that of decoupling stock buffers.
DDMRP takes advantage of the prepositioning of strategic decoupling stocks (buffers) to ensure reactivity to real demand and the organized management of supply priorities. This strategic decoupling mechanism protects the relevant flow of information and materials, as the system is set up so as to allow the buffers to absorb both supply and demand variability, thereby limiting the perturbations that traditional planning logic triggers with each new round of planning cycle (the famous "nervousness" of traditional MRP).
How DDMRP differs from MRP
We need to note that traditional MRP also makes use of security stocks to "protect" against variations in demand and supply. However, very often traditional safety stocks are calculated using out-of-date data or even simply estimated based on operator experience. Furthermore, in my own consulting experience, I rarely see manufacturers take the time to update safety stocks more than once a year. More often than not, they can’t even remember the parameters that dictated the original sizing.
MRP also releases replenishment orders based on expected future consumption (forecasts). But as noted so often, forecasts are always wrong, and the further out we try to forecast, the more wrong they are. No matter how much we tinker with forecasting processes and protocols, this is always the case.
And it’s not going to get any better. Today's reality is very different from what existed when MRP was conceived and adopted in the 1950s and 60s. Our current context is characterized by extreme volatility and reaction times required by the ever-growing market. As a countermeasure to this volatility, safety stock is included in the planning parameters, but it often proves ineffective and exacerbates the bullwhip effect.
wHy Lean Manufacturing Often Fails
Experts in Lean Manufacturing and proponents of Pull logic addressed, at least partially, the problems of nervousness through synchronization mechanisms such as demand leveling (e.g., the Heijunka board) and replenishment signals based on consumption (e.g., Kanban and the Pull supermarket).
Over the years, I’ve implemented many Lean and Pull systems and have seen first-hand some intrinsic weaknesses of this approach. One of the main challenges is the difficulty of merging the management of the data in the ERP system with decoupling structures placed on the shop floor.
Very often, manufacturers end up running “off-system" a procurement process based on Kanban and Lean supermarkets. While that works on paper (sometimes literally on paper), it can easily throw off the system, especially in light of the reality in today’s markets and shop floor environments: seasonality, changes in consumption profiles, lost Kanban cards, etc.
DDMRP offers a way to account for demand visibility with decoupling buffers that the purely consumption-based approaches of Pull and Lean Manufacturing do not. This becomes more evident as you dig into how these decoupling buffers work, but for now, it’s safe to say that the Lean Manufacturing world is a bit like an ancestor of DDMRP.
6 More Bottom Line Benefits of DDMRP
In my last post, I mentioned a couple of the most notable benefits of DDMRP: lowering inventory levels and increasing service levels. Typically, my customers lower their inventory levels anywhere from 15% to 30% from their current position within weeks of implementation.
But, there are far more benefits of DDMRP for those of you who have additional KPI goals as part of your continuous improvement efforts. Here are a few:
1. Lower Obsolescence.
When you’re only ordering what you need, your stock has less time to become obsolete. This benefit of DDMRP is especially pronounced in consumer goods manufacturing, which often deals with perishable items. Chad Smith of the Demand Driven Institute recorded a webinar focused on the benefits of DDMRP in the FMCG (Fast-Moving Consumer Goods) industry. You can find that on Demand Driven Technologies’ resource page here.
2. SErvice LEvel Increases.
The improvement in service levels can be seen in both lower lead times (always important for those of you in highly competitive markets) and improved performance on commitment dates.
3. Increased Agility.
This is hard to tie to a specific metric, but as noted earlier, when you aren’t clogging your pipeline with excess production and materials, you can be more responsive to customer requests. Most of my customers see this expressed as an increase in sales.
4. Less Overtime.
In some production environments, the sense of panic is almost palpable. That’s because every change to the production plan means the shop floor has to scurry to adapt. Often, it’s “all hands on deck” with staff being asked to stay late to finish a run.
While I can’t say DDMRP never means having to adapt to last minute requests or unexpected delays, there are far less of them to deal with because you’re already buffering your critical resources, and again, not clogging production with work you won’t need. And, when things do crop up, you can adapt to customer and market opportunities as well as challenges more easily.
5. Lower Order Management Costs.
With less last-minute, hectic rearranging of production, other costs go down. For example, planners don’t need to spend as much time adjusting and readjusting the plan. (Leaving more time to work on activities with a greater value-added benefit to the organization.) Less expediting is needed as well, so cost of materials often goes down as does overhead such as shipping.
6. Higher Margins.
Margins suffer when manufacturers have to lower prices to win the business or when overhead costs like the cost of expediting orders rises. DDMRP often lets manufacturers cut lead times so dramatically that they aren’t forced to lower prices to compete. Many have even been able to charge a premium. And, as we’ve just discussed, a more predictable, less variable production plan lowers overhead costs that can eat into margins as well.
The Right Tools Can Stop the Noise
Overall, there’s just less noise in the system with DDMRP, especially when you use tools like those available from Demand Driven Technologies. Role-based dashboards show planners and others precisely what they need to do for the day, focusing their attention on the most critical items first. And, unlike the off-system solutions used with other methodologies, Demand Driven Technologies DDMRP tools can easily be bi-directionally integrated with almost any ERP system on the market today.
If you have questions about DDMRP or any of the points I’ve made in this post, feel free to connect with me on LinkedIn or reach out to Demand Driven Technologies directly to explore the potential impact of DDMRP in your organization.
Ivan Lavatelli, PMP, CPIM, CSCP, SCOR-P, is a certified supply chain professional and APICS instructor with more than 20 years of experience helping organizations of all sizes improve their supply chain management practices. From his home base in Italy, he leads PwC’s DDMRP practice and was named a Top 10 instructor for 2019.