Absorption Based Planning

There is – and actually has been for a long time – a lot of talk about buffers, safety stocks and de-coupling points in supply chain planning. Let me add another term to this: shock absorbers. “Oh my”… you might cry out “Not another buzz term or theory!” I’m with you… too much confusion and buzz around this subject. But please allow me to take a shot on simplification and order in this area.
From experience we know that supply chains are exposed to variability in supply, demand, in process and sometimes we even inflict it ourselves. We also know that when variability is present things do not work out as planned. We might end up with stock-outs, too much inventory, late deliveries, backlogs, exception message galore or general chaos. That is why we should plan with variability in mind.
None of this is new or of any revelatory kind. We all know this. The question is what we can do about it. And there are many schools of thought and also some schools of not-so—much-thought-through thought. My approach is one of segmentation with subsequent policy setting. That is also not new but just recently I had a little bit of an epiphany (far from earth shattering) with what I call absorbers. Allow me to elaborate:
Most planning systems I come across are set up with rigid connections. I call these deterministic. In it network nodes and Bills of Materials are strictly dependent on each other and any changes in demand or supply will cause a “rattling” of the entire structure. There is immense noise and nervousness in such a system and it often produces superfluous inventory, vast amounts of stock-outs and exception messages with no end to it.

Planners are usually very aware of this nervousness and being forced to work “in” the system (as opposed to be allowed to work “on” the system) trying to facilitate the issues with expediting and fire-fighting. When the situation starts to look like an unsurmountable mountain of orders, materials and requests, the static safety stock looks like a plausible solution. That is when things completely fall apart and for some reason no one can explain why inventories grow further and stock-outs happen more frequently (delays, my friends, delays is the problem).
So what can be done? I am not claiming that I know the all encompassing solution to the problem but let me make a couple of suggestions:
First, assess your network and bills of Materials and look for spots where you can de-couple the rigid structure. What I mean by that is that you free up the deterministic planning process of dependent requirements and dependent supply. De-coupling, however, is not limited to only inventory buffers (and that is my little epiphany here), it may also act like a shock absorber.
The problem with an inventory buffer is that you can only use it if your past consumption is somewhat consistent, that part is not too expensive and the replenishment lead time is relatively short. Some of those thought schools might not agree but how do you calculate a reasonable buffer that doesn’t become real expensive when you don’t know anything about the future demand, one part costs $1,000 and it takes 3 months to replenish?
Don’t get me wrong… I love replenishment buffers to de-couple rigid supply chains but sometimes they just don’t work. I have used these buffers extensively in our optimizations but often the planner rightfully asks “what if I get unusual demand? Where is my signal? How do I make sure I don’t miss it?”. My belief is that you must ignore the little signals but still see and react to the big signals. And that can be achieved by way of a shock absorber.
So what is a shock absorber? It is NOT inventory! Let’s think about safety stock in a planning environment (static or dynamic. Counter to most beliefs it is not inventory as long as it is in the future plan and it is acting as a buffer (there is a minimum and a target level of your safety stock). If you have such a buffer, then a replenishment element is only generated when the buffer is exceeded with demand. Any demand changes that are within the buffer between a minimum and a target level are simply absorbed.
Let’s further explore how this can work when your planning operations run on SAP software. The absorber I am talking about may be set up with a Range of Coverage profile (dynamic safety stock). SAP‘s RoC has a minimum and a target range of coverage. If, let’s say, you have a minimum of 1 day and a target of 5 days and your average future daily requirement comes out to 10 pieces, then you absorb incoming variability of 40 pieces. Note that this is not actual inventory you hold in your warehouse. It is a quantity you are holding in a plan. Any changes (in forecast or customer orders) not exceeding 40 pieces are simply absorbed in the profile and do not cause noise. However, if there‘s a BIG change the signal transmits right through to the next level (use MRP type PD together with a RoC).
And this is the desired outcome for materials that can’t be replenished with a consumption based method.
Sounds too trivial and simple? Good! Because that’s what we need in this overly complicated supply chain world (sometimes it seems to me that it is made complicated on - some calculated - purpose).
In summary here is my suggestion:
1. visualize your supply chain dynamics (a value stream map)
2. run a segmentation (ABC, XYC, EFG, UVW)
3. find places where you can decouple with inventory buffers (MRP type VV or V2 with a coverage profile)
4. find places where you need to decouple with absorbers (MRP type PD with a coverage profile)
5. replenish (accordingly), rinse and repeat (periodically)
You will find yourself working „on“ the system now and the system starts working for you (instead of you working for the system).
In the end it does not take a new revolutionary approach, theory, culture or methodology. Common sense is good too. Use it.