Demand Driven Material Requirements Planning (DDMRP) Demand Driven Material Requirements Planning (DDMRP) Carol Ptak and Chad Smith INDUSTRIAL PRESS, INC Industrial Press, Inc 32 Haviland Street, Suite 3 South Norwalk, Connecticut 06854 Tel: 203-956-5593, Toll-Free: 888-528-7852 E-mail: info@industrialpress.com Library of Congress Cataloging-in-Publication Data Names: Ptak, Carol A., author | Smith, Chad, 1971 – author Title: Demand driven material requirements planning (DDMRP) / Carol Ptak and Chad Smith Description: South Norwalk, Connecticut: Industrial Press, Inc., 2016 | Includes bibliographical references and index Identifiers: LCCN 2016023395 (print) | LCCN 2016026863 (ebook) | ISBN 9780831135980 (hardcover: alk paper) | ISBN 9780831193843 (eBook) | ISBN 9780831193850 (Epub) | ISBN 9780831193867 (EMobi) Subjects: LCSH: Material requirements planning | Manufacturing resource planning | Production control—Data processing | Inventory control—Data processing Classification: LCC TS161 P789 2016 (print) | LCC TS161 (ebook) | DDC 658.5/03—dc23 LC record available at https://lccn.loc.gov/2016023395 ISBN print: 978-0-8311-3598-0 ISBN ePUB: 978-0-8311-9385-0 ISBN eMOBI: 978-0-8311-9386-7 ISBN ePDF: 978-0-8311-9384-3 Copyright © 2016 by Industrial Press, Inc All rights reserved This book, or any parts thereof, with the exception of those figures in the public domain, may not be reproduced, stored in a retrieval system, or transmitted in any form without the permission of the copyright holders Sponsoring Editor: Judy Bass Copy Editor: Judy Duguid Compositor: Patricia Wallenburg, TypeWriting Cover Designer: Janet Romano Murray industrialpress.com ebooks.industrialpress.com 10 9 8 7 6 5 4 3 2 1 The Demand Driven Institute logo is a trademark of the Demand Driven Institute All rights reserved The Certified Demand Driven Planner logo is a trademark of the International Supply Chain Education Alliance (ISCEA) All rights reserved Contents Foreword Definitions in This Book Introduction About the Authors Acknowledgments PART 1 PERSPECTIVE CHAPTER 1 Planning in the New Normal The Material Requirements Planning Revolution Evidence of a Problem Return on Asset Performance Degradation Work-Around Proliferation The Inventory Bimodal Distribution The New Normal Summary CHAPTER 2 The Importance of Flow Plossl’s First Law Establishing Flow as the Foundation Relevant Information and Materials The Bullwhip Effect Summary CHAPTER 3 Material Requirements Planning in the New Normal What Is MRP? Distortions to Relevant Information Demand Signal Input Nervousness The Weekly Bucket Flattening the Bill of Material Distortions to Relevant Materials Common Cause Variation Delay Accumulation Amplifying the Distortions to Relevant Information and Materials— Batching Policies Summary CHAPTER 4 Unlocking a Solution—The Power of Decoupling Decoupling Decoupling Point Buffers Summary PART 2 BECOMING DEMAND DRIVEN CHAPTER 5 Supply Order Generation and Execution for the New Normal MRP Versus Lean—What Can We Learn? Dependence Versus Independence Supply Order Generation (Planning Versus Execution) Lean and Technology Demand Driven Material Requirements Planning The History of “Demand Driven” Position, Protect, and Pull Summary CHAPTER 6 Strategic Inventory Positioning Positioning Factors Customer Tolerance Time Market Potential Lead Time Sales Order Visibility Horizon External Variability Inventory Leverage and Flexibility Critical Operation Protection Applying the Positioning Criteria A New Form of Lead Time Advanced Inventory Positioning Considerations Distribution Positioning Considerations Summary CHAPTER 7 Strategic Buffers Inventory: Asset or Liability? Introducing Decoupling Point Buffers The Green Zone The Yellow Zone The Red Zone Buffer Profiles Factor 1: Item Type Factor 2: Lead Time Factor 3: Variability Individual Part Attributes Part Average Daily Usage Part Lead Time Part Minimum Order Quantity Part Location Calculating Replenished Part Buffer Levels and Zones The Green Zone The Yellow Zone The Red Zone Continuing with Company ABC Iterations Calculating Replenished Override Buffers Calculating Min-Max Buffers Summary CHAPTER 8 Buffer Adjustments Recalculated Adjustments Planned Adjustment Factors Demand Adjustment Factor Zone Adjustment Factor Lead Time Adjustment Factor Summary CHAPTER 9 Demand Driven Planning The Shift to Actual Demand The Net Flow Equation Qualifying Order Spikes Supply Order Generation Based on Net Flow Position Simulating DDMRP Supply Order Generation Calculating Average On-Hand Inventory Average On-Hand Range Average On-Hand Target Average Open Supply Orders Decoupled Explosion Hybrid Model Supply Order Generation Prioritized Share Supply Order Consideration Discount Optimization Freight Optimization Coverage Optimization Min-Max Supply Order Generation Completing the Company ABC Example Summary CHAPTER 10 Demand Driven Execution Buffer Status Alerts Challenging Priority by Due Date Planning Versus Execution Display Current On-Hand Alert Projected On-Hand Alert Synchronization Alerts Material Synchronization Alerts Lead Time Alert Summary CHAPTER 11 DDMRP Impacts on the Operational Environment DDMRP Strategic Buffer Criteria The Decoupling Test The Bidirectional Benefit Test The Order Independence Test The Primary Planning Mechanism Test The Relative Priority Test The Dynamic Adjustment Test DDMRP Versus Safety Stock and Order Point Safety Stock and the Buffer Criteria Order Point and the Buffer Criteria DDMRP Impacts on Scheduling DDMRP and Master Production Scheduling Assumptions DDMRP Shop Floor Scheduling Implications Finite Scheduling with DDMRP? Additional Scheduling Sequence Impacts DDMRP and WIP Priority Management Summary CHAPTER 12 DDMRP Metrics and Analytics Measuring Relevant Information (Signal Integrity) Measuring Decoupling Point Integrity Outlying Event Reports Measuring Velocity Driving Improvement in DDMRP Summary CHAPTER 13 The Demand Driven Organization The Demand Driven Adaptive System Demand Driven Sales and Operations Planning Conventional Sales and Operations Planning The Five Steps of Demand Driven Sales and Operations Planning Strategic Business Management Direction and Review Integrated Reconciliation Managing the Portfolio and New Activities Managing Demand Managing Supply Demand Driven Sales and Operations Planning Projections Working Capital Space Capacity Projected Order Frequency Summary Contribution of Dick Ling CHAPTER 14 Implications for Technology Operations and Information Technology—Two Ships Diverging in the Night? DDMRP Software Compliance Criteria PART 3 APPENDICES APPENDIX A An MRP Example group of parts in order to accommodate a specific limitation or requirement projected on-hand alert An alert generated by a low projected on-hand position over a part’s DLT based on on-hand, open supply, and either actual demand or ADU qualified actual demand The demand portion of the net flow equation composed of qualified order spikes, past due demand, and demand due today qualified order spike A quantity of combined daily actual demand within the order spike horizon and over the order spike threshold ramp-down adjustment Manipulations to the buffer equation that affect inventory positions, lowering buffer levels and their corresponding zones at certain points in time Ramp-down adjustments typically are used in part deletion ramp-up adjustment Manipulations to the buffer equation that affect inventory positions, raising buffer levels and their corresponding zones at certain points in time Ramp-up adjustments typically are used for part introduction red zone The lowest-level zone in a replenished, replenished override, and min-max part buffer The zone is color-coded red to connote a serious situation The red zone is the sum of the red zone safety and red zone base red zone base The portion of the red zone sized by the lead time factor red zone safety The portion of the red zone sized by the variability factor relative priority The priority between orders filtering by zone color (general reference) and buffer penetration (discrete reference) replenished override part A strategically determined and positioned part using a static (buffer zones are manually defined) three-zoned buffer for planning and execution replenished part A strategically determined and managed part using a dynamic three-zoned buffer for planning and execution Buffer zones are calculated using buffer profiles and specific part attributes such as ADU and DLT sales order visibility horizon The time frame in which a company typically becomes aware of sales orders or actual dependent demand seasonality adjustment Manipulations to the buffer equation that affect inventory positions by adjusting buffers to follow seasonal patterns significant minimum order quantity A minimum order quantity that sets the green zone of a buffer spike A comparatively large amount of cumulative daily actual demand that qualifies for inclusion into the net flow equation stockout (SO) An item that is not immediately available in stock (refer to the APICS Dictionary) stockout with demand (SOWD) An item that is not immediately available in stock and has a demand requirement Also known as negative on-hand stockout with demand alert A form of on-hand alert, triggered by a strategically stocked item with a lack of inventory on hand and the presence of a demand requirement strategic inventory positioning The process of determining where to put inventory that will best protect the system against various forms of variability to best meet market needs, leverage working capital, and mitigate the bullwhip effect supply offset Adjusting the timing of the application of a demand adjustment factor to account for long lead time components synchronization alerts Alerts designed to highlight problems with regard to dependencies thoughtware The analysis and process employed to define the relevant factors and dependencies in an organization or system in order to construct appropriate business rules and operating strategies that maximize velocity, visibility, and equity Within the DDRMP framework, thoughtware is commonly referred to with regard to applying the inventory positioning factors TOG See top of green top of green (TOG) The quantity of the top level of the green zone TOG is calculated by summing the red, yellow, and green zones of a buffer top of red (TOR) The quantity of the top level of the red zone top of yellow (TOY) The quantity of the top level of the yellow zone TOY is calculated by summing the red and yellow zones TOR See top of red TOY See top of yellow yellow zone The middle layer of the buffer level coded with yellow to convey a sense of warning The yellow zone is the rebuild zone for replenished and replenished override buffers zone adjustment factor Adjusting part buffer zones by applying a multiplicative factor to the value of the zone APPENDIX E DDS&OP Checklist A one-size-fits-all universal checklist for DDS&OP is not helpful because of the uniqueness of each company DDS&OP provides a dynamic adaptable approach for a company to set its strategy and then recognize and respond to real demand However, the following checklist is a start to ascertain where your company is at the current time Rather than a yes or no answer, consider your company’s progress along a continuum of these considerations: Is the purpose of Demand Driven Sales and Operations Planning understood? Does the DDS&OP process have an executive process champion? Does the DDS&OP process have process step owners? Are values and behaviors recognized as critical for a successful DDS&OP process? Is the emphasis on the future, understanding change and its impact on the success of the business? Are tactical issues and problems discussed and quickly resolved? Is there financial and volume integration? Do performance management systems reinforce integrated behavior and the discipline of execution? Is the DDS&OP process well documented, with documentation for each step updated on a regular basis? Does the business make a distinction between information and data? Is there a commitment to data integrity? Is there a new-product planning review that provides input to the managing demand process step and the overall DDS&OP process? Is there a monthly review of the future unconstrained demand plan for existing and new products based on inputs from marketing, sales, and finance? Is there a DDS&OP process at the supply point level that ensures that there is a valid plan to support orders and shipments? Is there a process that involves all the business functions in order to develop an integrated set of plans that reconcile the S&OP projection to the business plan? Is information presented to the senior business management team on an exception basis with a focus on understanding and managing changes? Are graphics used extensively to improve scheduling? As Ralph Waldo Emerson said about life, the same is true about DDS&OP —it is about the journey, not the destination Endnotes Chapter 1 All the APICS definitions in the book are from the fourteenth edition of the APICS Dictionary, (Blackstone, 2013) You can access the report at http://dupress.com/articles/success-or-struggleroa-as-a-true-measure-of-business-performance/ You can access the article at www.zerohedge.com/news/2013-02-12/howrookie-excel-error-led-jpmorgan-misreport-its-var-years Chapter 5 The definition is from The Free Dictionary, www.thefreedictionary.com Liker, J (2004) The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer New York: McGraw-Hill Appendix C www.businesswire.com/news/home/20150506005233/en/Research-ReportRetailers-Lose-1.75-Trillion-Revenue It can be easily proved that purchasing materials from more expensive suppliers but with short lead times or shipping by plane is a very profitable decision This fact totally goes against the generalized but very unwise practice of buying from cheaper producers in Asia or elsewhere that have several weeks’ or even months’ replenishment lead times Gómez, J (2015) “Reposición por Demanda,” Logismaster Congress, Medellín, Colombia “Ganadores de Proveedores de Éxito 2014,” www.grupoexito.com.co/es/proveedores/concurso-proveedores-deexito/historia-de-ganadores?id=1232 References APICS (2013) APICS Dictionary, 14th ed Chicago: APICS Goldratt, E M., & Cox, D E (1984) The Goal: A Process of Ongoing Improvement Great Barrington, MA: North River Press Liker, J (2004) The Toyota Way:14 Management Principles from the World’s Greatest Manufacturer New York: McGraw-Hill Noreen, B G (2013) Managerial Accounting for Managers, 3rd ed New York: McGraw-Hill Education Orlicky, J (1975) Material Requirements Planning: The New Way of Life in Production and Inventory Management New York: McGraw-Hill Plossl, G (1992) Orlicky’s Material Requirements Planning, 2nd ed New York: McGrawHill Ptak, C., & Smith, C (2011) Orlicky’s Material Requirements Planning, 3rd ed New York: McGraw-Hill Smith, D., & Smith, C (2013) Demand Driven Performance: Using Smart Metrics New York: McGraw-Hill Index actively synchronized replenishment (ASR) lead time See decoupled lead time actual demand, 23, 133, 149, 237 ADU See average daily usage ADU alert, 107 ADU alert horizon, 107 ADU alert threshold, 107 ADU exceptions, 109 ADU-based recalculation, 105 advanced planning and scheduling (APS/APO), 209 allergen sequence, 246 analytics view, 255 ASR lead time See decoupled lead time ASRLT See decoupled lead time assets vs liabilities, 93 average daily usage (ADU), 105 average inventory range, 178 average on-hand position, 176, 181 average open supply orders, 181 batches, 33 batching policies, 33 bidirectional benefit test, 231 bill of material, 28, 45, 60, 182, 239, 250 bimodal distribution, 9, 253, 265 blended ADU, 107 BOMs, 28 breakthrough S&OP, 273 Brown, F Donaldson, 18 buffer, 39, 93, 96 buffer levels, 111 buffer penetration, 149 buffer profile, 97, 293 buffer simulation, 305 buffer status alerts, 207 buffer zone, 96 bullwhip effect, 18, 32, 35 business plan, 268 calculating average daily usage (ADU), 109 calculating buffers, 111 campaign scheduling, 198 capacity, 142, 238, 246, 283 CDDL, 52 CDDP, 51 certified demand driven leader See CDDL certified demand driven planner See CDDP challenging traditional S&OP, 272 coefficient of variation, 80, 102 common usage of components, 58 common-cause variation, 30 components, 145 conflict with lean or pull, 45 continuous improvement, 263 control points, 247 conventional planning, 22 convergent point, 62, 247 coverage optimization, 195 critical operation protection, 60 critical positioning factors, 57 cumulative lead time, 61, 68 current on-hand alert, 214 customer tolerance time, 58 DDAS See demand driven adaptive system DDMRP, 267 DDMRP and retail, 315 DDOM See demand driven operating model DDS&OP checklist, 333 decoupled explosion, 182 decoupled lead time, 69 decoupled schedule, 240 decoupling, 34, 37, 41, 45 decoupling point buffers, 39, 231 decoupling point integrity, 253 decoupling points, 37, 96 delay accumulation, 30 deletion, 135 demand, 149, 237, 278 demand adjustment factor, 131 demand driven adaptive system (DDAS), 267 demand driven material requirements planning (DDMRP), 50, 294 demand driven model projections, 269, 280 demand driven operating model, 53, 268 demand driven performance using smart metrics, 34, 51, 54, 286 demand driven sales and operations planning, 53, 269 demand driven variance analysis, 269 demand manipulation, 286 demand signal, 23 demand signal distortion, 32, 37, 57, 209, 231, 234 demand trend sensing, 133 demand uncertainty, 59 demand variability, 80, 101 demand-driven manufacturing, 51 demand-driven MRP, 50, 294 demand-driven planning, 149 Deming, W Edwards, 17 dependence, 47 dependent demand, 22 discount optimization, 191 dispatching system See priority control disposition distribution inventory, 103 distribution networks, 79, 216 distribution positioning, 79 divergent points, 62 DLT See decoupled lead time DRP (distribution requirements planning), 52 drum, 317 drum schedule, 246 due date, 208 dynamic adjustment test, 232 dynamic buffers, 294 Einstein, Albert, 47 enterprise resource planning (ERP), 291 excess inventory, 260 execution, 207, 294 explosion of requirements, 183 finite schedule, 245 five-step process (Ling/Coldrick model), 274 flattening the bill of material, 28, 35 flow, 16 flow index, 49, 262 Ford, Henry, 18 forecast accuracy, 25, 278 forecasts, 23 forward ADU, 107 four sources of variation, 59 freight optimization, 195 frequency up update, 107 goal, 17, 246 Goldratt, Dr Eliyahu, 17, 246 green zone, 97, 112 green zone adjustment, 146 highly visible priority, 207 hub, 84 hybrid model, 90, 188 hypersensitivity See system nervousness independence, 47 integrated reconciliation, 275 introduction adjustment, 133 inventory, 93 inventory, assets vs liabilities, 93 inventory leverage, 60 inventory positioning, 71 inventory, bimodal, 9 ISCEA, 51 item type, 98 JIT, 24 kanbans, 45 lead time, 99, 109, 237 lead time adjustment factor, 100, 112, 148 lead time alert, 226 lead time alert zone, 226 lead time compression, 96 lead-time-managed (LTM) part, 227 lean, 45, 50, 52 length of period, 105 Ling, Richard (Dick), 288 Little’s Law, 16, 317 load manipulation, 285 location, 110 LTM part, 236 managing the portfolio and new activities, 276 manual adjustments, 133 manufacturing lead time (MLT), 60, 67 market intelligence, 268 market potential lead time, 58 master production schedule (MPS), 236, 272 master settings, 267, 271, 280 material requirements planning See MRP material synchronization alert , 222 matrix bill of material, 73 metrics and analytics, 251 minimum order quantity (MOQ), 110, 112, 266 min-max (MM) parts, 96, 125, 198 MLT See manufacturing lead time model and part parameters, 270 MRP, 3, 21, 35, 45, 50, 52, 57, 160, 297 MRP nervousness, 27 MRP system requirements, 297 multi-hub, 89 multilevel master schedule, 184 multiple plants, 79 nervousness See system nervousness net flow equation, 149 net flow position, 158, 190 new normal, 12, 18, 27, 292 occurrence-based recalculation, 127 Ohno, Taiichi, 17 old S&OP, 272 on-hand alert level, 214 on-hand balance, 150 on-order stock, 158 open orders, 150 order cycle, 112 order frequency variance, 261 order independence test, 232 order spike horizon, 152 order spike threshold, 151 order-point systems, 235 Orlicky, Joseph, 291 Orlicky’s MRP 3rd edition, 51 OSH See order spike horizon OSH1 See order spike horizon OSH2 See order spike horizon, 156 OST See order spike threshhold OTOG See over tip of green outlying events report, 257 over top of green (OTOG), 161, 194 overflattening, 45 oversimplification, 47 PAF See planned adjustment factor part attributes, 105 past ADU, 107 planned adjustment factor (PAF), 131 planning, 207 planning horizon, 26, 49, 82, 183, 233, 279 planning projections, 280 planning vs execution, 49, 212 Plossl, George, 15 PLT See purchasing lead time portfolio management, 276 position, protect, pull, 52 positioning, 293 positioning factors, 57 primary planning test, 232 prioritized share, 191 priority by due date, 208 priority control, 243 probabilities of simultaneous availability, 71 product deletion, 135 product introduction, 133 product transition, 136 projected buffer status alerts, 218 projected on-hand alert, 218 projected order frequency, 286 purchasing lead time (PLT), 61 qualified actual demand, 150 qualified order spike, 151 ramp-down adjustment, 135 ramp-up adjustment, 133 ramp-up/ramp-down, 136 rapid buffer adjustment, 133 recalculated adjustments, 127 red zone, 97, 113 red zone adjustment, 147 red zone base, 113 red zone safety, 114 relative priority test, 232 relative standard deviation See coefficient of variation relevant information, 18, 23, 251 relevant materials, 17, 30, 35, 57, 79, 149, 251, 256, 288 relevant range, 267 reorder-point techniques, 235 replenished override (RO) parts, 96, 125 replenished part, 96 replenishment of stock, 149 requirements explosion, 183 retail, 315 return on assets, 5, 16 RMRP See remanufacturing resource planning (RMRP) roughly right vs precisely wrong, 274 routing, 17, 60, 240 run chart, 175 S&OP, 269 safety stock, 184, 233 sales and operations planning See S&OP sales order visibility horizon, 58 seasonality adjustment, 140 shock absorber, 96 shop floor control system, 240 signal integrity, 251 significant minimum order quantity, 113 Six Sigma, 52 software compliance, 293 Souder’s Law, 291 space planning, 282 spike threshold, 152 stock out (SO), 214 stock out with demand (SOWD), 214 stock out with demand alert, 214 stop explosion, 184 strategic business management, 274 strategic horizon, 268 strategic inventory positioning, 57, 93 strategic relevant range, 268, 274 strategically replenished buffers, 93, 231 supply, 279 supply chains, 293 supply continuity variability, 33, 55, 57, 181, 209, 222, 231, 234 supply generation, 96, 158 Supply order generation, 49 supply variability, 59 supply-chain bullwhip effect, 59, 102 synchronization alerts, 222 system nervousness, 27 tactical horizon, 267 Taguchi function, 10, 95, 255 Taylor, Frederick, 17 technology, 291 Theory of Constraints (TOC), 52 TOG See top of green top of green (TOG), 115 top of red (TOR), 115 top of yellow (TOY), 115 TOR See top of red TOY See top of yellow Toyota Production System, 17, 50 traditional sales and operations planning, 272 transition, 136 understated, 139 variability, 37, 59, 101 variability category, 104 variability factor, 104 variable rate of demand, 59 variance analysis, 269, 271 velocity, 261 weekly bucket, 28 where used, 72 wholesale network, 85 WIP priority, 247 work-arounds, 7 working capital, 282 work-in-process, 247 yellow zone, 97,113 yellow zone adjustment, 147 zone adjustment factor, 146 .. .Demand Driven Material Requirements Planning (DDMRP) Demand Driven Material Requirements Planning (DDMRP) Carol Ptak and Chad Smith INDUSTRIAL PRESS, INC... Driving Improvement in DDMRP Summary CHAPTER 13 The Demand Driven Organization The Demand Driven Adaptive System Demand Driven Sales and Operations Planning Conventional Sales and Operations Planning The Five Steps of Demand Driven Sales and Operations Planning. .. book also devoted nearly 100 pages to an emerging alternative method of formal planning and execution? ?Demand Driven Material Requirements Planning (DDMRP) This book is entirely about that alternative method This book will provide an extensive blueprint for DDMRP It is the authors’