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What KPIs can assess demand-driven MRP when using SAP ERP?

Setting up demand-driven metrics and using analytics to monitor them can provide benefits such as helping to reduce working capital commitments and improving service levels.

Assessing the impact of implementing demand-driven materials resource planning requires defining important key...

performance indicators, then using analytics to monitor them.

SAP now offers demand-driven MRP -- also known as DDMRP or a replenishment solution -- for SAP S/4HANA Cloud and on-premises editions. SAP will be offering the same capabilities in SAP ERP Central Component (ECC) in early 2018. For now, only third-party add-ons are available to handle the analytics function for S/4HANA Cloud, On-premises, ECC, Advance Planning and Optimization and Integrated Business Planning.

Before delving into the three key performance indicators (KPIs) a company can monitor to evaluate the impact of its demand-driven MRP initiatives, it's important to first gain a quick understanding of how demand-driven materials planning actually works.

Demand-driven materials planning requires setting up inventory buffers at strategic points in the supply chain -- known as inventory positioning -- so as to independently plan, schedule and execute materials supply based on actual demand. Not only is the inventory position critical, but so is how much inventory is placed, known as sizing, so as to bring harmony between materials' demand and supply.

Effective inventory positioning and sizing immediately lead to business benefits such as reduction in working capital, storage costs and expedited material costs, all while increasing production efficiencies through effective machine capacity and resource utilization. Analytics can play an important role in a closed-loop approach to materials planning; supply order management; the regular, timely feedback on information and material flows; and in identifying areas for improvement.

Here are three demand-driven KPIs or metrics to monitor with analytics.

Signal integrity

Signal integrity in the supply chain monitors if there's a complete, correct and timely communication of requisite data and information to ensure replenishment. This replenishment should not only be timely, but should also meet the recommended quantity using the demand-driven approach.

A delayed placement of a replenishment order or a quantity mismatch can contribute to supply chain disruptions. Analytics can help look into the root causes of these disruptions, so as to improve the information flow and maintain signal integrity.

Decoupling point integrity

A decoupling point is an independent stock position in the supply chain that is strategically positioned to absorb the effects of demand variability or supply disruptions -- all too common factors in today's volatile and complex supply chain.

To ensure the integrity and reliability of a decoupling point, it's important to constantly evaluate the reasons, factors and causes that lead to deviations in material and relevant information flows. Using analytics, materials that exhibit a large variability between planned and actual supply order management are immediate candidates for attention and corrective actions.

Decoupling point velocity

The velocity at a decoupling point measures the frequency between planned and actual placement of supply orders. Take this example: After implementing demand-driven MRP, 10 purchase orders for a material are planned to be placed with a vendor on a monthly basis. However, in actuality, 14 purchase orders are placed within that time period. This deviation between planned and actual purchase orders points to an area where order frequency needs to increase.

Similarly, a group of materials belonging to the same classification or with the same attributes is measured for flow index; that is, how their ordering frequencies compare with their average daily usage.

While often the focus is on the materials that move too slowly or are ordered too infrequently, an equally important factor to look at is those materials that are ordered very frequently. This can mask the actual velocity of materials movement and, therefore, is a candidate for improvement in the materials flow. With analytics, such critical metrics are monitored and action can be taken to improve the flow index.

The key to ensuring success in materials planning and a smoother supply chain using demand-driven MRP requires that you focus on protecting and promoting material and information flows. This is only possible by leveraging the power of analytics.

Next Steps

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This was last published in November 2017

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