An introduction to DDMRP
How DDMRP can change the way you plan your supply chain
What is DDMRP?
DDMRP is the acronym for Demand Driven Material Requirements Planning. DDMRP is a methodology for protecting the flow of materials and information to increase the return on investment. It’s a new way of planning focused on real demand, mitigating the effects of variability within the supply chain.
Demand Driven MRP solves the Bullwhip Effect, the leading cause of shortages and excess stock in companies.
The methodology was created by Carol Ptak and Chad Smith after more than 15 years of research and is disseminated worldwide by the Demand Driven Institute. Books like Demand Driven MRP, The Demand Driven Adaptive Enterprise and Precisely Wrong, and others, show us that we are managing our supply chains with tools developed in and for 1960s reality. They point out how, in this VUCA world (Volatile, Uncertain, Complex, and Ambiguous) that we live in today, the relevant issues of supply chains are not treated correctly, leaving companies in a state of a constant struggle to know what should be produced, bought or transferred.
The methodology brings innovations in defining where we should have stocks, how much we should have, and the resupply’s size and frequency. This without destroying what other methodologies have brought before, but using best practices to form a set that meets this new scenario that we live in. Demand Driven comes to answer the questions we ask every day.
What do I have? What’s coming to me? What are my relevant demands? What are my urgencies?
Companies of various sizes and across multiple segments worldwide have seen successful implementations and radical changes in how they think and plan the supply chain. Case studies are presented at world conferences and published on the DD Institute website showing excellent results. Names familiar to our daily life like Coca-Cola, Michelin, Shell, Allergan, and BT are some of the cases that can inspire us. From Brazil, we have Ceramfix, a place where I enjoyed working and implementing the country’s 1st Demand Driven experience. Also, our client Acesco, a leader in the manufacture and distribution of steel products in Colombia.
The main benefits obtained with DDMRP break a paradigm. You can improve the service level with inventory reduction. Customers implementing tools with the methodology have reported average decreases above 30% in their inventory with service levels above 98%. The fall in spending on extra costs such as cross-docking, overtime, and emergency freight significantly impacts the operation’s total cost. Through strategic uncoupling, a reduction of Lead Time for the customer generates opportunities to capture new business or increase margins. And because it is a simple and straightforward methodology, the company has a unique, objective, and clear view of its positions and urgencies.
Planning becomes a visible and straightforward process without needing complementary Excel spreadsheets to ensure you made the right decision.
How does DDMRP work?
Currently, most companies use MRP or a derivation of it as a planning and programming tool. This way of planning became popular with the advancement of computer capacity and the publication in 1975 by Joe Orlick of his book MRP – A New Way of Life for Production and Inventory Management. MRP was a revolution for the industry, with time-phased planning, bill-of-materials explosion level, and dependent demand planning.
MRP has completely changed the way it acts in the manufacture of products, but we cannot ignore that MRP was conceived in the 1950s, codified in the 1960s, and then marketed in the 1970s; by the 1990s, most manufacturers already owned it. Today, almost the entire supply chain is dominated by MRP systems that transmit signals up and down the chain.
Today we still use a methodology that was conceived for a completely different world than today’s world.
The world has changed since the design of MRP, and supply chains have also changed. This VUCA (Volatile, Uncertain, Complex, and Ambiguous) has caused products to gain much higher complexity, just as the variety of products has grown, and customization has become fundamental in the competition for new customers. This new world causes product lifecycles to become shorter and consumers’ tolerance for waiting for an even smaller product. Sales forecasts began to be further and further away from real demand, while at the same time, the pressure for smaller inventories intensified.
This set of situations generates throughout the chain three major pains to analysts, planners, and buyers:
Chronic Shortages generate sales losses and force companies to on spend overtime and air freight.
Excess Inventories force companies to spend on cross-docking or cut margins to make the product out of the door.
High Cost with Waste generated from constant reschedules in production lines, hiring extra spaces to maintain unnecessary inventories, and analyst redoing MRP work in countless Excel spreadsheets.
This model no longer meets the modern world’s needs based on uncertain Sales Forecasts without protections against the variability of real demand and supply.
Demand Driven MRP organizes something that planners have been trying unsuccessfully: to define how to do strategic decoupling, which means there are points in the supply chain that should have stocks, but it is not everywhere’s. Placing reserves, which we will call Buffers as we advance, in strategic locations of the product structure or supply chain to prevent variability of demand or supplies from spreading the Bullwhip Effect and its unintended consequences is the first significant methodology’s impact.
To this end, DDMRP evaluates factors that may impact the transmission or amplification of this variation in the signal, such as Customer Tolerance Time, Potential Market Time, Demand Horizon, External Variability, Inventory Flexibility, and Critical Operations. At these points, Demand Driven recommends that buffers are in places that will mitigate variability and as triggering instruments to generate new orders. The MRP’s total coupling that seeks a “net zero” is replaced with strategically placed buffers to ensure the constant flow of materials.
DDMRP provides buffers between production or supply chain points, where variability does not propagate, avoiding chaos throughout the planning.
Strategically placing Buffers are calculated individually according to their characteristics and not by classes or families, thus respecting the characteristic and tendency of raw material or finished product. Within the methodology is done the dynamic maintenance of this buffer, usually daily and not monthly, or when the analyst has time as occurs in most industries. This is the second significant impact of the methodology, as the buffer will follow the demand trend and be corrected for seasonality or known events.
With Buffer zones defined and knowing that it is our order generator, the methodology’s next step is the demand’s qualification. Identify which demand is relevant and which are not. Relevant demand has a direct impact on the quantity of replacement and with this in the average stock of the item, defining the inventory turnover. We call this Net Flow Equation, and this is the third methodology’s impact.
And to close, the methodology starts to look at Buffers and their status and not the delivery dates to define their reorders. For MTS (Make-to-Stock) products, stocks will be reorder depending on the buffer situation in the face of the qualified inputs and outputs of that item, so nothing more direct than quantifying this Net Flow percentage and identifying what Color of the buffer is. Once done, the rule is Color first, Percentage next to evaluate the priorities of replacement and urgencies.
DDMRP Five Steps
For the success of the methodology follows five steps, mandatory and in this sequence:
1) POSITON – Strategic Decoupling
In this step, we seek to identify where in our product structure, we should have a buffer, and for this, we answer some questions:
The customer’s tolerance time before seeking an alternative is shorter than our lead time to deliver the product? If so, we must identify where the buffer should be so that our Lead Time is less than this time.
Can the reduction in Lead Time bring us new customers or a more significant margin? If so, one should explore the possibility of having a buffer in this path.
Is the sales horizon a known value giving us time to reorder? If not, identifying a position for the Buffer with Lead time within this range should be considered.
Can demand variability (peaks) or supply (outages) compromise service? If so, consider having buffers of finished products and raw materials.
The factory should consider Leverage or Flexibility Points within the BOM or supply chain that allows you to compress Lead Time and offer better options to the company should be regarded as potential points for a buffer.
Critical operations such as machines of limited or specialized capacity, specific labor, or quality is a determining factor that must be buffer-protected.
2) PROTECT – Buffer Profiles and Levels
In this step, we will identify the specific characteristics of each buffer, such as:
ADU (Average Daily Consumption), DLT (Lead time decoupled – longer time to the next protected point), MOQ (Minimum Order Quantity), Order Cycle (desired replacement frequency)
Group characteristics such as:
Item type (manufactured, purchased, etc.), Lead Time Category and Variability Category
Therefore, defined as the three zones that will form the buffer:
Green Zone – responsible for the frequency and size of the replacement, is directly impacted by MOQ, DLT, ADU, Order Cycle, and LT Factor.
Yellow Zone – The heart of the demand coverage; ADU and DLT impact it.
Red Zone – is the security incorporated into the buffer and is composed of two parts, the Base Zone impacted by ADU, DLT, and LT Factor and the Safety Zone affected by the Variability Factor.
3) PROTECT – Dynamic Adjustments
To ensure that the buffer is always correct and matching demand, you must recalculate it daily. It doesn’t matter if your data source for the average daily usage (ADU) coming from the history or sales forecast. The critical factor is it will always reflect what is happening (or its revised forecast), which means that the buffer follows the demand trend. It is unnecessary to wait until the end of the month to review security stocks or minimum points.
This action prevents the continued replacement of low-performance materials and, at the same time, alerts to the early need for replacement of high-performance ones.
Also, Demand Driven MRP uses Demand Adjustment Factors that allow you to anticipate events known as seasonality, promotions, and holidays and prevent shortages or excesses. These factors can be direct adjustments in the ADU or by zone depending on the need.
4) PULL – Demand Driven Planning
The Net Flow Equation answers the day-to-day questions of planners. What do I have? What’s coming to me? What are my relevant demands? What are my urgencies?
Every day, the methodology positions the net flow equation against the Buffer, and the result will indicate whether planning should replace the stock and how much it should be.
Planning identifies which items require replacement and because each Buffer has its outputs and inputs, the demand peaks are not amplified to the next buffer in the supply chain.
5) PULL – Visible and Collaborative Execution
Here the methodology organizes the Net Flow positions by Color first and by Percentage in sequence to define the replacement priorities. Why prioritize? Because we do not have an infinite capacity for the next period when the suggestion of replacement is greater than the production capacity or space in a truck that will proceed to the branch. It is made a prioritized allocation to equalize the buffers, raising the Net Flow position so that we have a homogeneous stock in terms of protection.
When we do not have enough material for a given item to meet all the network replacement demand, the planner executes an efficient distribution to balance the service risk.
So why not explore DDMRP?
DDMRP is no longer just an idea. It is a proven concept widely used around the world by several companies of different sizes and segments. DDMRP is technical modeling, planning, and execution method, supported by many books, courses, academic research, and certified professionals.
DDMRP has quality software tools that have produced consistent and significant results in a wide range of industries, including aerospace, consumer products, biotechnology, electronics, heavy assembly, retail, machining/manufacturing, and distribution.
Here are some links you might find useful:
• DDMRP page on Demand Driven Institute webpage which includes a professionally produced ten-minute video of the introduction to DDMRP: https://www.demanddriveninstitute.com/ddmrp
• DDMRP Case Studies (videos and presentations) of dozens of companies, including Acesco, ArcelorMittal, Ceramfix, Michelin e Shell: https://www.demanddriveninstitute.com/case-studies
• Information about Demand Driven Planner (DDP) (including personal stories about people’s accomplishment with training): https://www.demanddriveninstitute.com/demand-driven-planner-ddp