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
Orlicky’s 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
Orlicky’s Material Requirements Planning and a partner
at the Demand Driven Institute. Chad is also the co-
founder and Managing Partner of Constraints
Management Group, a services and technology
company specializing in demand driven manufacturing,
materials, and project management systems for mid-
range 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.”

4

The Evolution of Inventory Planning
1920’s: Inventory Mgmt

1961: BOMP

1965: MRP
2011 – Demand Driven MRP
1972: Closed-Loop MRP
1980: MRPII
(DDMRP)
1990: ERP
1996: APS

5

What is Demand Driven MRP?
A multi-echelon materials and inventory planning
and execution solution.

Demand Driven MRP
(DDMRP)

Material Requirements Distribution Requirements
Planning Planning Theory of
Lean Innovation
(MRP) (DRP) Constraints

6

What is the Problem we are
Solving?

Today’s formal planning
systems are
fundamentally broken!

7

Modern Planning Systems Broken?!
Companies Using Spreadsheets for Demand Management

Best-in-Class 63

Industry Average 71

Laggards 84

0 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)
8

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

9

The Planning Legacy
► Material Requirements Planning (MRP)
► Inside most modern ERP systems is MRP
► 79% of ERP Buyers implement MRP
► Conceived in the 1950’s
► Codified in the 1960’s
► Commercialized in the 1970’s and…
► …it hasn’t changed
► What has changed?

10

The “New Normal”
►Global sourcing and demand
► Shortened product life cycles
► Shortened customer tolerance time
Worldwide there is morecustomization
► More product complexity and/or
complex
► Pressure forand supply scenarios
planning leaner inventories
than ever – the
► Inaccurate forecasts 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)

12
DDMRP Sneak Peek

The Typical Effects in the New Normal
Frequent Shortages Leading to:
• Unacceptable Inventory Performance
• Unacceptable Service Level Performance
• High Expedite Related Wastes

Survey Results
www.beyondmrp.com
90

80

70

60

50

40

30

20

10

0
Poor Inventory Poor Service High Expedite At Least One
Performance Level Expense Effect

13

Is Improvement even possible in
the New Normal?

14

Inventory – Asset or Waste?

Asset
Amount of inventory

Too Little = Too much =
stock-outs, Waste cash, capacity
back orders, and space tied
expedites & up in inventory
missed sales

15

Unacceptable Inventory Performance
Unacceptable Service Level Performance
High Expedite Related Wastes

Oscillation

Asset

Too Little = Too much =
stock-outs, Waste cash, capacity
back orders, and space tied
expedites & up in inventory
missed sales

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 Visible and
Buffer Profiles Dynamic Demand Driven
Inventory Collaborative
and Levels Adjustments Planning
Positioning Execution

1 2 3 4 5
Modeling/Re-modeling the Environment Plan Execute

18


1 2 3 4 5
Modeling/Re-modelingthe Environment

19


1 2 3 4 5

20


1 2 3 4 5

21


1 2 3 4 5

22


1 2 3 4 5
Modeling/Re-modeling the Environment Plan
Plan Execute

23


1 2 3 4 5
Execute

24

Strategic Inventory Positioning

Where?
(Position)

BEFORE
How Much? When?
(Quantity) (Timing)

Strategic Demand Visible and
Buffer Profiles Dynamic
Inventory Driven Collaborative
and Levels Adjustments
Positioning Planning Execution

1 2 3 4 5 25

Answering “Where?”

6 Factors
1. Customer Tolerance Time
2. Market Potential Lead Time
3. Supply and Demand Variability
4. Inventory Flexibility and Matrix BOM
5. Supply and Distribution Net Structure
6. Critical Resource Considerations


1 2 3 4 5 26

Dampen variability
Compress lead times
Better leverage working capital
Flow with Pull-Signals and Buffer Positions Identified
Shaft
Stock Outside

12” Rough & Finish

13” Rough & Finish Endo Balance Assemble Finish Test
Shaft Press
14” Rough & Finish
Housing
15” Rough 15” Finish
H
S Castings
Castings

MTO
Customer
Time Buffer

Replenishment Buffer

Pull Signals
Paint Pack Ship
Distributor

Distributor


1 2 3 4 5 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


1 2 3 4 5 28

DDMRP Part Types
All parts

Non-
Stocked
Stocked

Replenished Lead Time
Replenished Min-max Non-buffered
Over-ride 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 = non-strategic part


1 2 3 4 5 29

Failure to properly position
inventory is a huge source of
waste for most manufacturing
and supply chain companies.
Position and Pull

1 2 3 4 5 30

Buffer Profiles and Levels
Stock Out ALERT! Rebuild OK Too Much

Group Trait Inputs + Individual Part/SKU Inputs

Lead Time Category Average Daily Usage
Make, Buy or Distributed Appropriate Discrete Lead Time
Variability Category Ordering Policy (min, max, multiple)
Significant Order Multiples Location (distributed parts)


1 2 3 4 5 31

Buffer Profiles and Levels

Part: 403P Buffer Profile: 233 590 890
Lead Time: 21 days B11MOQ ▼ ▼ ▼
Green Zone 300
403P R Y G
Yellow Zone 357
Red Zone Base 179
Red Zone Safety 54 0% 20% 40% 60% 80% 10 0 %


1 2 3 4 5 32

Dynamic Adjustments
Dynamic Buffer Adjustment
1000 100
Available Stock Position

Average Daily Usage
900 90
800 80
700 70
600 60
500 50
400 40
300 30
200 20
100 10

Recalculated Adjustments


1 2 3 4 5 33

Dynamic Adjustments
Seasonality Ramp Up Ramp Down
1000 100
1000 100
1000 100
900 90

Average Daily Usage
Average Daily Usage
900 90

Average Daily Usage
900 90
800 80
800 80
Zone Levels

800 80

Zone Levels

Zone Levels
700 70 700 70
700 70
600 60 600 60
600 60
500 50 500 50 500 50
400 40 400 40 400 40
300 30 300 30 300 30
200 20 200 20 200 20
100 10 100 10 100 10

▲ ▲
Effectivity Date Effectivity Date

Planned Adjustments


1 2 3 4 5 34

Demand Driven Planning
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 Open On-hand Demand Available Recommended Action
Supply Stock Supply Qty
r457 5453 4012 1200 8265 0 No Action

10,000 f576 3358 4054 540 6872 3128 Place New Order

h654 530 3721 213 4038 2162 Place New Order

r672 2743 1732 623 3852 0 Expedite Open
Supply (Execution)

5,000

Order Spike Horizon

De-Coupled Explosion

101

201 203 204

301 302 303P 304P

401P 402 403P 404P

501P


1 2 3 4 5 36

Highly Visible & Collaborative Execution
Priority by Buffer Status
Problem: Priority by DUE DATE

Order # Order Type Due Date Customer
MO 12367 Stock 5/12/2011 Internal
MO 12379 MTO 5/12/2011 Super Tech
MO 12465 Stock 5/12/2011 Internal Priority 1:
MO 12401 Stock 5/14/2011 Internal
MO 12411 Stock 5/16/2011 Internal Priority 2:
Priority 3:
Order # Order Type Due Date Customer
MO 12367 Stock Due NOW Internal Priority 4:
MO 12465 Stock Due NOW Internal Priority 5:
MO 12401 Stock Due NOW Internal
MO 12411 Stock Due NOW Internal


1 2 3 4 5 37

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


1 2 3 4 5 38

Material Synchronization Alert

Material Synchronization Alert Todays Date: 5/20/2011
Demand Release Supply Promise
Order # Part # Date QTY Order Type Shortage Order # Part # Order Type QTY Date
MO 532-32 SAG 5/24/2011 40 Replenished 5 PO 625-71 PPZ Replenished 30 5/25/2011
MO 531-47 FPS 5/28/2011 60 NB 60 PO 611-54 PPY NB 60 6/2/2011

Order Promise
Date
▼ Parent Order
Release Date
MO #9432 Parent Order
Promise Date
▼

MO# 8763

PO #87632
▲
Order Promise
Date


1 2 3 4 5 39


MO 531-47 FPS 5/28/2011 60 NB 60 PO 611-54 PPY NB 60 6/2/2011

Order Promise
Date
▼ Parent Order
Release Date
Promise Date
▼

MO# 8763

PO #87632
▲
Order Promise
Date


1 2 3 4 5 40


MO 531-47 FPS 5/28/2011 60 NB 60 PO 611-54 PPY NB 60 6/2/2011

Order Promise
Date
▼ Parent Order
Release Date
Promise Date
▼

MO# 8763

PO #87632
▲
Order Promise
Date


1 2 3 4 5 41

Lead Time Alerts
63 day lead time
Order Release Order Due
Date Date
▼ ▼
21 Day LTM Alert Zone

G Y R LATE
▲ ▲ ▲ ▲
Notification Notification Notification Notification

Lead Time Alerts Today's Date: 5/20/2011
Status Order # Days Left Part Type Part # ASRLT Request Date Promise Date
! PO 4532 LATE Purchased PPD 105 5/15/2011 5/19/2011
! PO 5120 6 Purchased PPI 63 5/26/2011 5/26/2011
PO 5214 10 Purchased PPJ 45 5/24/2011 5/30/2011
PO 5290 12 Purchased PPF 36 6/1/2011 6/1/2011


1 2 3 4 5 42

What Execution Looks Like
Purchased Items Manufactured Items Distributed Items
Order # Due Date Buffer Status Item # Location Buffer Status
Order # Due Date Item # Buffer Status
PO 820-89 05/12/09 Critical 13% FPA Region 1 Critical 11%
WO 819-87 05/24/09 FPA Critical 13%
PO 891-84 05/12/09 Med 39% FPA Region 2 Med 41%
WO 832-41 05/22/09 SAD Critical 17%
PO 276-54 05/12/09 Med 41% FPA Region 3 Med 36%
WO 211-72 05/22/09 ICB Med 34%

Supplier 1
Purchased Region 1
Parts List Bill of Materials
PPA
PPE
PPJ
PPG FPA
SAC ICB
Supplier 2 PPB PPI ICA
PPD
PPH SAF FPA Region 2
SAA PPD
PPA SAD
PPG
PPI PPF SAB ICC
FPA
PPC PPE PPC ICD SAE
Supplier 3
PPJ
PPB Region 3
PPF
PPH

Lead Time Managed Parts
▼follow up ▼
notification FPA

8 months
43


1 2 3 4 5

44

The Power of DDMRP

Asset
Amount of inventory

Stock Out ALERT! Rebuild OK Too Much
Stock-outs, Too much, cash,
back orders, capacity and
missed sales space tied up in
Waste inventory

45

An Example of the Realignment
Asset Asset

Too much, Too much,
Stock-outs, cash, Stock-outs, cash,
back orders, capacity and back orders, capacity and
Waste space tied up
Waste space tied up
missed sales missed sales
in inventory in inventory

Projected Inventory Reductions Over 1 Year
Mo 1 Mo 2 Mo 3 Mo 4 Mo 5 Mo 6 Mo 7-12 Totals
Inventory Beginning of Period $ 9,564,443 7,738,294 7,869,529 7,569,990 7,392,764 7,278,870 7,194,836 $ 9,564,443
Projected Inventory Reductions (consumption) (2,415,391) (796,305) $ (313,565) $ (187,875) $ (113,894) $ (84,033) $ (794,430) $ (4,705,494)
Projected Inventory Increases - (purchases) $ 589,242 $ 927,540 $ 14,025 $ 10,649 $ - $ - $ - $ 1,541,456
Net Inventory Reduction by Period $ (1,826,149) $ 131,235 $ (299,540) $ (177,226) $ (113,894) $ (84,033) $ (794,430) $ (3,164,038)
Inventory End of Month $ 7,738,294 $ 7,869,529 $ 7,569,990 $ 7,392,764 $ 7,278,870 $ 7,194,836 $ 6,400,406 $ 6,400,406

% Cumlative Inventory Reduction 19.1% 17.7% 20.9% 22.7% 23.9% 24.8% 33.1% 33.1%

Total Dollars to Build Positions by Period Total Dollars Drained by Period Net Inventory Reduction by Period

1,000,000 $3,000,000 500,000

900,000
$2,500,000
800,000 -

700,000
$2,000,000
600,000 1 2 3 4 5 6 7
(500,000)
500,000 $1,500,000

400,000
(1,000,000)
$1,000,000
300,000

200,000
$500,000 (1,500,000)
100,000

- $0
1 2 3 4 5 6 7 1 2 3 4 5 6 7 (2,000,000)
46

Is DDMRP really different?
DDMRP ERP/MRP Kanban/Super Spreadsheets
5 Zone Buffers YES RARELY NO RARELY

Dynamically Adjusted Buffers YES SOME SOME SOME

Planned Adjustments to Buffers YES YES, but1 NO RARELY

Relative Priority Based on Buffer Status YES NO NO RARELY

Globally Managed Buffer Profiles YES NO NO NO

Decoupled BoM Explosion YES YES, but3 YES, but2 NO

ASR Lead Time Calculation YES NO NO NO

Qualified Order Spike Horizon and Threshold YES RARELY NO RARELY

Material Synchronization Alert YES YES, but4 NO NO

Multi-Location Buffer Status Visibility YES SOME SOME RARELY

Lead Time Managed Parts YES NO NO NO

Matrix BoM + ASR Lead Time Analytics YES NO NO NO

Simple and Visible YES RARELY YES 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 extensive 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: Industrial Ingredient Division:
• Sales increased 20% • 60% reduction in make to order
• Customer Fill Rate improved from lead time
79% to 99.6% • 100% On-Time-Delivery
• 60% reduction in inventory • 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



700 700

Low Inventories
Stock-outs reduced by over 66%!
600

500
High Service
High Inventories
600

500

Fewer Expedites Shortages

$Millions
400
$Millions

400
Massive Expedites
300 300

200 200

100 100

0 0
Dec '01 Dec '02 Dec '03 Dec '04 Dec '05 Dec '06 Dec '07 Dec '08 Sep Dec '01 Dec '02 Dec '03 Dec '04 Dec '05 Dec '06 Dec '07 Dec '08 Sep
'09A

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

Material requirements planning in a demand driven world 2

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