A Perspective on Supply Chain Optimization

For a long time there has been a search for the perfect planning system. I have been looking for it too but after many years of trying, I've come to the conclusion that such a thing only exists for very specific situations. What I mean by that is that as we try to generalize, package and roll-out solution to the general market, I have seen nothing but either failed, misrepresented or incomplete solutions.

What I like is flexibility… having options… matching the proper strategy to the respective situation. It is hard to come up with a methodology, theory, package. philosophy or whatever you want to call it, when there is a multitude of industries, production types, inventory requirements and many, many situations. There are products that are expensive, have a long replenishment lead time, are hard to predict, demanded as a commodity, large in size, hard to move and complex to manufacture. Then there are products that go bad in a short period of time, must be refrigerated, are cheap, have consistent demand and consumption, are small in size, need a specific package and are strategic and important to the success of the business… and then there are a million situations in between and left and right of these.

No matter how much some marketers try to convince me that this or that method is superior to everything else… I don't buy it! As an example… deterministic planning (pure MRP) is prone to the bullwhip effect and has very detrimental effects to a supply chain (I've written extensively about the bad behavior of 'plan on demand/forecast driven' myself)… in maybe 97% of all cases. But in some cases it might actually be the best thing you can do. A static safety stock might increase your dead stock, but when the product is a life-saving instrument that might be exactly what you want. My point is… don't just let someone tell you what the solution is… bring up the specific situation and only look for the solution then. Because this is how most - if not all - ERP systems were implemented: make up a template or blueprint that covers most of your situations and then force the solution onto everything that comes in your way. Not a good idea as we all know when we look at how these systems are getting used (or not, when spreadsheet hell takes over the transactional business).

What I am suggesting to the contrary is that instead of buying a "fix-for-all" solution, develop good intuition to understand the dynamics of your supply chain and build a toolbox full of what I call 'Connectors'. Most people will want to sell you an all-encompassing methodology… a theory based on which service levels go up and inventory values go down. I like most of these things, just not as the 'fix for all'. There are many people today that promote buffer planning. Those are awesome solutions that work wonders in many situations because they replenish independently and de-couple themselves from variable demand. But what if the part is of strategic importance and you must know when there is an unexpected rate hike in demand? In a pure buffer you don't see this coming. Time to use an absorber. The absorber swallows little demand variation and alarms you of the big ones… in that it passes it right through - deterministically! MRP (determinism) doesn't always mean bad things… sometimes it’s actually helping you.

I am not promoting any one theory or methodology (I will leave this up to the people selling you new software or projects), I am suggesting that you put together a toolbox of connectors and apply them when the situation calls for it. One thing most thought leaders forget, is how to actually apply the teachings to the real world - in other words: if I tell you that you must use an inventory buffer, a time buffer or a capacity buffer… how do you actually do that in your planning system? A blog post is certainly not the right place to go into a detailed documentation of a system configuration, but I want to put the money where my mouth is and give you at least a few hints so that you can try a few things. I can only speak for SAP though… the following is an incomplete list of tips for SAP-ERP.

For a deterministic connector use MRP Type 'PD' and a static lot size. Every demand signal is transmitted unhindered. This will alarm you of any change - small or big - and also allows the bullwhip effect to do its thing. If you combine the 'PD' with a static safety stock on the left side of the MRP2 screen you get an unmovable block of inventory from which any demand signal is reflected and transmitted. Static safety stock is ignored in the MRP Run's net requirements calculation and taken out of the stock/requirements situation right away. All of MRP plans without static safety stock (there is, however, a way to make some or all of the safety stock available for planning).

To use a buffer in SAP you have a number of options. A buffer, as defined in much of today's literature has minimums, maximums and an ideal zone. You can work with reorder point procedures, min, max settings and the safety stock. My favorite way to define a buffer is with MRP type 'VV' and a Range of Coverage profile on the right side of the MRP2 screen. A buffer connector decouples itself from variable demand and replenishes itself based on historic consumption. The dynamic safety stock (Range of Coverage profile) absorbs the variation from actual consumption and increases with growing demand of the future. However, it only slowly reacts to future rate increases in which case I suggest to use an absorber. The absorber uses MRP Type 'PD' in connection with a dynamic safety stock. That way small variation is absorbed and big changes go right through to give you an exception messages and to generate an extra replenishment proposal.

These are just four tools in the box. You might need a lot more. As I write before… build intuition about what to expect from the dynamics of your specific supply chain and build up your toolbox.