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Based on sales results, we estimated that the demand for our product should increase by about 15% as compared to the previous year. With that in mind, we plan production, order the required parts, secure transport and take care of marketing and distribution. We are perfectly prepared for what the market has in store for us.
Unfortunately, the reality may force us to significantly change our plans.
For many years, dynamically changing conditions in the global market have shown us that this approach is associated with high risk. Perfect examples are events such as the pandemic and the obstruction of the Suez Canal by the Ever Given container ship. The answer is DDMRP (Demand Driven Material Requirements Planning), an approach which was first described in more detail in a 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 important role in industry. However, the first large-scale implementation of MRP did not take place until 1964. This system was based on mathematical formulas that take into account a wide range of data and the aim was 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 keeping the lowest possible costs of possessing/managing them,
- planning production, supplies and acquisitions.
The MRP flowchart looks as follows:
MRP processes needed to take into account factors such as the demanded quantities of specific products and materials, their shelf life and storage space. At that time, this approach was revolutionary and over the next decades, it made it possible to improve planning in companies all over the world. However, as time passed and globalisation progressed, some disadvantages became more apparent. The key problem was the very essence of the MRP system which relied on predictions and the stability of the market. Customers used to change their orders less often and there were 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 have a huge impact on our business. How well prepared we are determines 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 need to do as much as possible to be protected against their consequences.
C (Complex) – a growing number of factors affect the situation of your business and you have no control over a large number of them.
A (Ambiguous) – it refers to the growing difficulty in interpreting market signals and even in verifying whether specific signals are true or whether 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 around the world affect business, regardless of the sector. The aim of DDMRP is 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 and their goal is to determine the required stock levels and safety factors that make it possible to identify appropriate inventory buffers. In DDMRP, they are slightly modified and cover a larger scope of data in order to take into account the contemporary market reality and effectively respond to customers’ needs.
In a VUCA world, the classic MRP approach involves a huge risk that we will be short of some products and materials or that we will have 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 take into account a large number of 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, instead of an optimal level, we get a bipolar distribution of stocks. There is too little of some goods and too much of others. Both the former and the latter scenario in red generates 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 DDMRP is not based on forecasts, but mainly on actual demand for specific products, which is reflected by a fundamental change of approach.
Pull instead of push, or DDMRP at work
In the traditional MRP model, actions were based on the push system, which meant planning all processes and requirements in advance. Market forecasts served as the basis for determining requirements, in accordance with which companies ordered components and planned production. However, when initial forecasts 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 that are crucial for the company and refilling materials only when an order has been made, which is referred to as the pull system.. Instead of planning production and ordering parts well in advance on the basis of forecasts, we have an established buffer of specific resources, whereas new production processes or supplies are arranged according to current needs. Obviously, the key thing is to determine buffer levels that are appropriate, 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 avoid the costs of material and product wear
- you do not freeze the assets of the company
- you avoid the costs 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 so as 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 excessive value 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.