Demand Driven MRP: Abundantly Lean Mike Lilly, CDDP Delivery Performance Specialist All materials and content copyright 2012 Demand Driven Technologies, Constraints Management Group, LLC and the Demand Driven Institute, LLC
The Big Squeeze On one hand, we are pressured to NOT run out of stocked items. Running out leads to: Expediting costs Overtime Missed shipments Lost sales On the other hand, we are pressured to NOT have too much inventory. Having too much inventory leads to: Running out of cash Delaying or preventing investment in other assets that will help the company grow 2
Stuck in the Middle with You We need more inventory. We missed sales because of stock outs! We have too much inventory. We need to free up working capital!
Is this a solvable problem? Is there a way to resolve this conflict? WITHOUT inducing the pendulum effect Is this just the way things are? It s always been this way 4
Why are things the way they are? An unanswerable question? Like Why is the sky blue, Daddy? This conflict is a result of the systems that have been in use since the 1960 s That s why it seems to have been this way forever MRP and, by extension, ERP 5
Key assumptions of MRP Forecasting Assumes that you can predict what items customers will buy and when they will buy them And that we should buy and produce based on these predictions Standard lead times Assumes that the time to acquire purchased items is a constant and that the time to manufacture an item from its components is a constant Safety stock Assumes that you can compensate for the inadequacies of MRP with a fudge factor that is constant 6
Reality Forecasting Customers always buy more of some items than was forecast and less of others Customers always buy at different times than was forecast except when the forecast period is quite large (a year?) and too big for driving production actions Standard lead times Time needed to purchase and receive items is variable Time needed to make items is variable Safety stock If it worked, we d never run out nor ever have too much 7
The net effect of three false assumptions Driving production and purchasing based on forecast leads to these effects: Running out, which leads to: Expediting costs Overtime Missed shipments Lost sales Having too much inventory which, leads to: Running out of cash Delaying or preventing investment in other assets that will help the company grow We never have JUST ENOUGH 8
MRP is a fear-based approach Designed to prevent the state of not having enough Using time-phased netting techniques begins with quantity we have on hand of an item adds in existing supply orders subtracts out existing and predicted demand predicts when the future on hand balance will dip below zero recommends orders to increase supply to prevent the future on hand balance from going negative. We fear that if we do not predict future needs and act to meet them NOW, that we will run out 9
In the 1960 s The biggest fear of material planners was kitting a complex assembly and finding out they were short even a single part. If you don t have ALL the parts, you can t make it! This fear was so deep because such shortages were not an uncommon occurrence. Material planners routinely stashed expensive parts in their desk drawers just in case. 10
Men who designed MRP Acknowledged this fear and the fact that predictions of future supply and demand are unreliable with the inclusion of safety stock in their design. Safety stock is a number that is always increased but never decreased. Planners don t take the time to re-visit safety stock numbers, unless they run out of a part. Then the number is updated to a larger quantity to make sure the shortage doesn t happen again. The memory of being yelled at when they ran out prevents them from ever lowering that number 11
Safety stock effects With so many items having safety stock numbers that never get lowered, is it any wonder most companies carry excess inventory? It s easy for the guys in accounting to say we have too much inventory. They never feel the pain of running out They don t have to decide which items to cut and by how much 12
What to do instead? Use a confidence-based approach instead of a fear-based approach Instead of being afraid of running out and scrambling to get enough We begin knowing that we will not run out as long as we routinely take action at certain key levels triggered by actual consumption Additional supply consistently arrives in time to prevent us from ever running out KNOWING we will never run out Instead of FEARING that we will 13
What to do instead? (cont.) Instead of starting our planning with what we have on hand, we begin our planning with a starting quantity for each item enough to protect us from running out until we get more. Design a plan to make/buy sufficient quantity to get to enough level Make/buy more after that based on actual consumption To always have enough Such an approach would provide us with PLENTY of each item without being WASTEFUL. 14
Such an approach would be ABUNDANTLY LEAN Lean = not wasteful Abundance = plenty 2 seemingly incongruous terms that go together 15
How much is enough? Enough is a range That is why a constant safety stock number doesn t work We have to use 2 enoughs Enough on hand and immediately available Enough in the pipeline (on hand + on order) On order protects us before we ve even paid for it We have to explicitly define what these ranges are for every item we stock We need to define key levels within each range to signal us when to take actions that will keep us in this range as each item is actually consumed Even though consumption is not entirely predictable 16
Enough on hand ZERO is definitely too few Running out of items we sell means lost sales Running out of things we use to make things we sell results in production delays The minimum we would want to have on hand is enough to meet actual demand during the time it takes for the next open order to arrive and replenish our supply Making sure that we never run out Enough on hand is no less than this minimum 17
Enough on hand (cont.) Time for next open order to arrive changes daily Passage of time Ordering frequency We want to base enough on hand on the typical time between orders If enough on hand is sufficient to meet actual demand during the time it takes for the next open order to come in AND we order smaller quantities more frequently The typical time for the next order to arrive is shorter Our on hand amount of inventory is lower 18
ADU Average Daily Usage is the rate of ACTUAL consumption of an item in the recent past Length of the time sample depends on item type and industry. 90-120 days is typical. 365 days is not unusual Our best guess at what actual demand during the time it takes for the next open order to come in is What recent demand (reflected in ADU) would have been during that time period Enough on hand is typical days between orders X ADU 19
Defining the upper limit of enough for the pipeline BEGIN with a Reasonable Order Quantity (ROQ) The minimum it makes sense to order Keeping in mind that it makes good sense to order smaller quantities more frequently, keeping typical time between orders lower May be determined by supplier (Minimum Order Quantity) ADD in the expected usage during replenishment time We want to have enough to last during the time it takes for a new order to arrive ADU X lead time ADD in the on hand enough If actual usage is greater than ADU, we want to have enough to last until the next order comes in 20
Too much Enough is a set of ranges that must vary as ADU varies More than enough in the pipeline is too much When ADU decreases after order placement but before order shipment, we may have too much in the pipeline AND be able to cancel, defer or reduce quantity on the order to prevent having too much 21
This is the pipeline Enough Enough ROQ expected usage during replenishment time On hand enough Zero 22
This is Demand Driven MRP (DDMRP) Too Much Enough ROQ expected usage during replenishment time When pipeline (on hand + on order) is below top of yellow zone, DDMRP recommends a new supply order responding to actual consumption quantity sufficient to bring pipeline back to top of green, no higher Zero On hand enough 23
This is Demand Driven MRP (DDMRP) Too Much Enough ROQ expected usage during replenishment time When pipeline is above top of green zone, DDMRP recommends cancelling, deferring or reducing quantity of a supply order Enforcing the limits we set Avoiding having too much Zero On hand enough 24
On hand Enough Zero Too Much OK Caution Danger When on hand dips below top of yellow, DDMRP generates a watch signal Double check that supply is coming in as scheduled When on hand dips below top of red, DDMRP generates a warning May be time to expedite Frequent red zone incursions are sign of increasing instability Time to revisit buffer sizing 25
Predicted Average on Hand Computed as: ½ pipeline green zone plus pipeline red zone ½ Reasonable Order Quantity (ROQ) plus on hand enough Actual average on hand tracks very closely to predictions For most items, is 30-45% LESS than company carried prior to using DDMRP principles 26
Source The principles of DDMRP are laid out in: Orlicky s Material Requirements Planning Third edition, published in 2011 Carol A. Ptak. CFPIM, CIRM and Chad J. Smith 27
Demand Driven MRP Simulator Tracking a single part daily 28
What DDMRP Does Promotes FLOW Makes sure we never run out Makes sure we never have too much Provides signals to take actions to always stay within limits Based on ACTUAL Consumption, not Forecast Dynamically adjusts the limits Based on evolving ADU Seasonality Promotional events Ramp up Ramp down 29
Buffer Adjustments Available Stock Position 900 800 700 600 500 400 300 200 Based on a rolling average daily usage factor (ADU) Dynamic Buffer Adjustment 1000 100 100 10 90 80 70 60 50 40 30 20 Average Daily Usage Zone Levels 1000 900 800 700 600 500 400 300 200 Planned - Seasonality 100 100 10 90 80 70 60 50 40 30 20 Average Daily Usage Zone Levels 1000 900 800 700 600 500 400 300 200 100 Effectivity Date Planned - Ramp Up All materials and content copyright 2012 Demand Driven Technologies, Constraints Management Group, LLC and the Demand Driven Institute, LLC 100 90 80 70 60 50 40 30 20 10 Average Daily Usage Zone Levels 1000 900 800 700 600 500 400 300 200 100 Planned - Ramp Down 100 90 80 70 60 50 40 30 20 10 Average Daily Usage Effectivity Date
Results Companies that implement Demand Driven MRP typically reduce their inventory from 30 45% while, at the same time, reducing expedited-related costs and increasing sales. LeTourneau has two plants. One implemented DDMRP, the other continued using traditional MRP. Both companies experienced rapid growth in sales, followed by a downturn. The DDMRP plant grew inventory by much less. The MRP plant was stuck with a lot of slow-moving inventory following the downturn All materials and content copyright 2012 Demand Driven Technologies, Constraints Management Group, LLC and the Demand Driven Institute, LLC
For more information Simulator can be run using your data Snapshot estimate of how much of each item your company would carry under DDMRP And how much total inventory investment reduction would be under DDMRP Email: mike.lilly@synergyresources.net Phone: 603-315-8766 32