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How can demand-driven MRP boost supply chain efficiency?

Demand-driven MRP reduces uncertainty, volatility, complexity and ambiguity -- factors that are often responsible for degrading supply chain efficiency. Incorporating DDMRP into a supply chain plan can ensures these negative factors are avoided.

Demand-driven MRP is a materials planning tool that some companies are turning to as an alternative to traditional...

material requirements planning (MRP). Also known as demand-driven material requirements planning (DDMRP), it is gaining some traction as a way to manage critical components that have long lead times. Proponents say it has a number of potential benefits, including the ability to reduce stockouts and bring stability to chaotic production environments.

DDMRP relies on actual demand to position where inventory is and how much is to be held to minimize lead times and reduce variability in the supply chain. It is able to do so by dynamically adjusting strategic stock positions so as to promote flow and reduce inventory capital. 

Although the MRP program in SAP ERP Central Component provides a number of helpful functions, such as automatic calculation of reorder points and safety stocks of materials based on past consumption patterns, MRP-generated replenishment proposals aren't well suited to providing timely information availability and enabling accurate quantity flows in a complex and volatile globalized supply chain.

Demand-driven MRP is an initiative of the Demand Driven Institute, led by Carol Ptak and Chad Smith, with a focus on helping supply chains provide high service levels. A service level is the company's ability to fulfill a customer's order or a replenishment order on time and in full. DDMRP draws from various frameworks, including relevant aspects of MRP and lean manufacturing principles, such as visual cues to signal the need for replenishment. For example, DDMRP uses a tricolor system to quickly provide materials planners with necessary information on materials quantity flows.

The DDMRP methodology has five sequential elements.

1. Strategic inventory positioning

A key component of demand-driven MRP is strategic inventory positioning, or where inventory is placed. With DDMRP, the stock (supply sources) is placed closer to its demand sources; for example, smaller warehouses or storage locations closer to the demand sources.

Supply sources can also procure materials from vendors whose lead time, or product delivery time, is shorter than a vendor with a long delivery time.

Demand sources include all the production steps needed to produce a product (or semi-finished product); each step requires supplies that are quickly and readily available.

While traditional MRP calculates all the raw, packing and semi-finished materials' quantities (or ingredients) required to produce a finished product, MRP isn't able to respond quickly and efficiently when there are supply disruptions or demand variability. The resulting inefficiency is known as the bullwhip effect.

In contrast, DDMRP delinks (or decouples) ingredients required to produce a product by placing intermediate stock at various decoupled points, so that planners can immediately see which decoupled point (and its inventory) needs attention due to a change in demand or supply.

In other words, DDMRP works on a piecemeal approach to materials planning as compared to MRP, which is a complex web of suppliers, vendors, in-house production and outsourced manufacturing.

2. Buffer profiles and levels

If a company produces products with lots of variants, then maintaining buffers of so many individual materials can become a herculean task. To address this challenge, materials that have similar attributes or profiles, such as high-value or critical-to-production components, long lead times, consumption patterns (high, medium, low) or that share the same transport routes or zones, are grouped together in buffer profiles.

These buffer profiles are then set with buffer levels, such as maintaining a minimum of three days of inventory, so as to ensure replenishment orders are created on time.

The core buffer zones use three colors to signal status: red for alerts, yellow for attention, green for an achieved supply chain stability.

3. Dynamic adjustments

As strategic inventory buffers, or supply sources, are placed near their demand sources, materials planners are able to intervene quickly and act fast in the case of an upward or downward change in demand by increasing the production of a required part or reducing the demand from supply sources, respectively. Any qualified spike that accounts for increased sales, such as a year-end inventory clearance sale or an annual festival, is taken into account.

4. Demand-driven planning

With MRP, demand planners produce and procure to meet future demand based on a materials forecast. But this forecast is often highly inaccurate, and companies end up with excess produced or procured materials that end up laying in warehouses and tying up capital.

With demand-driven MRP, demand planners use a formula (known as net flow position) to match firmed and qualified sales orders with available inventory plus on hand orders. (The formula is: net flow position = qualified sales order demand - on-hand inventory + on-order materials). Any material that still needs to undergo quality inspection is not counted in this calculation, in case it is rejected for quality reasons.

Since materials are grouped, it is possible for materials planners to quickly see materials that need action or attention based on the tricolor visual signals of net flow position of individual materials.

5. Visible and collaborative execution

Eventually, all the materials planning in the first four steps culminates into timely action and effective execution in the form of procurement, production or stock transport orders. This is possible when demand-driven MRP is able to alert materials planners of the buffer statuses of decoupled materials.

DDMRP should also be able to alert you of any deviation from supply chain synchronization. While buffer alerts are meant for on-hand and projected on-hand stock, buffer synchronization focuses on alerting materials planners whenever there is deviation from material or lead time synchronization at various decoupled points.

Figure 1 is a freely available, Microsoft Excel-based, demand-driven simulation tool that compares the benefits of implementing DDMRP with traditional MRP. In this hypothetical example, implementing DDMRP (black dotted lines) brings a 31% reduction in stock level (Y-axis) when compared with traditional MRP (blue dotted lines) over a 10-week period (X-axis), while maintaining a high service level of 98%. The material replenishment lead time is four days.

graph showing comparison between DDMRP and MRP stocks
Figure 1: Comparison between DDMRP and MRP stocks

As with any new initiative, a company can reap greater business benefits by embarking on a pilot project of using demand-driven MRP on a few selected materials for planning. With lessons learned and experience gained, the pilot can expand to cover more materials, and even several physical and geographical locations.

To that end, SAP is working on bringing demand-driven MRP to S/4HANA, but there's still no firm release date. In the meantime, several third-party software vendors have stepped in to fill this gap by offering DDMRP as an SAP add-on. Examples of this include Camelot ITLab and Olivehorse Consulting Services, but the Demand Driven Institute includes a full list of compliant software.

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