Why digitalization can't fix your supply chain problems

There's a pretty good chance that when you asked for a solution to your supply chain problems, someone brushed you off saying "don't worry, we're digitalizing soon". Just look at all the software vendor's marketing pitches, browse discussion groups and networks on the internet, listen to analysts and consultants... more often than not digitalization is perceived to be the holy grail. While writing this post I called up LinkedIn and the second post had the following text:

"Delighted to host the <name left out> workshop with more than 30 top customers in <location left out>. Focus on <software vendor left out> Digital Supply Chain Product Strategy and tangible business use-cases for Intelligent Technologies like IoT, Machine Learning and Blockchain. Thank you for your participation and insightful discussions. hashtag#digitalsupplychain "

The 3rd and 5th article were similar but I simply want to point out that the talk about digital supply chains is over proportional compared to the necessary talk about human factors influencing the outcome of planning. Undoubtedly, digitalization is coming and it certainly is necessary, however, my point here is that by simply digitalizing your supply chain or shop floor or company or whatever, you're not brushing away the problems inherent to supply chain dynamics.

In my opinion digitalization or, as it was previously called, software implementations will get you two primary benefits:
- process automation and standardization to free a planner's time away from doing busy work
- improved quality of information which allows the planner to make decisions that the machine (that digital thing) is not good at making

Now many of you will say "but the machine is now intelligent... " Really? Are we there yet? Then our manufacturing and distribution companies can be solely run by IT departments (they are already anyway) and we don't need planners anymore? The VUCA world (Variability, Uncertainty, Complexity, Ambiguity) is real and unfortunately (or thankfully) we're still dependent on the excellent functioning, very creative and immensely intelligent human brain. Humans are still making decisions and are still running the show. Machines are still stupendous data crunchers but they're very good at that.

Let's remain flat footed and not exaggerate what digitalization can do for us. Except, of course, if you're making a living selling digitalization. But for the rest of us... those that struggle to keep the right inventory at the right place in the right quantity at the right time, let's use the machines (and software and all things digitalized) for what the are good at...

- automating so we have more time to work and think analytically and make good decisions
- increase the quality of data we use to make decisions so that we make better decisions

...and further our knowledge and experience with the dynamics of a supply chain, so we can effectively use our brains to fight the challenges we're faced with by the VUCA world.

Intelligent, experienced and effective planners are still rocking the supply chain world! Let's work on raising good, effective human planners too... spend some of the digitalization budget on the human factor... it pays.

...and then I wonder why my plan doesn't work out!

Taking the noise out of the planning process improves delivery reliability and therefore fill rates to customers and production lines. I don't believe that many people would disagree with me on this. But why? Because when you send your suppliers (internal or external) an even demand, chances are that they deliver regularly and more reliably as well. Therefore, when we engage in a supply chain transformation, the first order of business is to stabilize and dampen inventory swings and generate leveled demand to the production lines and outside vendors. We do so using buffers and shock absorbers.

Now the big question is how and where to set the buffers and how big these ought to be. In my quest to optimize buffer levels I like to apply various mental models so I can analyze the problem from various viewpoints (if you follow discussions around the subject on the internet you will find out quickly that the topic is quite complex and supply chain dynamics are not necessarily easy to understand or intuitive). First of all I have come to the conclusion that chasing forecast accuracy is not very benefiting. Even If you’re lucky enough to work out the ideal plan (with very high forecast accuracy), what is it good for if your suppliers can’t deliver to it? It does seem nonsensical to shift priorities from trying to increase forecast accuracy to worrying about your suppliers, but don’t you think that when your supply comes in regular and reliable that you have a lot more control over your inventories and fill rates?

So if the intention is to level the demand to our production schedulers and/or outside suppliers then we must absorb as much noise as we can. Some suggest to de-couple parts from demand using buffers. That works in some cases but when you need visibility into future changes, this can fatally mess with your plan. I personally believe in absorbers, cushions, whatever you want to call them. In a cushion noise is absorbed to a degree and if there's a big change coming at you, you'll be notified by your planning alerts. Depending on the situation (high or slow mover, consistency in consumption, value of part etc.) you need to decide on the size of your absorber.

Other than most believe, absorbers can be implemented not only on the supply side but also on the demand side as the following graphic shows:

The absorber on the supply side is a dynamic safety stock that goes up and down with varying demand and has a minimum, a target and a maximum level. If the minimum is breached, noise transmits and alerts. The same happens if the maximum is exceeded. On the demand side we use the forecast as a buffer. To make it effective we increase the demand forecast and level it so it wraps around - and absorbs - actual demand. Once, through carefully defined consumption logic, the actual demand exceeds the forecast envelope, we use the supply absorber until the minimum is breached.

This all means that I am sending a very level demand to my suppliers and it stays that way with all the little changes until a big change alerts me to take action and expedite. My suppliers will thank me for that and after I get deliveries as expected and reliably, I really don't care that much anymore whether I had a forecast accuracy of 96 or 97 per cent.

People often wonder why their plan doesn't work out, but is it really so difficult to figure out that when you disable your suppliers from delivering on time, that it's impossible to fulfill a plan?

What's wrong with this picture?

Just this week I came back from an analysis on how a very large, global company is planning their replenishment of purchased raw materials and manufactured goods. We've looked into many functional areas and interviewed most of the users in that plant. Then there was one thing that really stuck out to me. You can see it in the following graphic:

The graphic shows one of their highest mover's consumption and receipts pattern as posted into SAP. when the red line goes up the receipts outweigh consumption and if the line goes down the opposite is true. The resulting level represents the inventory holding of that day. Whilst it is not difficult to discern that there is an upward trend of some sort going on over time, the real question is why does it consistently go up.
The easy answer is that there are simply more receipts than issues. Yes, but why do they keep on bringing more in than they consume? Wouldn't it be prudent to adjust the receipts to the issues so that the inventory level stays at the same low level as it was in June 2016 (which was plenty)?
To make my point of what's happening here, I also called up the Receipts/Issue diagram in SAP. It displays cumulative receipts and issues and if you take a close look you can see that the gap between those ever widens - which means receipts consistently outweigh issues or consumption.

Back to the question why and the 'not so easy' answer... if you look at the red line (inventory) you can see that consumption goes down very regularly (it's always the same angle). But receipts are pretty regular too. Only do they go up steeper than the issues, which go down flat. There are a number of dynamics going on here. For one this material is planned deterministic by placing replenishment orders with a long lead time to an anticipated demand. That demand is stubbornly overstated and there is no check in place when inventory keeps rising. Also, the planner is much more afraid of stock-outs than they are punished for holding too much inventory. Therefore, if one can't look at every part every day then keeping it coming is not a bad solution for them.
In my relentless efforts to try to convince organizations that placing buffers to absorb variability is better than to try to bring in... 'exactly what I need in exactly the quantity that I need it at the exact time that I need it', I often am faced with resistance to do so (calculating and placing buffers after analyzing historic consumption by the system) because planners do not want to hand over their calculations to SAP. They'd rather do it themselves to stay in control...

look again at above graphics! How did that work out for you?

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The incredible Power of a Material Forecast

What is a material forecast? This is not to confuse with sales forecasting or a master plan where finished good's demands are forecasted through product groups. A material forecast relates to the anticipation of future consumption of purchased parts. In SAP ECC, for example, you can assign a material forecast as a policy. In that case you would use the MRP type VV together with a lot size procedure and a buffering strategy (I suggest a dynamic safety stock through a Range of Coverage profile).

This would result in a de-coupling of the part from any dependent requirements coming through the Bill of Material and the only demand that triggers replenishment, is the material forecast itself. Let me be a little more descriptive… When using such a policy you are - for planning purposes - ignoring any demand coming from a master plan and simply fill up stock at the beginning of each period… irrespective of what that a finish goods or production planner thinks you need to put up, based on what they think they will need.

To not have visibility into the future scares the living daylight out of most buyers and materials planners! This is so, because most people are told that they must bring in exactly what we need, exactly when we need it (who the heck came up with that mantra?). The problem with this kind of thinking is, that you will never exactly need what you think you need when exactly you think you need it. But because you act this way (and order this way) your supplier is chasing your lead… and that "lead" pulls in and pushes out and pulls in and pushes out and orders less and orders more and…

Because your supplier never knows what you want and when you want it, they get frustrated and won't make stuff to stock anymore. They say "if you want 25 pieces on November 20 then place an order and I start the process the first week of July. You can then have it delivered on 11/20 because it takes me 3 months to get my raw materials, 2 months to manufacture the parts and 3 weeks for transportation to your facility." So you place the Purchase Order and after 2 weeks the master plan has changed and you need 22 --> order an additional 2! One week after that it turns out that we need the parts only in December ---> exception: push out the order. Then a rush order for the finished product comes in and we need some of these parts in September ---> exception: pull in.

Now, this game can be repeated (and will happen) over and over and over and you end up in exception message galore… and you'll experience a constant back and forth between stock-outs and excess inventory… and the supplier goes crazy!

Here is an idea! Ignore all this stuff because it is not going to happen anyway, and - if you have some sort of a consistent consumption pattern - just fill up your inventory at the beginning of the period, so that you can consume what you need without running out and with no excess stock. How do you do that? You forecast an approximate future consumption (which is easy if you have somewhat consistent consumption) and put an additional buffer on top (but it must be a buffer, not a static safety stock) and tell your supplier to deliver the same quantity at the beginning of every period (so you end up ordering the same quantity regularly). Provide the supplier with that forecast and give them a guarantee that you'll pick up that quantity at that time for at least the next [fill in blank here] months. You will be surprised how the supplier all of the sudden makes the parts to stock before you ask for them, how the lead time shrinks to the transportation time only and how you get your stuff on time and in full like clockwork…

I know, I know what you say… "I can't do this. What if I have an unusual demand? What if I don't have any demand anymore? What if Florida freezes over?" Let's compare what you do today and what a material forecast does.

1. Today your suppliers experience an incredible amount of noise in your ordering. They insist to start the process ONLY when they know what you order. Tomorrow they would experience a leveled demand from you and make this stuff to stock and deliver regularly to fill your inventory at the beginning of every period.
2. Today you receive your parts after a long lead time and sometimes you'll get what you ordered. The problem is that what you ordered a long time ago is not what you need anymore. Tomorrow you just consume what you have in stock and the supplier fills it back up. Should you need more than what you forecasted, you'll run out… BUT!... The next receipt from the supplier is near. (You will not run out at the beginning of the period and if you run out at the end your next, scheduled receipt is close)
3. Today you are fire-fighting the hell out of your ordering process (exception messages are plentiful)… AND… nobody is able to help you. The suppliers can't keep up with your ordering patterns and will give up on you. Tomorrow, the supplier receives a leveled and consistent stream of orders which they are able to plan for on their side. Once the relationship has improved, engage with the supplier to have him take on part of the safety buffer your maintaining ion your side

The graphic shows the effects when you switch from a deterministic replenishment policy to a material forecast (we call the policy "Dynamic Buffer"). In this example the average inventory holding drops from 200 parts to 40 parts. The supplier is given a forecast to deliver 62 parts at the end of every months. This will ensure that there are 62 pieces plus 8 pieces buffer (5 days in the Range of Coverage profile) in inventory at the beginning of every month. With an average daily consumption in the past of 3 pieces per day, a stock-out - if it ever happens - can only occur towards the very end of the months and therefore, the worst that could happen is that a production order would have to wait for a few days until the next receipt comes in.

I strongly suggest that you explain this new situation to the supplier and give him a guarantee that you will pick up these exact quantities at exactly that time for at least the next 3 months. This should motivate them to make the parts into their own stock ahead of time so that they only need to pick the parts from their inventory and ship it on the 28th of every months. Can you see how now the lead time (Planned Delivery Time in MRP2) drops dramatically? In the above example the lead time was cut from a whopping 212 days down to 2 days transportation.

Let me be clear, this is not for every part… it has to have some sort of consistent consumption pattern and there must be some movement. But I am sure there are plenty of parts in your business that match that description… so why not improving your life as a planner at least to some extend?

Per my experience it is very difficult to get planners to not only dare to move to a "dynamic buffer" policy but to also leave it there. They feel an incredible amount of pressure coming at them when their managers, partners or colleagues do not agree with what they see now in MD04. The key to getting the change done is to communicate properly with all parties involved. You'll have to explain your intent and show the benefits this will bring along.

The switch is very hard to get done - not because it's not working - but it's hard to imagine that all of a sudden the system works for you, instead of you working for the system.

What's the Difference between a Buffer and a Shock Absorber?

Lately, in industry publications and social networks, you can read a lot about shock absorbers and how to apply them in supply chain planning to reduce variability or absorb it. Apparently, many thought leaders have been replacing and complementing buffers with these shock absorbers… at least in theory. Not wanting to get into anybody’s conversations but I do have my own view on the topic. In my opinion a buffer and a shock absorber are not the same thing and therefore I do not use them interchangeably.

Let me explain my thinking. A buffer is a medium (inventory, capacity, time) that blocks and swallows up a signal... like a firewall prevents heat getting through to the other side. A shock absorber takes the signal in and absorbs it to a certain degree. When the signal is big enough and the absorber‘s buffer is exhausted, there is no holding back anymore.

To use an analogy, think of  driving your car into a pool of mud at 50 miles an hour and you know how a buffer acts. Drive that same car through a pothole 10 inches deep and you get an idea what shock absorbers do… they let you feel what a big change in variability there may be, while a buffer simply stops you right in your tracks.

The problem with buffers is that a part equipped with a buffer doesn’t ‘see’ when a big change in demand is on the horizon. The buffer simply blocks all that’s coming at it. The shock absorber, however, swallows up the little changes but carries through the big ones. That can be very helpful in some situations but annoying and inefficient in others. This is why both buffers and shock absorbers are awesome tools to take the noise out of your supply chain. You just have to use them in the right situation and not mix them up because that can lead to chaos and bad planning.

In the same way one certainly doesn't want to drive a brand new BMW into the mud to slow down when there are a few bumps in the road. But coming down from a mountain pass in a 14 wheeler with failing brakes, you’d be happy if there’s a buffer coming up absorbing all that energy.

Who needs a rough-cut capacity check anyway?

Just recently I was visiting with a manufacturing company that builds parts for the automotive industry. It’s a repetitive business and they use Make To Order and Make To Stock strategies. The problem is that there is a humongous backlog, because there isn’t enough capacity and there is too much of the stuff nobody requires and too little of the stuff they desperately need.

I do not want to go into the specifics why I think the backlog is there (no flow and therefore wasted capacity, missing parts and therefore orders stuck in the line wasting capacity, no scheduling system and therefore inefficient schedules and therefore wasted capacity). No… I want to ask why there is no planning? All over the internet there are discussions going on where everybody pitches in with the newest and greatest planning methodologies… Advanced Planning & Optimization, DDMRP, IBP, S&OP, agile, lean. Then there are the software solutions that supposedly make it all happen… and eventually everybody is so keen to improve forecast accuracy with demand sensing or probabilistic forecasting. Everybody is out there to get the best and coolest planning solution.

Why? Why is so much money spent on implementing the greatest software tools, applying the best methodologies and engaging thought leaders and evangelists when - in the end - orders are scheduled in MS Excel (where there is no information about capacity, inventory or demand), carefully crafted strategy (like are we making to stock and how big is our shock absorber) gets blatantly ignored and all the big rules fly out the door when the sales rep claims a super important customer request?

The last six customers I have worked with did not do planning. That is a heavy statement. Especially if I would tell you the names of the six… you’d know them all by name. So what do they do? Let me start with what they do do and then we’ll discuss what they don’t do. Some of them work with a forecast (four of the six).  Of those that do, the forecast comes from the Sales department. Some of these forecasts are in a different system than the system in which production orders are scheduled (two companies of the four forecasting, maintain an interface) This raises the question about what objects are transferred through the interface. Both companies that maintained a forecast, and had two systems, transferred planned orders (supply elements) over into the system that takes care of scheduling. The other two companies that maintained a forecast - but within the same system as scheduling - did not make a difference of a long term, a mid term, a short term horizon or a frozen zone. It was all one long period in which there were planned orders, fixed planned orders or production orders. The two companies that were not maintaining a forecast were going by customer orders only.

What does that say about planning? We have three situations (please note that a forecast can also drive a schedule for MTO products, as in that case capacity for MTO production is reserved on the line):

1. No forecast, customer demand driven
2. Forecast drives schedule, two different systems
3. Forecast drives schedule integrated in one system

Refutation for situation 1.: if you go by customer orders only, then there is no planning. And unless your customers accept the time it takes to procure materials, fabricate components, build sub assemblies and assemble the finished products, they will go someplace else to get the product they need and want.

Refutation for situation 2.: if you maintain a forecast in one system, perform a rough capacity check for the long term. This is necessary so that you can decide whether you have the capacity to fulfill the expected demand in-house or you’ll have to talk to a trusted supplier who’s helping out and provides some extra capacity. If you don’t do that and simply hand over supply proposals (planned orders) to the scheduling system, then I’d call that bullying but certainly not planning. If anything, hand over demand (instead of supply) so that your MRP Run can at least do some planning in the short term. It’s probably too late to do anything good anyway (what is a production scheduler to do if the demand causes a utilization of 400% plus?).

Refutation for situation 3.: The two companies that forecasted and scheduled in the same system had discrepancies between how they wanted to operate and how the system was setup to support those efforts. In other words: they were trying to do the right thing but didn’t get the right advice on how to set up that system that was supposed to ensure an integrated planning process. There were no planning horizons, the planning strategies were not setup correctly, the sales orders didn’t consume the forecast properly, the sales availability check did not work and therefore demand was transferred incorrectly… etc pp.

And here is the sore point. I don’t think it matters much what system one uses or what methodology one applies when the construct (the third floor) is not supported by the basement. All those methods are great when applied to the proper situation. And all these system have all the function and features one needs to plan effectively and efficiently. But deciding on the right methodology and right tools isn't even half the way towards the end goal. You must support the philosophy with sound structures (planning horizons, planning strategies, planning hierarchies). What good is it if you place strategic buffers but you send the wrong elements (supply orders instead of demand) through to the wrong transaction at the wrong time?

It is absolutely justified to invent newer and better systems and methods, but we also - or should we say primarily - need to make sure the foundation is build first and is solid. Too often I hear „this software is crap“ or „we need to replace that old method with a new one“. Remember… just because you can‘t fly an F16 doesn‘t mean it‘s a shitty plane!

Takt-based scheduling? Yes, but just not really…

Takt is a German word. It’s used in the music world. A conductor uses a baton primarily to regulate the tempo of the music. So why would we use takt to schedule production? Well… maybe to regulate the tempo of production? I see managers everywhere, trying to regulate the flow of production lines. And we intuitively know that when things flow we get better results as when things get stuck. And then there is a multitude of literature, white papers and theory that suggests many solutions, all geared towards a noise-less, well moving, uninterrupted production program to fulfill customer demand in the most efficient way. Therefore, we try to get things flowing.

…and we do so when working on the design of the production shop floor and assembly lines. Pull systems (Kanban cards) are used, a takt counter provided, scheduling boards (Heijunka boards) pop up everywhere, sirens go off when there’s a problem (in one plant in Juarez, Mexico they play ‘Für Elise’ by Ludwig van Beethoven instead) and the assembly line is organized in a way to support a balanced workload from station to station.

Do you see yourself in that picture? Yes? So what about your ERP system? Does it allow you to schedule for that setup?
Here are a few answers that I get when asking that question (in no particular order):
- We are a lean shop… we don’t need ERP to schedule production
- No, our ERP cannot support a takt-based schedule
- What do you mean…?
- Yes, we developed a great solution into our SAP system. We have a transaction called Z_SCHEDULE that does a great job reshuffling our production orders
- Yes, we have a very good production scheduler who figured this all out… yes, he works with EXCEL spreadsheets but updates everything into SAP on a regular basis so our cost controllers will get everything they need

As you can see there’s not a lot of system support for a takt-based flow line… at least perceptively. In fact, I personally have seen many, many shop floors (especially assembly lines) that are run by takt, but I have not ever seen any of those setups supported by an ERP system (as I primarily work with customers who run SAP, I’d like to limit this observation to SAP-ERP or APO). There is always a work-around (which never works)… or no support at all… when SAP has the perfect support for that… all with standard transactions! (It would be too much for an article like this to elaborate on how to set up takt-based scheduling in SAP. But I am more than happy to elaborate to specific requests – let me just point out here that SAP ERP provides transactions for line balancing, takt calculations and takt-based sequencing. It does so in its repetitive manufacturing module and from early 2018 on for a discrete setup as well by way of an SAP Add-On Tool)

At this point I just would like to point out the difference between truly scheduling takt and what is done much more often: lead time scheduling. In lead time scheduling, the operations are backward scheduled from the requirements date of the product whereas in takt-based scheduling the operations are distributed – without violations – in the provided takt time

This (takt-based scheduling) has the affect that work is evenly distributed across a production line and therefore allows the product to flow. In lead time scheduling this is not the case because WiP builds up in front of a station that has more work to do (longer operation times) than the station before. 

So don’t use lead time scheduling in an ERP system if you truly try to run by takt time. Your ERP system doesn’t work very well if it supports a different animal than the one you own. A very smart man told me recently “if it quakes like a duck, walks like a duck and looks like a duck… chances are: it’s a (f…) duck!” And then you should treat it like it’s a duck.

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.

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.