Article

Lift your operational planning

with Demand Driven Material Requirement Planning

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Demand Driven Material Requirement Planning will lift your operational planning … if used appropriately.

Demand Driven Material Requirement Planning (DDMRP) is the new buzzword in supply chain management, as articles, blogs and books are published at a fast pace. The trend was initiated by the concept authors Carol Ptak and Chad Smith and their disciples.

DDMRP argues that the “traditional” way of planning is not fit for today’s dynamic and volatile environment due to various factors. Amongst other things, they argue that no forecast should be used for operational planning, and only confirmed orders should be considered in the operational planning. Furthermore, they argue that having a comprehensive, yet simple, operational planning model (DDMRP), considering buffer points, buffer stocks and supply generation, will create a more accurate and stable plan.

In our network, discussions often revolve around: “What exactly is DDMRP”, “What are the new elements that our current planning principles do not consider”, “Where can it fit into our processes”, “What are the potential business benefits”, “Can our current system landscape support DDMRP”? The purpose of this small blog is to put a few words on our viewpoints on DDMRP, and how we think it can support the existing supply chain planning processes.

As a starting point, we do believe that DDMRP adds many business benefits, but it is not an invention of the “wheel”.

Simply put, you could argue that DDMRP is “advanced” or “extended” reorder point logic. When the conventional reorder point planning (ROP) is combined with the elements from the DDMRP concept, there is an opportunity to combine the strengths of both approaches.

Where DDMRP differs from traditional ROP is that it brings a concept for not only calculating the reorder levels, but adds elements such as:

  1. A concept for where in your supply chain network and bill of materials hierarchy you should strategically put reorder point triggered buffer inventories.
  2. A concept for how supply orders upstream the supply chain are triggered based on future orders, history and future spike orders.
  3. Being very visually appealing, which in turn makes the planning a lot more transparent, allowing the planning tasks to become more simple and efficient.
  4. A concept on execution of orders based on priorities and level of current “inventory” penetration, which increases the focus on where actions are most critical.

What is DDMRP

DDMRP stands for Demand Driven Material Requirement Planning. It is a supply chain planning concept formulated by Carol Ptak & Chad Smith (Demand Driven Material Requirement Planning, 1st edition 2016, Carol Ptak & Chad Smith).

DDMRP is a concept to manage your multi-echelon inventory levels and supply order generation, which argues to decrease overall inventory levels and improve customer service levels by creating more flow stability, shorter lead times and visual planning support.

Strategic inventory buffer points are established for de-coupling the demand, to create stability and shorter lead times.

The buffer levels are created using three different buffer types that serves different buffer purposes. Safety buffer, demand in lead time buffer and order dependend buffer.

Furthermore, the concept suggests the use of various visuals for monitoring how "deep" in the buffer levels a given material is for prioritising purposes.

We believe that the intuitive colour coding in DDMRP (advanced ROP) allows for clear visualisation of the current state of your stock levels, which can easily be recreated to match whatever system your company is currently using, such as APO, IBP or Excel. Combine this with its easily implementable rules and you can enable a deeper understanding of the system and transparency of the processes.

The order generation formula is simple, straightforward and easily understandable so that it can be implemented even in Excel. In turn, this further strengthens the trust in the system from a user perspective.

DDMRP provides you with a method for order prioritisation and spike order handling. Its smart order prioritisation system is based on the inventory point rather than the order due date, allowing a more streamlined process to take place. Spike orders can be identified and compensated for, using qualified order spike horizons and thresholds, making buffers and customers safe from anomalously large sales orders.

Some considerations to make

If you are thinking about implementing DDMRP and want to know if this could be the right solution for you, we suggest that you take into consideration the following things:

  • Defining your network buffer points might look simple on paper, but elements like variation in supply chain flows, political opinions, strategic considerations etc. make the decision comprehensive.
  • DDMRP calculations are quite simple and based on rules of thumb – although this makes them easy to understand, it also includes the risk of poor accuracy.
  • The link between safety stock and service level is not as clear as in traditional safety stock formulas, which makes the buffer calculations based on rules of thumb rather than scientifically proven. The simple logic used to calculate safety buffer levels could be overly simplistic, thereby carrying the risk of being inaccurate.
  • DDMRP assumes the demand to be normal distributed, which makes it less efficient when the demand is lumpy.
  • DDMRP argued that it does not rely on a forecast. However, it does rely on a projection of average historical sales – which is a simple forecasting method.

We strongly believe that many companies can reap major benefits by introducing planning concepts from the DDMRP approach. We believe that the approach can stabilise and thus enhance your planning processes to increase customer service levels and reduce inventories and firefighting, but it is not a silver bullet – there are limitations that need to be considered. In mature companies, these limitations of accurateness need to outweigh the benefits.