1. Building a Demand Driven Supply Chain

2. What is the Problem we are Solving?
Today’s formal planning systems are
fundamentally broken!
Today, formal planning systems are fundamentally broken. It does not matter the particular brand of ERP product that a company uses, the symptoms and compromises are the same. 2
All material and © copyright Demand Driven Institute 2011, all rights reserved 2

3. Old Rules, Old Tools, New Pressures
Forecast error is on the rise
Supply Chain Complexity and Volatility is increasing
Legacy planning tactics and tools are breaking down
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
Today we are in a time of tremendous friction between old rules, old tools and new pressure. We know that despite the proliferation of advanced forecasting algorithms forecast error is on the rise. Why? Because volatility and complexity in supply and demand is increasing. Despite this we attempt to deploy the same rules and tools, legacy rules and tools that are breaking down. What are these legacy rules and tools?

4. The “New Normal”
Global sourcing and demand
Shorter product life cycles
Shorter customer tolerance times
More product complexity and/or customization
Pressure for leaner inventories
Inaccurate forecasts
More product variety
Long lead time parts/components
Worldwide there are more complex planning and supply scenarios than ever – the past is NOT an predictor for the future
The world is a much different place then when MRP was conceived and codified. (Talk about each aspect). At the end of it all we have more complex planning and supply scenarios than ever and conventional planning can no longer handle it. We have reached the point of diminishing returns. Companies that keeping applying and optimizing old rules and tools will put more in and get less back. 4
DDMRP Intro
All material and © copyright Demand Driven Institute 2014, all rights reserved 4

5. Circumstance 1965 2013 Supply Chain Complexity Product Life Cycles
Low. Supply chains looked like chains – they were more linear. Vertically integrated and domestic supply chains dominated the landscape
High. Supply chains look more like “supply webs” and are fragmented and extended across the globe.
Product Life Cycles
Long. Often measured in years and or decades (e.g. rotary phones)
Short. Often measured in months (particularly in technology)
Customer Tolerance Times
Long. Often measured in weeks and months
Short. Often measured in days with many situations dictating less than 24 hour turns
Product Complexity
Low.
High. Most products now have relatively complex mechanical and electrical systems and micro-systems. Can you even work on a modern car anymore?
Product Customization
Low. Few options or custom feature available.
High. Lots of configuration and customization to a particular customer or customer type.
Product Variety
Low. Example – toothpaste. In 1965 Colgate and Crest each made one type of toothpaste.
High – in 2012 Colgate made 17 types of toothpaste and Crest made 42!
Long Lead Time Parts
Few. Here the word “long” is in relation to the time the market is willing to wait. By default if customer tolerance times were longer it stands to reason that there were less long lead time parts. More so, however, is that fact that supply chains looked different. Most parts were domestically sourced and thus often much “closer” in time.
Many. Today’s extended and fragmented supply chains have resulted in not only more purchased items but more purchased items coming from more remote locations.
Forecast Accuracy
High. With less variety, longer life cycles and high customer tolerance times forecast accuracy was almost a non-issue. “If you build it, they will buy it.”
Low. The combined complexity of the above items is making the idea of improving forecast accuracy a losing battle.
Pressure for Leaner Inventories
Low. With less variety and longer cycles the penalties of building inventory positions was minimized.
High. At the same time operations is asked to support a much more complex demand and supply scenario (as defined above) they are required to do so with less working capital!
Transactional Friction
High. Finding suppliers and customers took exhaustive and expensive efforts. Choices were limited. People’s first experience with a manufacturer was often through a sales person sitting in front of them.
Low. Information is readily available at the click of the mouse. Choices are almost overwhelming. People’s first experience with a manufacturer is often through a screen sitting in front of them.
This chart is a comparison of manufacturing and supply chain circumstances in 1965 versus The chart is from the book Demand Driven Performance. Use examples from day to day usage like the number of different kinds of toothpaste now available.
From Demand Driven Performance – Using Smart Metrics (Debra Smith and Chad Smith, McGraw-Hill, 2013)

6. Modern Planning Systems Broken?!
Aberdeen Group (Demand Management, November, 2009)
How do we know that formal planning systems are broken? Let’s look at some research. The first is a survey by Aberdeen Group that shows that on average over 70% of manufacturing companies use spreadsheets for demand management. What does this really tell us? It tells us that planning personnel have a tremendous amount of distrust when it comes to the picture and recommended actions that their formal planning system gives them. It forces them to work outside of the system rather than within it. This is often risky, ineffective and further complicates the IT landscape. People even understand the these downsides but they do it nonetheless. If they did what the system told them to do the results would be worse. Companies are beginning to wake up to the planning problem. Another Aberdeen Study showed that there is more awareness and pressure to resolve this issue. Where did we go wrong? 6
DDMRP Intro
All material and © copyright Demand Driven Technologies 2014, all rights reserved

7. Poll Question #1
What would happen to your planning and scheduling capability if you lost your Microsoft Office License?

8. Something Must Change Deloitte University Press DUPress.com MRP MRP II
ERP
APS
Deloitte University Press DUPress.com

9. Where to Start?

10. The First Law of Supply Chain
All benefits will be directly related to the speed of FLOW of materials and information.
Information
Materials & Information
In order to find a way out we have to go back to what is known as the first law of manufacturing. This was what George Plossl beloeved to be the key for manufacturing. Carol and I added a corollary to this law. The materials and information must be relevant. Today, companies are drowning in materials and data that are irrelevant. So what does this mean for materials and inventory effectiveness?
Corollary:
Materials and Information must be RELEVANT!!!

11. "All Benefits" Encompass:
Service is consistent and reliable when a system flows well.
Revenue is maximized and protected.
Inventories are minimized.
Expenses ancillary and/or unnecessary are minimized.
Cash flow follows the rate of product flow to market demand.
Protect and Promote Flow = ROI Maximization
All Benefits is an encompassing statement so let’s be sure we are very clear on what we are mean and why.
** When a system flows well Service is consistent and reliable
** Today that is necessary to ensure Revenue is maximized and protected. Market share grows or, at a minimum, doesn’t erode.
** When a system flows well Inventories are minimized. Raw and pack, work-in-process, and finished goods inventories will be minimized and directly proportional to the amount of time it takes to flow between stages and through the total system.
**Additionally unnecessary ancillary Expenses are eliminated or at least minimized. When flow is poor, additional activities and expenses are incurred to close the gaps in flow. Examples would be expedited freight, overtime, rework, cross-shipping, and unplanned partial ships.
** Cash flow follows the rate of product flow. Materials and labor are converted to cash at the rate of flow to market demand. When flow is maximized, material that a company paid for is converted to cash at a relatively quick and consistent rate. This makes cash flow much easier to manage and predict.
**Every for-profit company has a universal primary goal: maximize some form of return on shareholder equity or Return on Investment ROI. The best sustainable way to achieve that goal is to promote and protect flow. This is the very definition of an efficient manufacturing and distribution system. Conversely, one of the fastest ways to compromise ROI and system efficiency is to make decisions and reinforce behaviors that impede or block flow.

12. Flow is the enabler for the primary objectives of most functions in the company
Planning
FLOW
Quality
Finance
Plant/ Operations
Sales
Marketing

13. FLOW Flow is the intersection of prevailing improvement methods Lean
Primary Objective:
Reduce Waste
Lean
FLOW
Primary Objective:
Reduce Variability
Six-Sigma
Primary Objective:
Improve Throughput
Theory of Constraints

14. Two Universal Point of InventoryB
Too Little
Warning
Optimal Range
Warning
Too Much
Note: “Optimal” is from an on-hand perspective

15. The MRP “Bi-Modal” Distribution
# of parts or SKU
Too Little
Warning
Optimal Range
Warning
Too Much

16. Virtually All Supply Chains Suffer from the “Bi-Modal” Inventory Distribution
Oscillation
# of parts or SKU
Too Little
Warning
Optimal Range
Warning
Too Much
Three Simultaneous Effects:
Persistently High Inventories
Chronic and Frequent Shortages
High Expedite and Waste Related Expenses
“How can we have so much inventory and not be able to ship orders?!”
“We paid for fast freight now we don’t need it?!”

17. Do you have the bi-modal distribution in your business?
Poll Question #2
Do you have the bi-modal distribution in your business?

18. Bullwhip Example
Here is an example that shows a non-volatile, mature product at the point of sale. The market pulls this product at a relatively steady rate. As we walk back in the supply chain through transportation and manufacturing we see higher and higher volatility. This volatility is largely self-imposed through transportation and manufacturing policies around batching.

19. See How Nervousness Happens in MRP

20. What is Demand Driven MRP?
A multi-echelon materials and inventory planning and execution solution.
Demand Driven MRP
(DDMRP)
DDMRP is designed from the very beginning to be applied across a supply chain. A supply chain is not a linear structure from supplier’s supplier to customer’s customer. A supply chain is a web-like structure with complex interdependence between the nodes. This view of the supply chain is the background on all the slides and on the cover of Orlicky’s MRP 3rd edition. This slide does not say that DDMRP includes MRP, DRP, Lean, and TOC but rather uses these concepts as a foundation and builds on them. DDMRP is standing on the shoulders of giants that have gone before – including Joe Orlicky, Eli Goldratt, Jim Womack, John Constanza, George Plossl and many others.
The attribution to Bernard is due to John of Salisbury. In 1159, John wrote in his Metalogicon:[2]
"Bernard of Chartres used to say that we are like dwarfs on the shoulders of giants, so that we can see more than they, and things at a greater distance, not by virtue of any sharpness of sight on our part, or any physical distinction, but because we are carried high and raised up by their giant size.“ This quote is usually attributed to Isaac Newton famously remarked in a letter to his rival Robert Hooke dated February 5, 1676 [5] that:
"What Des-Cartes did was a good step. You have added much several ways, & especially in taking ye colours of thin plates into philosophical consideration. If I have seen further it is by standing on ye sholders of Giants [sic]."
Material Requirements Planning
(MRP)
Distribution Requirements Planning
(DRP)
Lean
Theory of Constraints
Six Sigma
Innovation 20

21. The Five Components of DDMRP
Demand Driven Material Requirements Planning
Strategic Inventory Positioning 1
Buffer Profiles and Levels 2
Dynamic Adjustments 3
Demand Driven Planning 4
Visible and Collaborative Execution 5
Modeling/Re-modeling the Environment
Plan
Execute
There are five components of DDMRP. These components are sequential and all are necessary for DDMRP to produce its full impact.

22. Component 1: Positioning
Demand Driven Material Requirements Planning
Strategic Inventory Positioning
Buffer Profiles and Levels
Dynamic Adjustments
Demand Driven Planning
Visible and Collaborative Execution
Where?
(Position)
Throughout the world planners and buyers try to answer two questions on a daily basis – how much and when. These questions are necessary BUT they are secondary in nature. In fact, buyers and planners can never answer these questions with effectiveness if their organization cannot answer THE PRIMARY question about planning first. That question is, “where”? Where do we place strategic points of inventory in order to decouple dependencies.
BEFORE
How Much?
(Quantity)
When?
(Timing)

23. Component 1: Positioning
Demand Driven Material Requirements Planning
Strategic Inventory Positioning
Buffer Profiles and Levels
Dynamic Adjustments
Demand Driven Planning
Visible and Collaborative Execution
Strategically places decoupling points within the product structure and supply chain to absorb variability and compress lead times
Dampened Variability
Answering the question “where” is strategic in nature a planner or buyer cannot do it. The market, product structure, resource and supplier base must be considered together. There are 6 factors that are used to walk through the question of answering where. Customer Tolerance time is the time the market is willing to wait before it goes somewhere else. Market Potential Lead Time is the lead time that the market will reward you with more business or a higher price. The level of supply and demand variability must be considered throughout the system. Shared componentry and the total parent-child relationships must be considered. The structure of the Supply and Distribution net. Finally, any critical resources that must protected from shortages or disruption must be considered.
Supplier
Raw Stock
Intermediate
Stock
Finished Stock DC
Compressed Lead Times

24. Component 1: Positioning
Demand Driven Material Requirements Planning
Strategic Inventory Positioning
Buffer Profiles and Levels
Dynamic Adjustments
Demand Driven Planning
Visible and Collaborative Execution
6 Factors
Customer Tolerance Time
Market Potential Lead Time
Supply and Demand Variability
Inventory Flexibility and Matrix BOM
Supply and Distribution Net Structure
Critical Resource Considerations
Answering the question “where” is strategic in nature a planner or buyer cannot do it. The market, product structure, resource and supplier base must be considered together. There are 6 factors that are used to walk through the question of answering where. Customer Tolerance time is the time the market is willing to wait before it goes somewhere else. Market Potential Lead Time is the lead time that the market will reward you with more business or a higher price. The level of supply and demand variability must be considered throughout the system. Shared componentry and the total parent-child relationships must be considered. The structure of the Supply and Distribution net. Finally, any critical resources that must protected from shortages or disruption must be considered.

25. Failure to properly position inventory is a huge source of waste for most manufacturing and supply chain companies.
Position and Pull
DDMRP recognizes that one of the largest forms of waste in manufacturing and supply chains is the failure to answer the question where. DDMRP moves companies out of the world of “Push and Promote” and into the world of “Position and Pull”

26. Component 2: Buffer Profiles and Levels
Demand Driven Material Requirements Planning
Strategic Inventory Positioning
Buffer Profiles and Levels
Dynamic Adjustments
Demand Driven Planning
Visible and Collaborative Execution
Group Trait Inputs +
Individual Part/SKU Inputs
Lead Time Category
Make, Buy or Distributed
Variability Category
Significant Order Multiples
Average Daily Usage
Appropriate Discrete Lead Time
Ordering Policy (min, max, multiple)
Location (distributed parts)
Once a company or supply chain knows where to place inventories, those position levels must be set. DDMRP groups these strategic parts and SKU by like attributes. These attributes are typically by lead time whether the parts are made, bought or distributed, how variable they are and if there are significant minimum order quantities. The group profiles are then combined with unique individual part traits to come up with a level. These part specific traits are rate of use (average daily usage), the actual lead time, any specific ordering policies, and for distributed parts the location. DDMRP then uses a 5 zone color system to manage these levels. Light blue meaning over-stocked, green meaning no planning action required, yellow meaning the rebuild zone, red meaning a dangerous situation and deep red meaning out of stock.
Stock Out
Too Much
ALERT!
Rebuild OK
ALERT!
Rebuild OK
Too Much
Stock Out

27. Component 2: Buffer Profiles and Levels
Planned Adjustment Factor 21
300
B11 17
None
Forecast, Historical Usage, Demand Sensing
Buffer Levels at Chosen Decoupling Points
Average Daily Usage (ADU)
Part/SKU Lead Time
DDMRP and Part Master Data
Part/SKU Order Multiple
Buffer Profile Assignment ▼
233 ▼
590 ▼
890
Here is an example of what a part’s position may look like. Here the part is a purchased part with a significant minimum order quantity but shorter lead time and lower variability settings. The top of the green (or top of total buffer) is 890 pieces. If a part’s buffer profile is set properly it average on hand position will hover in the lower half of the yellow zone.
Part: 403P
Lead Time: 21 days
Buffer Profile: B11MOQ
Green Zone
300
Yellow Zone
357
Red Zone Base
179
Red Zone Safety 54 R Y G

28. Component 3: Dynamic Adjustments
Recalculated Adjustments
Buffer levels flex as Average Daily Usage is updated.
Planned Adjustments
Now that we have determined where to place inventory and what the levels and zones of those positions should be we need to make sure that they can adjust to changes that happen naturally or that we plan to happen. The first is an example of what is called a recalculated adjustment. The buffer flexes as demand changes up or down. This recalculation occurs through a rolling horizon. The length of that horizon is situational. The next three are what are called planned adjustments. Planned adjustments are things that we know will happen or plan to make happen. The first type of situation is for seasonality. Here a seasonal profile is built that flexes the buffer and zones to accommodate known demand increases. The next example is for the introduction of a product where market roll-out or acceptance may be staged. The final example is for a part that is going to be discontinued and we want to prevent having large obsolete quantities.
Buffers are intentionally flexed up in anticipation of planned uplifts or seasons and then flexed down.

29. Component 4: Demand Driven Planning
Demand Driven Material Requirements Planning
Strategic Inventory Positioning
Buffer Profiles and Levels
Dynamic Adjustments
Demand Driven Planning
Visible and Collaborative Execution
Shifts to a Sales Order driven planning method
Planned orders create supply orders in anticipation of need
Forecast error associated with Planned orders results in inventory misalignments and expedite expenses
Only qualified sales orders within a short range horizon qualify as demand allocations
Sales orders give a near perfect demand signal in terms of what will be sold and when it will be sold.
From:
Forecast
Plant
Planning
Suppliers
Logistics
To:
Sales Order
Plant
Planning
Suppliers
Logistics
Planning is the process of generating supply requirements. DDMRP use a unique equation called the “available stock” equation to alert planner for the need to launch supply orders. The available stock equation is on-hand plus on-order minus sales order (not planned orders) or work order allocation that are due today and in the past and that qualify as spikes in the near term future. Spikes are qualified through the combination of a spike threshold (represented by the dotted line) and a spike horizon which is a length of time that typically corresponds to a part’s lead time. Each bump in the order spike horizon represent a sales order but only one qualifies as a spike – the largest one that breaks threshold within horizon. That is the only future order that is included in the available stock equation. Here we see only two orders that require planning action, while one requires no action and the other requires immediate execution attention – meaning that open supply should be considered for expedite. The use of colors for a general reference and percentages for discrete reference allows planners to see relative priority in a short period of time.

30. Poll Question #3
How many of you directly tie the forecast to the creation of planned orders?

31. Component 4: Demand Driven Planning
DDMRP creates resupply orders based on the “available stock” status of each buffer. This gives prioritized sequence based on actual need.
“Available Stock” is unique to DDMRP – used to create supply order recommendations
On-hand + On-order – Qualified Sales Order Demands
Planning is the process of generating supply requirements. DDMRP use a unique equation called the “available stock” equation to alert planner for the need to launch supply orders. The available stock equation is on-hand plus on-order minus sales order (not planned orders) or work order allocation that are due today and in the past and that qualify as spikes in the near term future. Spikes are qualified through the combination of a spike threshold (represented by the dotted line) and a spike horizon which is a length of time that typically corresponds to a part’s lead time. Each bump in the order spike horizon represent a sales order but only one qualifies as a spike – the largest one that breaks threshold within horizon. That is the only future order that is included in the available stock equation. Here we see only two orders that require planning action, while one requires no action and the other requires immediate execution attention – meaning that open supply should be considered for expedite. The use of colors for a general reference and percentages for discrete reference allows planners to see relative priority in a short period of time.
On-Hand
On-Order

32. Qualifying Demand Past Due, Due Today + Qualified Spikes
Total Quantity Ordered
Today 2 3 4 5 6 7 8 9
Order Spike Horizon = Length of time in the future in which spikes are considered
Order Spike Threshold = Quantity in daily buckets which would qualify for available stock equation inclusion

33. Generating Supply Order Recommendations
Supply generation is based what zone the available stock equation places the part
Available stock = on-hand + on-order – QUALIFIED sales order demand (past due, due today and qualified spikes)
Part
Open Supply
On-hand
Demand
Available Stock
Recommended Supply Qty
Action
r457
5453
4012
1200
8265
No Action
f576
3358
4054
540
6872
3128
Place New Order
h654
530
3721
213
4038
2162
r672
2743
1732
623
3852
Expedite Open Supply (Execution)
10,000
5,000
r457
f576
h654
r672
Planning is done by the available stock equation. If the equation places the part in the yellow zone then an order is released.
Available stock is on hand added to on order minus demand.
Qualified spikes are large orders in the future. The horizon is typically the ASR LT. The order spike threshold is set at 50% of the red zone. The dotted line is NOT average daily usage – the dotted line is the threshold for qualified spikes.
In the event of a known short term promotion an order can be put into the system that would recognize the short term promotion as a spike.
The other smaller spikes are not considered as an issue because of the existence of the buffer. This is the reason the buffer exists.
For a part where the on hand is in the yellow zone and the available stock is in the green then no action is required.
For a part where the on hand and the available stock is in the yellow then an order should be placed with a quantity of part to equal top of green minus current on hand.
For a part where the on hand is in the red and the available stock is in the green then correct planning has already been done and the open orders need to be expedited.

34. Component 5: DDMRP Execution
Open Supply Priority Management
Order #
Order #
On-Hand Status
PO 819
WO 819 - - 87 87
Critical 23%
WO 832
WO 832 - - 41 41
Critical 37%
WO 211
WO 211 - - 72 72
Alert 54%
Priority by Buffer Status instead of Priority By Due Date!

35. The Power of DDMRP (Planning Perspective)
# of parts or SKU
Too Little
Red
Yellow
Green
Too Much
DDMRP Intro

36. Analytics and Metrics Starting Demand Driven Mature Implementation
Initial Results

37. FLOW The DDMRP Pyramid ▲ ROI Sales Orders Decoupling Points Lead Time
Better Alignment of resources to actual demand retains flexibility, promotes velocity with fewer course corrections.
High Service
Lower Inventory
Fewer Expedites
New emphasis on relevant operational components for FLOW.
Lead Time
Buffer Status
Order Minimums
Sales Orders
Decoupling Points
Fundamental planning equation based on sales order demand against dynamically managed decoupling points.
DDMRP is the new innovation in material planning and collaborative execution. DDMRP is multi echelon planning and execution solution that builds on MRP, DRP, TOC, Lean, Six Sigma with significant breakthrough innovation.
The fundamental principle behind DDMRP is to establish and maintain FLOW. Based on that guiding principle then there are fundamental planning changes required to react only to actual demand and establish decoupling points that will allow lead time to be compressed and return on capital employed to be improved WITHOUT compromise. These fundamental change then result in a new operation equation including a new lead time called ASR lead time, buffer status of the decoupling points and acknowledging any order minimums. This new operational equation then results in significant bottom line benefits without tradeoffs. At the top of the pyramid, the end goal is to dramatically improve return on capital employed. Case studies are included at the end of the session on actual companies that have achieved these results.
FLOW
Fundamental Principal

39. LeTourneau Case Study
DDMRP
MRP 39

40. Synchronization and Flow Challenge
Lead Time before DDMRP
Forestry
Products C
Demand / Information Variability
Distortions & amplification in demand requirements reverberate backward C
Suppliers
Mining
Products
Steel
Products
Component
Supply (H/L) C
Drilling
Systems
Generally we had a huge lack of synchronization. We had huge distortions in demand signals and requirements as well as huge delays and long lead times in getting what we needed where we needed it.
Supply Variability C
End Item Assembly inherits the amplifying upstream variability.
C = Customer
Offshore
Products
= Remote Location C

41. DDMRP Design C C FP C MP SP CS C DS OP
= Strategic Replenishment Buffers
= Time Buffer C FP
Suppliers C MP SP CS C DS
This gives you a high-level view of what the solution looks like. We use a combination of strategically placed stock and time buffer to absorb or dampen variation in both direction between the links of the chain. The “buckets” represent strategic stock positions and the “bars” represent strategic time buffers. The color coding system give us a highly visible status report through all levels. C OP
C = Customer C
= Remote Location

42. DDMRP (Longview) vs. MRP (Houston)
Stock-outs reduced by over 66%!
Low Inventories
High Service
Fewer Expedites
High Inventories
Shortages
Massive Expedites 42

43. About Chad Smith
Chad Smith is the co-author of the third edition of Orlicky’s Material Requirements Planning 3/E (Ptak and Smith, McGraw-Hill, 2011) and the co-author of Demand Driven Performance – Using Smart Metrics (Smith and Smith, McGraw-Hill, 2013). He is a co-founder and Partner at the Demand Driven Institute, an organization dedicated to proliferating demand driven methods globally.
Chad serves as the Program Director of the International Supply Chain Education Alliance’s Certified Demand Driven Planner (CDDP) Program. Clients, past and present, include Unilever, LeTourneau Technologies, Boeing, Intel, Erickson Air-Crane, Siemens, IBM, The Charles Machine Works (Ditch Witch) and Oregon Freeze Dry. Chad is also a certified expert in all disciplines of the Theory of Constraints studying directly under the tutelage of the late Dr. Eli Goldratt.
Contact Chad at: