The old paradigm and the new...

in this post I'd like to write about historic development of MRP systems and most planner's pursuit of “The Holy Grail” to Improve Forecast Accuracy.
From Orlicky’s early MRP system through today’s Advanced Planning Systems there were lots of advancements from a technical point of view. With new databases like HANA we have now so much computing power that an explosion and net requirements calculation of a Bill of Material – no matter how deep or wide – is a non-issue. Integration was also accomplished. First, through MRP II’s addition of capacity and resources leveling as well as a material availability check. And with the dawn of ERP systems, notably SAP’s R/3 the assimilation of HR, Sales, Finance and much more was accomplished. Eventually, the Advanced planning Systems (in SAP that was APO) took center stage and promised full automation.  However, it was forgotten that complex, non-linear supply chains afforded much more from organizations that had to stay competitive. Noise-laden, constantly expedited production programs wrecked havoc on purchased parts requirements and materials planners still today are chasing forecasts and ever changing demands with loads of variability in the hope that they can expedite and manual correct infeasible plans. So... Over the years the tools have developed and grown technologically but not really delivered results
Additionally, demand fluctuations being propagated from consumer behavior upstream through the supply chain define the bullwhip effect. In fact, the increase of fluctuation is quite large as we go ‘backwards’ towards the source. Research indicates a fluctuation in point-of-sale demand of +/- five percent will be interpreted by supply chain participants as a change in demand of up to +/- forty percent. Much like cracking a whip, a small flick of the wrist (a shift in point of sale demand) can cause a large motion at the end of the whip (manufacturer’s response)

This phenomenon still holds true today in most supply chains. Companies driven by MRP, MRPII, ERP or APS systems and their inherent deterministic planning place pressure on planners. These are faced with sheer insurmountable tasks to keep high service levels to the production lines with low inventory holdings in the face of variability. The only remedy seems to improve forecast accuracy which is nearly impossible as the future still can’t be predicted with certainty. It is time to rethink and revive this very important department. Years of negligence due to excitement about new technologies have taken a toll on its performance and effectiveness. The Bullwhip Effect is getting the better of us and, in many cases, destroys cash flow and profitability

The new paradigm centers on variability and its detrimental impact on the bottom line. Variability is anticipated and part of the plan. Only then can you plan strategies to either reduce or absorb the enemy number one of any value chain. A reduction of variability directly translates into a reduction of required inventory levels, a lift of availability and with it the service levels and shorter cycle times

Instead of ‘single order related replenishment’ – which is a prevalent planning method in many of today’s organizations – our method is mostly demand neutral and plans with buffers to fulfill any actual requirements… within its defined performance boundaries and set service levels. This will make your system liberated and independent from demand swings and cuts out the uncertainty in forecasting.

Like a seawall holds of surges of water, the new paradigm provides protection from the bull whip effect and ensures noise-reduced and leveled replenishment and inventory management of your purchased parts, ingredients or materials. What we suggest is... Instead of creating a detailed plan for a single situation that will never occur… 

...create a set of policies that work for a range of situation, using the buffers time, inventory and capacity. The buffers Time, Capacity and Inventory are an integral and important part of our system of Effective Materials Planning as they serve as the basis for the construction of replenishment policies. As described in the award winning book Factory Physics® or the teachings of Demand Driven MRP, the right combination of buffers to counter variability is key. It reduces noise, increases transparency and automation, allows for integration and helps to align the plan with a company’s supply chain strategy. It even helps to drive awareness for the need of a strategy and the definition of performance boundaries and general user or planner guidelines.

Buffer Strategies help to standardize your Planning and Execution and provide standard operating procedures to help planners, buyers and schedulers to align their activities to achieve a large increase in performance and profitability.

How do you construct these buffers into SAP? That answer requires a bit of an elaborate discussion but in a nutshell: for the inventory buffer... instead of the static safety stock (which drives a bunch of dead stock) your using a dynamic safety stock with a range of cover profile. For the time buffer, you fix the availability checking rules and work with safety time (On MRP2) and to use capacity buffers you must set up your value stream and production scheduling methods in a way that your bottleneck work center runs below 100% utilization.