Demand Driven MRP: Abundantly Lean - APICS New...

Demand Driven MRP: Abundantly Lean

All materials and content © copyright 2012 Demand Driven

Technologies, Constraints Management Group, LLC and

the Demand Driven Institute, LLC

Demand Driven MRP: Abundantly Lean

Mike Lilly, CDDPDelivery Performance Specialist

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�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

Copyright © 2012 Synergy Resources. All rights reserved. 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


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�That’s why it seems to have been this way forever

�MRP and, by extension, ERP


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


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 actionsdriving 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


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�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


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 �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


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 �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”.


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. 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


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. much inventory.

�They never feel the pain of running out

�They don’t have to decide which items to cut and by how much


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 enoughD

�We begin knowing that we will not run out as long as we �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


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“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.


Such an approach would be

�ABUNDANTLY LEAN

�Lean = not wasteful�Lean = not wasteful

�Abundance = plenty

�2 seemingly incongruous terms that go together


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)� “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


“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 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


“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 ordersbetween 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


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


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


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 �AND be able to cancel, defer or reduce quantity on the order to prevent having too much


This is the pipeline “Enough”

ROQ

Enough


On hand “enough”

expected

usage during

replenishment time

Zero

This is Demand Driven MRP (DDMRP)

ROQ

Too Much

Enough

�When pipeline (on hand + on order) is below top of yellow zone, DDMRP recommends a new supply order



expected

usage during

replenishment time

Zero

supply order

• responding to actual consumption

• quantity sufficient to bring pipeline back to top of green, no higher

This is Demand Driven MRP (DDMRP)

ROQ

Too Much

Enough

�When pipeline is above top of green zone, DDMRP recommends cancelling, deferring or reducing quantity of a supply



expected

usage during

replenishment time

Zero

or reducing quantity of a supply order

�Enforcing the limits we set

�Avoiding having “too much”

On hand

�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

Too Much

Enough

�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


Danger

Caution

OK

Zero

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�Actual average on hand tracks very closely to predictions

�For most items, is 30-45% LESS than company carried prior to using DDMRP principles


Source

�The principles of DDMRP are laid out in:

�Orlicky’s Material Requirements PlanningRequirements Planning

�Third edition , published in 2011

�Carol A. Ptak. CFPIM, CIRM and Chad J. Smith


Demand Driven MRP Simulator

Tracking a single part daily


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�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


Buffer Adjustments

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▲Effectivity Date

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Planned - Ramp Up Planned - Ramp DownAll materials and content © copyright 2012 Demand Driven Technologies,

Constraints Management Group, LLC and the Demand Driven Institute, LLC

100 10100100 1010

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

Results

All materials and content © copyright 2012 Demand Driven Technologies,

Constraints Management Group, LLC and the Demand Driven Institute, LLC

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

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: [email protected]

�Phone: 603-315-8766


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