Partners with. An Introduction. All contents copyright 2018 Demand Driven Institute, all rights reserved.

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1 Partners with An Introduction

2 Introduction Roberta McPhail, CPIM,CIRM,CSCP, DDPP, CDDL, PMP, CLTD 25 years of direct industry experience mostly metals and plastics industries. Up to level of Director of Supply Chain Planning. 8 years of training\consulting experience in supply chain Director of Corporate Training\Biz Development for APICS Vancouver APICS Master Instructor teaching thru out BC (BCIT and Camosun) Demand Driven Instructor(only one in Canada) Fresh Connections Instructor Associate Consultant for CMG- contraints mgt group (demand driven consultants)

3 Lets Review - How do we plan and managing inventories in Supply Chain What methods and tools do we use?

4 Who is doing this ddmrp thingy?

5 Is there software? YES!

6 Material Requirements Planning Joe Orlicky Features: Time Phased Planning Level by level BOM explosion Dependent demand planning Benefits: Component synchronization Reduction in inventory Improved priorities As this book goes into print, there are some 700 manufacturing companies or plants that have implemented, or are committed to implementing, MRP systems. Material requirements planning has become a new way of life in production and inventory management, displacing older methods in general and statistical inventory control in particular. I, for one, have no doubt whatever that it will be the way of life in the future. Orlicky 1975 MRP did become THE way of life for planning. It was conceived in the 1950s with the prevalence of computers. It was codified in the 1960s by a small group of practitioners. It was commercialized in the 1970s By 1990 most manufacturers of even modest scale had an MRP system

7 But Something is Terribly Wrong Companies Using Spreadsheets for Demand Management Most Planner and Buyers mistrust their planning tools. Best-in-Class 63 Industry Average Laggards Spreadsheet use is rampant and often unmonitored Aberdeen Group (Demand Management, November, 2009) Close to 90% of spreadsheet documents contain errors, a 2008 analysis of multiple studies suggests. Spreadsheets, even after careful development, contain errors in 1% or more of all formula cells, writes Ray Panko, a professor of IT management at the University of Hawaii and an authority on bad spreadsheet practices. In large spreadsheets with thousands of formulas, there will be dozens of undetected errors. These spreadsheets have limited capability, scalability and transferability. They also are error prone. Wall Street Journal s MarketWatch, April 20, 2013, Jeremy Olshan

8 The Father of S&OP Planning says they got it wrong

9 Complex and Volatile is the New Normal Supply Chain Characteristics 1965 Today Supply Chain Complexity Low High Product Life Cycles Long Short Customer Tolerance Times Long Short Product Complexity Low High Product Customization Low High Product Variety Low High Long Lead Time Parts Few Many Forecast Accuracy High Low Pressure for Leaner Inventories Low High Transactional Friction High Low Today s supply chains look VERY different from 1960 s supply chains when conventional planning rules were formulated but Conventional planning rules have not appreciably changed since the 1960s. MRP still plans today the way it did 50 years ago!

10 The New Normal and Inventory Implications Supply chains have elongated and fragmented while customer tolerance times have dropped dramatically. This disparity means holding stock at some strategic point is a must to keep and/or grow sales. This also means that planning horizons are more remote from actual demand realization (longer range forecast). Also, there are more products with shorter life spans to manage - many use common components and resources. This means managing stock positions effectively is a must for effective capital and resource management. This also means that detailed item level forecasting is much more difficult. The three rules of forecasts: 1. They start out wrong 2. The longer the range, the more wrong they are 3. The more detailed, the more wrong they are How is the conventional approach faring with all of this?

11 Conventional Inventory Management Effects We know there are two universal points with regard to inventory. Between these points there is an optimal range to maintain. A B Too Little Warning Optimal Range Warning Too Much 0

12 # of parts or SKU Conventional Inventory Management Effects Most companies exhibit a bi-modal distribution most of the inventory is either too low or too high A B With every MRP run an oscillation effect often occurs in which inventory quickly moves from one distribution to the other. Too Little Warning Optimal Range Warning Too Much 0 90% of companies report this issue!

13 Three Bottom Line Effects to Companies: 1. Chronic Shortages 2. Excessive Inventory 3. High Expedite Expenses & Waste But the real problem is at a higher level!

14 The Collective SCM Problem Bull-Whip Effect: An extreme change in the supply position upstream in a supply chain generated by a small change in demand downstream in the supply chain. Inventory can quickly move from being backordered to being excess. This is caused by the serial nature of communicating orders up the chain with the inherent transportation delays of moving product down the chain. (APICS Dictionary, 14 th Edition) Demand Signal Distortion Transference AND amplification of variability in BOTH directions. Foundry Component Sub- Assembler End Item Assembler The more parts to the supply chain the worse the effect! Supply Continuity Variability A true solution must deal with demand AND supply distortion together.

15 SUPPLY CONTINUITY VARIABILITY Material is not ready at needed time WHY? WHY? DEMAND SIGNAL DISTORTION Signals with known error are used Latent signals are used Oversimplified signals are used Changing and conflicting signals MRP Plans never properly synchronize So, if we fix the demand signal distortion the bullwhip is solved? NO!

16 Demand Driven MRP A method to model, plan and manage supply chains to protect and promote the flow of relevant information and materials. DDMRP uses strategic decoupling points to drive supply order generation and management throughout a supply chain. Material Requirements Planning (MRP) Distribution Requirements Planning (DRP) Lean Theory of Constraints Six Sigma Innovation Position, Protect and Pull First articulated in 2011 by the Demand Driven Institute after 15 years of research and extensive application. Through innovation critical planning needs are fused with mainstream improvement disciplines based on FLOW.

17 The Five Components of DDMRP Position 1 Protect 2 3 Pull 4 5 Strategic Decoupling Buffer Profiles and Levels Dynamic Adjustments Demand Driven Planning Visible and Collaborative Execution

18 A Core Problem? DISTORTIONS TO RELEVANT MATERIALS Material is not ready at needed time DISTORTIONS TO RELEVANT INFORMATION 1 Signals with known error are used WHY? WHY? WHY? Cumulative Manufacturing and Procurement Times are much longer than customer tolerance times Latent signals are used Weekly buckets are used WHY? WHY? WHY? WHY? WHY? Oversimplified signals are used Nervousness BOMs are flattened Adjustments must occur as actual demand becomes known MRP is loaded with forecasts MRP treats everything as dependent WHY? Changing and conflicting signals WHY? MRP Plans (timing and quantity requirements) are built using all dependencies MRP Plans never properly synchronize Supply variability transference causes delay accumulation across dependent networks WHY? WHY?

19 Position Strategic Decoupling 1 Strategically places decoupling points of inventory within the product structure and supply chain. Demand Signal Distortion This stops the transfer and amplification of variability in BOTH directions where it matters most. Foundry Component Sub- Assembler End Item Assembler Planning horizons shorten AND lead times compress. Supply Continuity Variability

20 Decoupling Placement Criteria 1 Customer Tolerance Time Market Potential Lead Time Sales Order Visibility Horizon External Variability Inventory Leverage and Flexibility Critical Operation Protection Decoupling Point Placement Considerations The time the typical customer is willing to wait before seeking an alternative source. This lead time will allow an increase of price or the capture of additional business either through existing or new customer channels. The time frame in which we typically become aware of sales orders or actual dependent demand. Demand Variability: The potential for swings and spikes in demand that could overwhelm resources (capacity, stock, cash, etc.). Supply Variability: The potential for and severity of disruptions in sources of supply and/or specific suppliers. The places in the integrated bill of material (BOM) structure (matrix bill of material) or the distribution network that enables a company with the most available options as well as the best lead time compression to meet the business needs. These types of operations include areas that have limited capacity or where quality can be compromised by disruptions or where variability tends to be accumulated and/or amplified.

21 Position MRP versus DDMRP 1 MRP (Everything Coupled) DDMRP (Strategically Decoupled) Critical Difference: MRP was never designed to decouple! It makes everything dependent forcing longer planning horizons and variability accumulation.

22 Protect Buffer Profiles and Levels 2 = Order frequency and size Primary coverage Safety Group Settings (Buffer Profiles) x Individual Part Properties = Zone and Buffer Levels for Each Part Item Type Lead Time Category Variability Category Lead Time Minimum Order Quantity (MOQ) Location (Distributed parts only) Average Daily Usage (ADU)

23 Protect Buffer Profiles and Levels 2 Safety Part Demand Information (Forecast and/or Historical Usage) DDMRP Part Settings Demand Adjustment Factors Average Daily Usage (ADU) Part/SKU Lead Time Part/SKU Order Multiple None Buffer Levels at Chosen Decoupling Points Stock Buffer Profile Assignment PLH Critical Difference: MRP was NOT designed to manage stock positions it was designed to be the perfect make to order calculator. MRP nets to zero. DDMRP NEVER nets to zero!

24 Protect Dynamic Buffer Adjustment 3 Recalculated Adjustments Buffer levels flex as Average Daily Usage (ADU) is updated Demand Adjustment Factors Buffers are intentionally flexed up or down in anticipation of planned events or seasons Critical Difference: Most conventional safety stock and reorder point positions are static NOT dynamic.

25 Pull Demand Driven Planning 4 It Starts With a More Relevant Demand Signal Conventional MPS-MRP Planning Planned orders create supply orders in anticipation of need over a longer planning horizon DDMRP Supply Order Generation Only qualified sales orders within a short range horizon qualify as demand allocations Plant Plant Critical Difference: Logistics? Forecast Planning Versus Logistics Sales Order Planning A sales order is HIGHLY ACCURATE. A planned order is HIGHLY INACCURATE Suppliers Suppliers It Continues With a More Relevant Supply Order Generation Equation

26 The Net Flow Equation Questions every planner cares about each day. What is coming What do I have? to me? 4 What demand do I need to fulfill immediately? What future demand is relevant? Buffer Status and Supply Order Generation occurs through a DAILY application of the Net Flow Equation. On-Hand + Open Supply - Qualified Sales Order Demand Net Flow Position Supply order issued for up to the top of the buffer

27 Part/SKU Info TOG = 157 TOY = units 70 units Replenishment Lead Time = 7 days Lead time = 7 days (Medium 50%) ADU = 10 Medium Variability (50%) Order Spike Horizon = 7 days Order Spike Threshold = 26 (50% Red) Supply Orders TOR = units Order Spike Threshold (50% of red) Order Spike Horizon Sales Order Demand As time progresses Sales Orders and Supply Orders advance toward the buffer

28 Sales Order Demand Supply Orders DAY Order Spike Threshold Order Spike Horizon 9 10 Net Flow Today: On Order Sales Order Demand Today s Order Recommendation: NONE Net Flow TOG = 157 TOY = 122 TOR = 52

29 SPIKE Sales Order Demand Supply Orders DAY Order Spike Threshold Order Spike Horizon Net Flow Today: 79 Today s Order Recommendation: 78 On Order Sales Order Demand SPIKE! Net Flow TOG = 157 TOY = 122 TOR = 52

30 SPIKE Sales Order Demand Supply Orders DAY Net Flow Today: Order Spike Threshold Today s Order Recommendation: NONE 8 Order Spike Horizon 5 9 On Order Sales Order Demand Net Flow TOG = 157 TOY = 122 TOR = 52

31 SPIKE Sales Order Demand Supply Orders DAY Net Flow Today: Order Spike Threshold Today s Order Recommendation: NONE 8 9 Order Spike Horizon On Order Sales Order Demand Net Flow TOG = 157 TOY = 122 TOR = 52

32 SPIKE Sales Order Demand Supply Orders DAY Order Spike Threshold Order Spike Horizon 9 11 Net Flow Today: On Order Sales Order Demand Today s Order Recommendation: NONE Net Flow TOG = 157 TOY = 122 TOR = 52

33 SPIKE Sales Order Demand Supply Orders DAY Order Spike Threshold Order Spike Horizon Net Flow Today: On Order Sales Order Demand Today s Order Recommendation: 37 Net Flow TOG = 157 TOY = 122 TOR = 52

34 SPIKE Sales Order Demand Supply Orders DAY Order Spike Threshold Order Spike Horizon Net Flow Today: On Order Sales Order Demand Today s Order Recommendation: NONE Net Flow TOG = 157 TOY = 122 TOR = 52

35 SPIKE Sales Order Demand Supply Orders DAY Order Spike Threshold Order Spike Horizon Net Flow Today: On Order Sales Order Demand Today s Order Recommendation: NONE Net Flow TOG = 157 TOY = 122 TOR = 52

36 Sales Order Demand Supply Orders DAY Order Spike Threshold Order Spike Horizon Net Flow Today: On-Order Sales Order Demand Today s Order Recommendation: NONE Net Flow TOG = 157 TOY = 122 TOR = 52

37 Sales Order Demand Supply Orders DAY Order Spike Threshold Order Spike Horizon Net Flow Today: On Order Sales Order Demand Today s Order Recommendation: NONE Net Flow TOG = 157 TOY = 122 TOR = 52

38 Sales Order Demand Supply Orders DAY Order Spike Threshold Order Spike Horizon Net Flow Today: On Order Sales Order Demand Today s Order Recommendation: NONE Net Flow TOG = 157 TOY = 122 TOR = 52

39 Sales Order Demand Supply Orders DAY 12 Order Spike Horizon Order Spike Threshold Net Flow Today: On Order Sales Order Demand Today s Order Recommendation: 40 Net Flow TOG = 157 TOY = 122 TOR = 52

40 Sales Order Demand Supply Orders DAY Order Spike Threshold Order Spike Horizon Net Flow Today: On Order Sales Order Demand Today s Order Recommendation: NONE Net Flow TOG = 157 TOY = 122 TOR = 52

41 Sales Order Demand Supply Orders DAY Order Spike Threshold Order Spike Horizon 20 Net Flow Today: On Order Sales Order Demand Today s Order Recommendation: None Net Flow TOG = 157 TOY = 122 TOR = 52

42 Sales Order Demand Supply Orders DAY Order Spike Threshold Order Spike Horizon Net Flow Today: On Order Sales Order Demand Today s Order Recommendation: 37 Net Flow TOG = 157 TOY = 122 TOR = 52

43 Sales Order Demand Supply Orders DAY 16 Order Spike Horizon Order Spike Threshold Net Flow Today: 147 Today s Order Recommendation: None On Order Sales Order Demand Net Flow TOG = 157 TOY = 122 TOR = 52

44 Sales Order Demand Supply Orders DAY 17 Order Spike Horizon Order Spike Threshold Net Flow Today: 127 Today s Order Recommendation: NONE On Order Sales Order Demand Net Flow TOG = 157 TOY = 122 TOR = 52

45 DAY Demand Net Flow On Order Average Daily Usage over 17 day period = 11.8 Average Inventory = Demand Net Flow Open Supply

46 Inventory Distribution Average Inventory =

47 Net Flow vs. DAY Net Flow Average On Hand Inventory = Net Flow

48 Decoupled Explosion The explosion starts when a part s Net Flow position enters the rebuild zone The explosion stops at each stock position No Matter What!! P 304P 401P P 404P 501P

49 Dependence Within Independence In DDMRP parent demand passes through non-buffered components just the same as with MRP That demand will stop at stocked points no matter what MRP Explosion DDMRP Decoupled Explosion

50 Pull DDMRP Execution 5 Easy to Interpret Signals on Open Supply Priorities Order # PO WO WO On-Hand Buffer Status 27% (RED) 42% (RED) 88% (YELLOW) Critical Difference: MRP = Priority by due date DDMRP = Priority by buffer status Order # Order Type Due Date Customer MO MTS May - 12 Internal MO MTO May - 12 Super Tech MO MTS May - 12 Internal MO MTS May - 14 Internal MO MTS May - 16 Internal vs. Order # On-Hand Status Order Type Due Date Customer MO MTO May - 12 Super Tech MO % RED MTS May - 14 Internal MO % RED MTS May - 12 Internal MO % YELLOW MTS May - 12 Internal MO % YELLOW MTS May - 16 Internal

51 # of parts or SKU Say Goodbye to the Bi-Modal Distribution A B Too Little Warning Optimal Range Warning Too Much 0 DDMRP is proven to allow companies to plan and execute in the optimal range at strategically chosen points!

52 Enterprise Wide Process for Flow

53 DDMRP s Proven Benefits Benefit Improved Customer Service Lead Time Compression Right-sizes Inventory Lowest total supply chain cost Easy and Intuitive Typical improvements Users consistently achieve % on time fill rate performance Lead time reductions in excess of 80% have been achieved in several industry segments Typical inventory reductions of 30-45% are achieved while improving customer service Costs related to expedite activity and false signals are largely eliminated (fast freight, partial ships, cross-ships, schedule break-ins) Planners see priorities instead of constantly fighting the conflicting messages of MRP Case Studies Available at:

54 RESULTS

55 THE authoritative book on Demand Driven Material Requirements Planning THE authoritative education on Demand Driven Material Requirements Planning

56 Learn More Demand Driven Planner Training class registration via Two day class Dec 5-6, 2018 RCAB - Building (South Boardroom) st Street Langley, BC V1M 3E8 Costs: $995-1,095 Cdn Learn more at