If you are running an e-commerce business, you are certainly well aware that keeping inventory levels at an appropriate, safe level tends to be a demanding job. Neither the situation, […]
What is DDMRP and how does it enable companies to better prepare for dynamic market conditions?
- Last update: 19.10.2022
- Published: 19.04.2022
- Read in: 6 min
Based on the sales results, we estimated that the demand for our product should increase by about 15% compared to the previous year. Therefore, we plan production and order the required parts. Next, we secure transport and plan marketing activities and distribution. We are perfectly prepared for what the market cooks for us.
Sounds familiar? Unfortunately, reality can verify our plans to a great extent.
The dynamically changing conditions of the global market have shown us for many years that such an approach is associated with high risk. Events such as the blockage of the Suez Canal by the Ever Given container ship and the pandemic are perfect examples of this. The answer to this is the DDMRP approach, i.e. Demand Driven Material Requirements Planning, which was first described in more detail in the book by Carol Ptak and Chad Smith in 2011.
MRP, or what stock planning and production management looked like in the second half of the 20th century
The foundation of the above-mentioned DDMRP method is MRP (Material Requirements Planning), which dates back to the 1950s when computerisation started to play an essential role in the industry. However, the first large-scale MRP implementation did not occur until 1964. This system was based on mathematical formulas that considered a wide range of data and aimed to determine material and product requirements. The main goals of MRP included:
- securing the supply chain (parts and materials required for production),
- keeping them available and maintaining the lowest possible costs of possessing/managing them,
- planning production, supplies and acquisitions.
The MRP flowchart looks as follows:
MRP processes must consider factors such as the required quantities of specific products and materials, their shelf life and storage space. At that time, this approach was revolutionary, and over the following decades, it made it possible to improve planning in companies worldwide. However, as time passed and globalisation progressed, some disadvantages became more apparent. The critical problem was the very essence of the MRP system, which relied on predictions and the market’s stability. As a result, customers changed their orders less often, with fewer market fluctuations. All of these disadvantages are addressed by DDMRP.
A VUCA world as an impetus for creating DDMRP
It is impossible to discuss DDMRP without explaining VUCA, an acronym which characterises the current global market.
V (volatile) – it requires the ability to adapt to changes, regardless of how serious they are. Events halfway around the world that are beyond our control may hugely impact our business. How well prepared we determine how much they will affect us.
U (Uncertain) – full of surprises which make planning harder. It is impossible to predict many events that may affect our processes, but we must do as much as possible to be protected against their consequences.
C (Complex) – a growing number of factors affect your business situation, and you have no control over many of them.
A (Ambiguous) – refers to the growing difficulty in interpreting market signals and verifying whether specific signs are genuine or we should disregard them as fake news.
In a VUCA world, companies and organisations need a new approach to managing risk, analysing their situation, interpreting information, making decisions and solving problems. Almost every year, events, conflicts and natural disasters worldwide affect business, regardless of the sector. DDMRP aims to better prepare companies for what cannot be foreseen. It fits perfectly into the reality of VUCA.
Why is the new approach demand driven?
In a perfect world, a company should always have a stock of materials and products, referred to as the optimal quantity, which guarantees that no costs will be generated due to having too many or too few parts or products. It is illustrated below:
Both methodologies (MRP and DDMRP) are based on mathematical formulas. Their goal is to determine the required stock levels and safety factors that make it possible to identify appropriate inventory buffers. However, in DDMRP, they are slightly modified and cover a more extensive scope of data to consider the contemporary market reality and effectively respond to customers’ needs.
In a VUCA world, the classic MRP approach involves a considerable risk of being short of some products and materials or having too many of them when the demand for a given product increases or decreases. It happens because this system is based on forecasts and does not consider many factors that could potentially turn these forecasts around. It does not apply solely to external factors but also to the product lifecycle, increased competitiveness and growing expectations of customers.
As a result, we get a bipolar distribution of stocks instead of an optimal level. There is too little of some goods and too much of others. Both the former and the latter scenario in red generate significant losses, starting from losing sales and the market position to incurring additional costs due to the shelf life of specific components, taking up storage space and blocking a part of the budget. Of course, there can be many more potential consequences.
This is why instead of the forecast, DDMRP is based mainly on actual demand for specific products, which is reflected by a fundamental change of approach.
Pull instead of push. DDMRP at work
In the traditional MRP model, actions were based on the push system, which meant planning all processes and requirements. Market forecasts served as the basis for determining requirements by which companies ordered components and planned production. However, when initial projections turned out to be wrong, the company risked overproduction, problems with sales and storage, or, on the contrary, shortages and downtime.
The main difference in the DDMRP methodology is determining safety buffers in areas crucial for the company and refilling materials only when an order has been made, referred to as the pull system. Instead of planning production and ordering parts well in advance based on forecasts, we have an established buffer of specific resources. In contrast, new production processes or supplies are arranged according to current needs. The critical thing is to determine appropriate buffer levels, do not generate risk and enable us to focus on what matters the most, namely on the customer, not on fighting fires in the warehouse.
Thanks to this shift and focus on actual consumer demand, we gain many advantages:
- you avoid overproduction
- the costs of storage and breakage are lower
- materials and products do not become obsolete
- you do not freeze money in the stock
- you avoid the expenses related to handling excess materials
How can you implement DDMRP in a company?
The basic version of the DDMRP approach makes it possible to use simple and intuitive rules for calculating buffers and managing stocks for every business, so it can be implemented in practically every company. Of course, in order for the algorithm to work better, it is necessary to provide information specific for the given business, such as the delivery time for purchased products and the minimum order value. However, there are few such parameters, so the implementation is intuitive.
It is true that the DDMRP method provides mechanisms for adjustments, which means manually correcting planning parameters in formulas. It makes it possible to modify the size of buffers to adapt them to the market conditions of the given company. However, experience shows that even default values make it possible to significantly increase the availability of the offered products and limit the excessive weight of stocks. Therefore, it is possible to implement this methodology off-hand.
The advantages offered by DDMRP in a VUCA world make it possible to significantly limit costs, improve processes and protect a business against unpredictable events. At Taxology, we help businesses smoothly implement the DDMRP method and show them how to use it step by step. If you feel that this solution could help your business, write to us and we will talk about implementing it together.