Material Requirements Planning in A Demand-Driven World 2

Material Requirements Planning in a Demand-Driven World
Carol A. Ptak, CFPIM, CIRM Chad Smith
Carol Ptak
Carol Ptak is the co-author of the third edition of Orlickys Material Requirements Planning and a partner at the Demand Driven Institute. Previously, Carol was at Pacific Lutheran University as Visiting Professor and Distinguished Executive in Residence after years of executive management experience at PeopleSoft and IBM Corporation. Ptak served as the vice president and global industry executive for manufacturing and distribution industries at PeopleSoft. Additionally, Carol is a past President and CEO of the American Production and Inventory Control Society (APICS).
Chad Smith
Chad Smith is the co-author of the third edition of Orlickys Material Requirements Planning and a partner at the Demand Driven Institute. Chad is also the cofounder and Managing Partner of Constraints Management Group, a services and technology company specializing in demand driven manufacturing, materials, and project management systems for midrange and large manufacturers.
1975: The First Significant Explanation of MRP

Joe Orlicky
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.
The Evolution of Inventory Planning

1920s: Inventory Mgmt
1961: BOMP
2011 Demand Driven MRP 1972: Closed-Loop MRP (DDMRP) 1980: MRPII
1990: ERP
1965: MRP
1996: APS
5
What is Demand Driven MRP?

A multi-echelon materials and inventory planning and execution solution.
Demand Driven MRP (DDMRP)
Material Requirements Planning
Distribution Requirements Planning
(MRP)
(DRP)
Lean
Theory of Constraints
Innovation
What is the Problem we are Solving?
Todays formal planning systems are fundamentally broken!
Modern Planning Systems Broken?!

Companies Using Spreadsheets for Demand Management Best-in-Class
63
Industry Average
71
Laggards
84
20
40
60
80
100
Aberdeen Group (Demand Management, November, 2009)
86% of respondents indicate that their management team has asked them to find opportunities to improve their companies supply chain planning processes and 71% of respondents have indicated the same for supply chain technology improvement.
Aberdeen Group (Inventory Optimization Technology Strategies for the Chief Supply Chain Officer, December 2010)
Old Rules, Old Tools, New Pressures

Forecast error is on the rise Volatility in supply and demand is increasing Legacy planning tactics and tools are breaking down
The Planning Legacy

Material Requirements Planning (MRP) Inside most modern ERP systems is MRP 79% of ERP Buyers implement MRP Conceived in the 1950s Codified in the 1960s Commercialized in the 1970s and it hasnt changed What has changed?
10
The New Normal

Global sourcing and demand Shortened product life cycles Shortened customer tolerance time Worldwide there is more complex More product complexity and/or customization planning scenarios Pressure forand leanersupply inventories Inaccurate forecasts than ever the past is NOT an More product variety predictor for the future Long lead time parts/components
11
DDMRP Sneak Peek
The New Normal is Here to Stay
Forty-eight (48%) percent of companies indicate that increased supply chain complexity is a top pressure.
Aberdeen Group (Enabling Supply Chain Visibility in the Cloud, November, 2010)
DDMRP Sneak Peek
12
The Typical Effects in the New Normal

Frequent Shortages Leading to:
Unacceptable Inventory Performance Unacceptable Service Level Performance High Expedite Related Wastes
Survey Results
90 80 70 60 50 40 30 20 10 0 Poor Inventory Performance Poor Service Level High Expedite Expense At Least One Effect
www.beyondmrp.com
13
Is Improvement even possible in the New Normal?
14
Inventory Asset or Waste?
Asset
Amount of inventory
Too Little = stock-outs, back orders, expedites & missed sales
Waste
Too much = cash, capacity and space tied up in inventory
15
Unacceptable Inventory Performance Unacceptable Service Level Performance High Expedite Related Wastes
Oscillation
Asset
Too Little = stock-outs, back orders, expedites & missed sales
Waste
Too much = cash, capacity and space tied up in inventory
16
The Shift to Demand Driven

The problem is not going away The world of push and promote is done Companies and supply chains need to align their working capital with actual consumption From Push to Demand Driven
17
The Five Components of DDMRP

Demand Driven Material Requirements Planning
Strategic Inventory Positioning Buffer Profiles and Levels Dynamic Adjustments Demand Driven Planning Visible and Collaborative Execution
4
Plan
5
Execute
Modeling/Re-modeling the Environment
18

4
Plan
5
Execute
Modeling/Re-modeling the Environment Modeling/Re-modeling the Environment
19

4
Plan
5
Execute
20

4
Plan
5
Execute
21

4
Plan
5
Execute
22

4
Plan Plan
5
Execute
23

4
Plan
5
Execute Execute
24
Strategic Inventory Positioning
Where?
(Position)
BEFORE How Much?

(Quantity)
Strategic Inventory Positioning Demand Driven Planning Buffer Profiles and Levels Dynamic Adjustments
When?
(Timing)
Visible and Collaborative Execution
25
Answering Where?
6 Factors
1. 2. 3. 4. 5. 6. Customer Tolerance Time Market Potential Lead Time Supply and Demand Variability Inventory Flexibility and Matrix BOM Supply and Distribution Net Structure Critical Resource Considerations
26
Dampen variability Compress lead times Better leverage working capital

Flow with Pull-Signals and Buffer Positions Identified
Shaft Stock 12 Rough & Finish 13 Rough & Finish Shaft Press 14 Rough & Finish Housing 15 Rough S Castings 15 Finish H Castings Outside
Endo
Balance
Assemble
Finish
Test
Time Buffer Replenishment Buffer Pull Signals Paint Pack Ship
MTO Customer
Distributor Distributor
Buffer Profiles and Levels
Dynamic Adjustments
Demand Driven Planning
27
ASR LT + Matrix BOM

ASR Lead Time = The longest unprotected sequence in the BOM
Matrix Bill of Material depicts relationships between ALL child and parent items
101 1H01 20H1 20Z1
201
203
205
203
204
304
301
303
301
305
307P 304P
305
304P 309P
401P 305
408P 305 403P 417P
408P 409 403P 501P
403P 501P
403P 501P
403P 501P
501P
Dynamic Adjustments
28
DDMRP Part Types

All parts
NonStocked
Stocked
Replenished
Replenished Over-ride
Min-max
Non-buffered
Lead Time Managed
Typically 20% of Purchased Parts are strategic Typically 10% of Manufactured Parts are strategic Typically most Distributed Stock is strategic
= strategically positioned and managed part
Strategic Inventory Positioning Buffer Profiles and Levels
= non-strategic part
Dynamic Adjustments Demand Driven Planning Visible and Collaborative Execution
29
Failure to properly position inventory is a huge source of waste for most manufacturing and supply chain companies.
Position and Pull

30

Stock Out ALERT! Rebuild OK Too Much
Group Trait Inputs Lead Time Category Make, Buy or Distributed Variability Category Significant Order Multiples
Strategic Inventory Positioning Buffer Profiles and Levels
Individual Part/SKU Inputs Average Daily Usage Appropriate Discrete Lead Time Ordering Policy (min, max, multiple) Location (distributed parts)
Dynamic Adjustments
31

Part: 403P Lead Time: 21 days Green Zone Yellow Zone Red Zone Base Red Zone Safety Buffer Profile: B11MOQ 300 357 179 54
0% 20% 40% 60% 80% 10 0 %
233
403P
590
Y G
890
Dynamic Adjustments
32
Dynamic Adjustments
Dynamic Buffer Adjustment
Available Stock Position
1000 900 800 700 600 500 400 300 200 100 100 90 80 70 60 50 40 30 20 10
Recalculated Adjustments
Average Daily Usage
33
Dynamic Adjustments
Seasonality
1000 900 100
Ramp Up
Average Daily Usage
90 80 70 60 50 40 30 20 10
1000 900 100 90 80 70 60 50 40 30 20 10
Ramp Down
1000 100 90 80 70 60 50 40 30 20 10
Zone Levels
800 700 600 500 400 300 200 100
Average Daily Usage
900 800
Zone Levels
Zone Levels
800 700 600 500 400 300 200 100
700 600 500 400 300 200 100
Effectivity Date
Effectivity Date
Planned Adjustments
34
Average Daily Usage

Supply generation is based what zone the available stock equation places the part Available stock = on-hand + on-order demand (past due, due today and qualified spikes)
Part r457 10,000 f576 h654 r672 5,000 Open Supply 5453 3358 530 2743 On-hand 4012 4054 3721 1732 Demand 1200 540 213 623 Available Stock 8265 6872 4038 3852 Recommended Supply Qty 0 3128 2162 0 Action No Action Place New Order Place New Order Expedite Open Supply (Execution)
Order Spike Horizon
De-Coupled Explosion
101
201
203
204
301
302
303P 304P
401P 402 403P 404P
501P
Dynamic Adjustments
36
Highly Visible & Collaborative Execution

Priority by Buffer Status
Problem: Priority by DUE DATE
Order #
MO 12367 MO 12379 MO 12465 MO 12401 MO 12411
Order Type
Stock MTO Stock Stock Stock
Due Date
Customer
5/12/2011 Internal 5/12/2011 Super Tech 5/12/2011 Internal 5/14/2011 Internal 5/16/2011 Internal
Priority 1: Priority 2: Priority 3: Priority 4: Priority 5:
Order #
MO 12367 MO 12379 MO 12465 MO 12401 MO 12411
Order Type
Stock MTO Stock Stock Stock
Due Date
Due NOW 5/12/2011 Due NOW Due NOW Due NOW
Customer
Internal Super Tech Internal Internal Internal
Dynamic Adjustments
37

Priority by Buffer Status
Solution: Priority by BUFFER STATUS!
Order #
MO 12379 MO 12401 MO 12465 MO 12367 MO 12411
OH Buffer Status
12% (RED) 27% (RED) 33% (YELLOW) 41% (YELLOW)
Order Type
MTO Stock Stock Stock Stock
Due Date
Customer
5/12/2011 Super Tech 5/14/2011 Internal 5/12/2011 Internal 5/12/2011 Internal 5/16/2011 Internal
Priority 1: Priority 2: Priority 3: Priority 4: Priority 5:
Order #
MO 12379 MO 12401 MO 12465 MO 12367 MO 12411
OH Buffer Status
12% (RED) 27% (RED) 33% (YELLOW) 41% (YELLOW)
Order Type
MTO Stock Stock Stock Stock
Due Date
Customer
5/12/2011 Super Tech Due NOW Internal Due NOW Internal Due NOW Internal Due NOW Internal
Dynamic Adjustments
38

Material Synchronization Alert
Demand Order #
MO 532-32 MO 531-47
Todays Date: 5/20/2011

Part # Order Type QTY
PPZ PPY Replenished NB 30 60
Part #
SAG FPS
Release Supply Date QTY Order Type Shortage Order #

5/24/2011 5/28/2011 40 Replenished 60 NB
Order Promise Date
Promise Date
5/25/2011 6/2/2011
5 PO 625-71 60 PO 611-54
MO #9432
Parent Order Release Date
Parent Order Promise Date
MO# 8763 PO #87632

Order Promise Date
Dynamic Adjustments
39

Demand Order #
MO 532-32 MO 531-47

Part #
SAG FPS

5/24/2011 5/28/2011 40 Replenished 60 NB
Order Promise Date
Promise Date
5/25/2011 6/2/2011
5 PO 625-71 60 PO 611-54
MO #9432
MO# 8763 PO #87632

Order Promise Date
Dynamic Adjustments
40

Demand Order #
MO 532-32 MO 531-47

Part #
SAG FPS

5/24/2011 5/28/2011 40 Replenished 60 NB
Order Promise Date
Promise Date
5/25/2011 6/2/2011
5 PO 625-71 60 PO 611-54
MO #9432
MO# 8763 PO #87632

Order Promise Date
Dynamic Adjustments
41

Lead Time Alerts
Order Release Date 63 day lead time Order Due Date
21 Day LTM Alert Zone
G
Lead Time Alerts
Status ! ! Order #
PO 4532 PO 5120 PO 5214 PO 5290
LATE
Notification Notification Notification Notification
Today's Date: 5/20/2011

Days Left Part Type Part #
LATE Purchased 6 Purchased 10 Purchased 12 Purchased PPD PPI PPJ PPF
ASRLT
105 63 45 36
Request Date
5/15/2011 5/26/2011 5/24/2011 6/1/2011
Promise Date
5/19/2011 5/26/2011 5/30/2011 6/1/2011
Dynamic Adjustments
42
What Execution Looks Like

Purchased Items
Order # PO 820-89 PO 891-84 PO 276-54 Due Date 05/12/09 05/12/09 05/12/09 Buffer Status Critical 13% Med 39% Med 41% Order # WO 819-87
Manufactured Items
Due Date 05/24/09 Item # FPA Buffer Status Critical 13%
Distributed Items
Item # FPA FPA FPA Location Region 1 Region 2 Region 3 Buffer Status Critical 11% Med 41% Med 36%
WO 832-41
WO 211-72
05/22/09
05/22/09
SAD
ICB
Critical 17%
Med 34%
Supplier 1
Purchased Parts List
PPE PPG PPJ SAC PPB PPD PPA PPI PPH SAA PPG PPF PPE SAB ICC PPC ICD PPB SAE FPA PPD SAD PPI ICA SAF FPA ICB
Region 1
Bill of Materials
PPA
FPA
Supplier 2
Region 2
Supplier 3
PPC PPJ PPF PPH
Region 3
Lead Time Managed Parts
follow up 8 months
notification
FPA
43

4
Plan
5
Execute
44
The Power of DDMRP
Asset
Amount of inventory
Stock Out Stock-outs, back orders, missed sales
ALERT!
Rebuild
OK
Waste
Too Much Too much, cash, capacity and space tied up in inventory
45
An Example of the Realignment

Asset Asset
Stock-outs, back orders, missed sales Too much, cash, capacity and space tied up in inventory Stock-outs, back orders, missed sales Too much, cash, capacity and space tied up in inventory
Waste
Waste
Projected Inventory Reductions Over 1 Year Inventory Beginning of Period Projected Inventory Reductions (consumption) Projected Inventory Increases - (purchases) Net Inventory Reduction by Period Inventory End of Month % Cumlative Inventory Reduction
Total Dollars to Build Positions by Period
1,000,000 900,000 800,000 700,000
$ $ $ $
Mo 1 9,564,443 (2,415,391) 589,242 $ (1,826,149) $ 7,738,294 $ 19.1%
Mo 2 7,738,294 (796,305) 927,540 131,235 7,869,529 17.7%
$ $ $ $
Mo 3 7,869,529 (313,565) 14,025 (299,540) 7,569,990 20.9%
$ $ $ $
Mo 4 7,569,990 (187,875) 10,649 (177,226) 7,392,764 22.7%
$ $ $ $
Mo 5 7,392,764 (113,894) (113,894) 7,278,870 23.9%
$ $ $ $
Mo 6 7,278,870 (84,033) (84,033) 7,194,836 24.8%
$ $ $ $
Mo 7-12 7,194,836 (794,430) (794,430) 6,400,406 33.1%
$ $ $ $ $
Totals 9,564,443 (4,705,494) 1,541,456 (3,164,038) 6,400,406 33.1%
Total Dollars Drained by Period

$3,000,000
500,000
Net Inventory Reduction by Period
$2,500,000
-
$2,000,000
600,000 500,000 400,000 300,000 200,000
(500,000)
$1,500,000
(1,000,000)
$1,000,000
$500,000
100,000 1 2 3 4 5 6 7
(1,500,000)
$0 1 2 3 4 5 6 7
(2,000,000)
46
Is DDMRP really different?

DDMRP
5 Zone Buffers Dynamically Adjusted Buffers
YES YES
ERP/MRP
RARELY SOME
Kanban/Super
NO SOME
Spreadsheets
RARELY SOME
Planned Adjustments to Buffers

Relative Priority Based on Buffer Status Globally Managed Buffer Profiles
YES
YES YES
YES, but1
NO NO
NO
NO NO
RARELY
RARELY NO
Decoupled BoM Explosion

ASR Lead Time Calculation Qualified Order Spike Horizon and Threshold
YES
YES YES
YES, but3
NO RARELY
YES, but2
NO NO
NO
NO RARELY

Multi-Location Buffer Status Visibility Lead Time Managed Parts
YES
YES YES
YES, but4
SOME NO
NO
SOME NO
NO
RARELY NO
Matrix BoM + ASR Lead Time Analytics

Simple and Visible
YES
YES
NO
RARELY
NO
YES
NO
YES, but5
YES, but1 (Planned positions are often forecast driven and, thus, not integrated into a demand driven framework) YES, but2 (Kanbans have no recognition of the BoM, they simply treat every connection as independent and factor only on-hand and on-order stock positions) YES, but3 (While almost every MRP system has the ability to do what is called two level master scheduling, it requires someone with e xtensive MRP background and is a very advanced technique. We have never seen it successfully implemented) YES, but4 (Shortage lists are typically limited to current and past shortages not future potential misalignments) YES, but5 (Most homegrown systems are simple and visible ONLY to the person who uses the tool)
47
Early Adopter Results
Mountain House Division:

Sales increased 20% Customer Fill Rate improved from 79% to 99.6% 60% reduction in inventory
Industrial Ingredient Division:

60% reduction in make to order lead time 100% On-Time-Delivery 20% reduction in inventory
Raw Material
No out of stock Reduced inventory $2.5M+
All material and copyright Demand Driven Institute 2011, all rights reserved
DDMRP MRP
700 600 500 400 300 200 100 0

Dec '01 Dec '02 Dec '03 Dec '04 Dec '05 Dec '06 Dec '07 Dec '08 Sep '09A
700
Stock-outs reduced by over 66%! High Inventories

600 500
Low Inventories High Service Fewer Expedites
$Millions
$Millions
400
Shortages Massive Expedites
300
200
100
0
Dec '01 Dec '02 Dec '03 Dec '04 Dec '05 Dec '06 Dec '07 Dec '08 Sep
Longview Inv
Longview TR
Houston Inv
Houston TR
What Would Papa Joe Say about DDMRP?

Traditional inventory management approaches, in pre-computer days, could obviously not go beyond the limits imposed by the information processing tools available at the time. Because of this almost all of those approaches and techniques suffered from imperfection. They simply represented the best that could be done under the circumstances. They acted as a crutch and incorporated summary, shortcut and approximation methods, often based on tenuous or quite unrealistic assumptions, sometimes force-fitting concepts to reality so as to permit the use of a technique. The breakthrough, in this area, lies in the simple fact that once a computer becomes available, the use of such methods and systems is no longer obligatory. It becomes feasible to sort out, revise, or discard previously used techniques and to institute new ones that heretofore it would have been impractical or impossible to implement. It is now a matter of record that among manufacturing companies that pioneered inventory management computer applications in the 1960s, the most significant results were achieved not by those who chose to improve, refine, and speed up existing procedures, but by those who undertook a fundamental overhaul of their systems.
35 Years Later Industry Finds Itself in Another Time of Transition and Re-Examination
cptak@demanddriveninstitute.com
csmith@demanddriveninstitute.com

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Material Requirements Planning in a Demand-Driven World

Carol A. Ptak, CFPIM, CIRM Chad Smith

1975: The First Significant Explanation of MRP

The Evolution of Inventory Planning

What is Demand Driven MRP?

Demand Driven MRP (DDMRP)

Material Requirements Planning

Distribution Requirements Planning

What is the Problem we are Solving?

Todays formal planning systems are fundamentally broken!

Modern Planning Systems Broken?!

Aberdeen Group (Demand Management, November, 2009)

Old Rules, Old Tools, New Pressures

The Planning Legacy

The New Normal

DDMRP Sneak Peek

The New Normal is Here to Stay

DDMRP Sneak Peek

The Typical Effects in the New Normal

Is Improvement even possible in the New Normal?

Inventory Asset or Waste?

Too Little = stock-outs, back orders, expedites & missed sales

Too much = cash, capacity and space tied up in inventory

Too Little = stock-outs, back orders, expedites & missed sales

Too much = cash, capacity and space tied up in inventory

The Shift to Demand Driven

The Five Components of DDMRP

Modeling/Re-modeling the Environment

The Five Components of DDMRP

Modeling/Re-modeling the Environment Modeling/Re-modeling the Environment

The Five Components of DDMRP

Modeling/Re-modeling the Environment Modeling/Re-modeling the Environment

The Five Components of DDMRP

Modeling/Re-modeling the Environment Modeling/Re-modeling the Environment

The Five Components of DDMRP

Modeling/Re-modeling the Environment Modeling/Re-modeling the Environment

The Five Components of DDMRP

Modeling/Re-modeling the Environment

The Five Components of DDMRP

Modeling/Re-modeling the Environment

Strategic Inventory Positioning

BEFORE How Much?

Dampen variability Compress lead times Better leverage working capital

Time Buffer Replenishment Buffer Pull Signals Paint Pack Ship

Strategic Inventory Positioning

Buffer Profiles and Levels

Demand Driven Planning

Visible and Collaborative Execution

ASR LT + Matrix BOM

408P 305 403P 417P

408P 409 403P 501P

Strategic Inventory Positioning

Buffer Profiles and Levels

Demand Driven Planning

Visible and Collaborative Execution

DDMRP Part Types

Lead Time Managed

Position and Pull

Buffer Profiles and Levels

Demand Driven Planning

Visible and Collaborative Execution

Buffer Profiles and Levels

Strategic Inventory Positioning