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About the author

Lindsay Harding MIOM and Carol Ptak

ven MRP be
on we nave oeen loo

that the concepts that he brought to the table proliferated


throughout the industrial world within two decades. Despite
ntional material requirements the major update to the second edition in 1994 by George W
'), given today's more volatile, complex and PlossI, industry now faces another time of transition and
id manufacturing scenarios, DDMRP re-examination. The circumstances under which Oriicky and his
ints planning strategies that cadre developed the rules behind MRP and distribution
provides a well-defined and actionable tool kit to manufacturing requirements planning (DRP) have dramatically changed:
companies of all sizes. Much of this report is based on two customer tolerance times are much shorter: product variety
white papers produced by the Demand Driven Institute in has risen dramatically: supply chains have extended around the
2011.'' world; product complexity has risen: outsourcing is more
^i*. ..J. . ^ i;f , . ! , u,yg reduced; and reductions in
Background rrianuaie, i his led to Carol Ptak and Chad
Smith being approached in 2010 to update Orlicky's Material
When Joe Orlicky wrote the first book on MRP in 1975, only
Requirements Planning completely to address the dilemmas of
700 companies had implemented the concept. He said: 'It is
modern supply chains. This third edition' is where the DDMRP
now a matter of record that among manufacturing companies
methodology has been articulated.
that pioneered inventory management computer applications in
the 1960s, the most significant results were achieved not by
W h y such a change has become necessary
those who chose to improve, refine and speed up existing
1j^ i^ijj i^y t|-|Q5g ^piQ undertook a fundamental In order to improve flow and achieve more agility throughout
supply chains, we must seriously re-examine the conventional
overhaul of their systems.'
matenals planning and execution systems. This is not about
In the first edition of his book, Orlicky made the case for a speeding up the antiquated rules and tools that we already
fundamental re-examination of how companies planned and have, but rather causing a fundamental shift in how companies
managed inventory and resources. This case was so compelling manage their supply chains.
Could demand-driven MRP be the
solution we have been looking for?

Software is a tool that translates and reinforces rules into a


routine. If the rules behind the software are inappropriate
and outdated, we must change the rules before we change
the tools.

Today, almost every mid-range and large manufacturing counterproductive. Given the current world of increased
company is using MRP tactics and tools that are not enabling this variability and volatility, conventional MRP and DRP logic now
agility. N o matter how much money you spent on your ERP requires a fundamental overhaul. Working to forecast has long
product, your planning system is antiquated and fundamentally been compared to driving a car by looking in the rear view
broken. To compound this, there is excess capacity in the world mirror Today, however, w e are driving on a narrow mountain
since Eastern Europe and China came online, and global road in dense fog. The penalties for error are significant, even
sourcing is now easy through the internet, meaning if you catastrophic. Paying large sums of money for more
do not offer the service desired by the market they will sophisticated forecast algorithms simply means you now have a
go elsewhere. more expensive rear view mirror Any appreciable gains by
these smarter algorithms are being more than offset by the rise
To understand the context of the required change better, the
of volatility.
following five questions need to be asked:
Today, due to the increasing complexity of the global
Is the vision behind MRP still relevant in this more complex
manufacturing and supply landscape the supply order
world?
generation signals that move down through our supply chains
What rules need to change with MRP? have become more and more out of alignment with actual
Why do lean and other pull-based techniques often come demand, this bull-whip effect kills fiow and supply chain agility
into conflict with MRP? At the 2012 Demand Driven World International Conference,
Why has MRP not significantly evolved to meet dramatically Carol Ptak listed the legacy tactics that are inherent in planning
different circumstances? today:

How must MRP change to become demand driven? Demand input to MRP and DRP = forecast
This incredible pressure has forced companies into less than Focus on forecast accuracy improvement
acceptable alternatives. In November 2009, the Aberdeen
Aggregate demand into weekly buckets
Group released a survey that showed that on average 71 % of
ERP users were using spreadsheets for demand management Dependency throughout the bill of material

rather than their ERP's planning module.' Such outcomes Use safety stock to cover forecast error
always bring to mind a diagram from an old issue of
Freeze production scheduling - longer than CTT
lOM's Control magazine in which Don Ralston described an
Most batch decisions based on unit cost performance rather
implementation loop in which users started bucking the system
after hitting a brick wall when the continuous improvement than agility
necessary was not forthcoming.^ Planners fundamentally distrust Which is the more accurate: a sales order or a planned order?
the signals they get from their integrated planning systems, A sales order, of course, because it is not based on forecast like
and businesses have inadvertently incorporated numerous a planned order Hence the creation of DDMRP In DDMRP
work-arounds into their operations - mirroring closely in real works orders are prioritised by buffer replenishment not due
life the fictitious suspects in: Who Murdered MRP?, that will likely dates; due dates are likely based on forecast.
be familiar to lOM members.' Utilising the ease to export data,
planners have created shortcuts and ad-hoc mechanisms in Today's demand-driven world
order to get a relatively better approximation of real
The term 'demand driven' is not new. In 2003, before the 2005
requirements. These tools have limited capability, scalability and
hostile takeover by Oracle, ERP vendor PeopleSoft developed
transferability. Sounds hard to believe? Ask your planning
the concept of demand-driven manufacturing (DDM) and
personnel what would happen if your company's Excel licence
briefed the analyst community at the time including AMR and
was pulled; you probably will not like the answer
Gartner amongst others. The benefits of becoming demand

Software is a tool that translates and reinforces rules into a driven are widely acknowledged. A recent report in

routine. If the rules behind the software are inappropriate and The Economist' cited numerous companies - for example.
outdated, we must change the rules before we change the Dell, Lenovo and Diageo - where huge gains had resulted.
tools. In recent years, however, industry and software However, whilst being aware of these obvious benefits,
providers have attempted to combat increasing complexity with many manufacturers have struggled to tackle the
better software applications: applications with the old rules demand-driven planning dilemma. Hindsight has shown that
embedded at their core. The net effect is that we have kanban pull signals made huge improvements in execution
improved the efficiency of doing the wrong or inappropriate when upstream/downstream operations were bought into the
things. If you speed up poor processes you just do bad things lean philosophy, and with limited uptake, other tools have been
faster. Money and energy spent to optimise antiquated rules developed to enhance such signals, such as the POLCA
with increasingly sophisticated tools is wasteful, distractive and solution from Rajan Suri" and his team at the QRM" centre.
Operations Management Number 6
www.iomnet.org, uk 2012

Typical MRP Attributes Effects to the Organisation

MRP uses a forecast or master production schedule as an input Part planning becomes based on a "push" created by these forecasted demand
to calculate parent and component level part net requirements requirements. Forecast accuracy at the individual sku and part levels is highly inaccurate.
Build Plans and PO's that are calculated from this forecast often are misaligned with
actual market demand. This leads to excessive expediting, overtime, premium freight,
increased inventory ofthe wrong items and missed shipments.

MRP pegs down the ENTIRE Bill of Material to the lowest Creates an overly complicated materials and scheduling picture that can totally change
component part level whenever available stock is less than with one small change at a parent tem. When capacity is scheduled infinitely there are
exploded demand massive priority conflicts and material diversions. When capacity is scheduled finitely
across all resources there is massive schedule instability due to cascading slides from
material shortages.

Manufacturing Orders are frequently released to the shop floor Manufacturing Orders are released to the floor but cannot be started due to shortages.
without consideration of component part availability This leads to increased WIR constantly changing priorities and schedules, delays, lots of
expediting and possibly overtime.

Limited future demand qualification. Limited early warning Planners either have to bring in all future demand which inflates inventories and wastes
indicators of potential stock outs or demand spikes capacity and matehais or bring In no future demand which makes the environment
extremely vulnerable to spikes or must pour through large amounts of data in order to
quality spikes for each part,

Lead time for parent part is either the manufacturing lead time MLT typically represents a gross underestimation of realistic lead time. When MLT is
(MLT) or the cumulative lead time (CLT) for the parent item used. Manufacturing Orders are often released with dates that are impossible to achieve
and/or without all component parts available, CLT typically represents a gross
overestimation of lead time. When CLT is used Manufacturing Orders are typically
released too far in advance, raising WIP levels and making the environment more
susceptible to disruption when order changes occur.

Fixed reorder quantity, order points, and a safety stock that Additional exposure to forecast inaccuracies resulting in increased expediting
typically do not adjust to actual market demand or seasonality

Past due requirements and orders to replenish safety stock are There is no way to judge relative priority between stock orders. Every safety stock
often treated as "Due N o w " order looks the same, which means there is no REAL priority, I b determine real
priorities requires massive attention, analysis and priority changes.

Priority of orders is managed by due date (if not Due Now) There is no way to judge relative priority between stock orders. Due dates will not
9
reflect actual priorities. To determine real priorities requires massive attention, analysis
and priority changes.

Once orders are launched, visibility to those orders is essentially There is no advanced warning or visibility to potential problems with a critical order
lost until the due date of the order when it is either present or late Critical parts are often late and disrupt parent tem schedule.

Issue of MRP Source: Demand Driven Institute


Table I

However, as is usually the case, there is no one-size-fits-all in this demand driven world. However, planning personnel see
solution. The DDMRP logic appears to be a major step fonward it a completely different way They understand that without the
in addressing the missing link in modern planning, it has been ability to see the total material requirements picture, critical blind
described as a produce-to-demand fundamental that as a: spots then exist in the planning process leading to shortages or
',,,minimum, production reliability needs to be between 85 and excessive Inventory positions or both. They see the lean
90%, Lower reliability requires more finished goods inventory approach as a gross oversimplification for the complex scenarios
to buffer the consequences of not getting what is needed from that are now the new normal. The irony is that both sides are
the plant. This makes it less likely for produce-to-demand to absolutely correct. They are blind to the real issues. There is an
be successful.''" elegant solution to this conflict. Both sides need each other to
stay competitive in this hypersensitive environment,'
Why do pull-based techniques come into conflict
Keith Launchbury is noted for his humorous real-life
MRP?
observational remarks-for example, 'MRP runs at the speed of
In addition to the rise of volatility and complexity, the night.' 'The costing systems we use today were designed for a
proiiferation of lean and other pull-based philosophies has put world that does not exist anymore,' A standard cost gives the
additional pressure on planning personnel and MRP systems. illusion of a precise forecast.' 'If you don't plan, you are doomed
The fundamentally different view of inventory puts lean to react,' but even he remarks: 'Even the leanest operations
advocates and planning personnel at odds. As stated in the white need planning systems,'''
papers: 'The tension between the formal planning and the lean
Let us explore some ofthe issues raised in Table I.
communities must be eliminated; they need each other
desperately' Many lean implementations attempt to abandon Unrealistic lead-time calculations For manufactured items,
MRP completely This causes tremendous friction between MRP only recognises two types of lead-times. In most cases,
them and the planning personnel responsible for ensuring a both are unrealistic. Cumulative lead-time assumes that all
reliabie source of supply: 'Lean advocates often see MRP as an raw material/components are not available, which tends to
overly complex and wasteful dinosaur that simply doesn't work lead to overestimates, whilst manufacturing lead-time
Could demand-driven MRP be the
solution we have been looking for?

Provides easy status and relative priority visibility for planning and execution
at all levels
I Dynamically adjusted buffers Flexes buffer positions based on changes to consumption
1 Planned adjustments to buffers Accounts for seasonality, product ntroduction/deletionAransition
Globally managed buffer profilers Parts/SKUY are grouped by like attributes for ease of management
Decoupled BOIM explosion Creates a unique blend of dependence and independence for planning
I ASR lead-time calculation . Lead-time determination based on the BOM's longest unprotected sequence
Order spike protection Highlights and accounts for problematic sales orders based on a threshold
and horizon
Material synchronisation a! Identifies specific misalignments between child supply and parent demand
I Multi-location buffer status visibility Relative status visibility across a distribution net for like parts/SKU
[ Lead-time managed parts Managing critical non-stocked items through timed alert zone J^
Matrix MOB + ASR lead-time analytics A revolutionary lead-time and working capital compression approa
all BOMS
Source; Demand Driven Institute
Demand-driven MRP critical components
Table 2

assumes all r a w material is available exactly at t h e start date T h e r e are many w h o believe that carrying inventory is a waste,
for parent d e m a n d , so perhaps underestimates. H o w often but this only true if it is located in the wrong places and in the
is that t h e case? In reality, a different type o f lead-time is wrong quantities. The key is to determine first where the right
required that m o r e accurately refiects t h e fact that some o f places are to stock and only then determine the amounts to be
the components will be in stock. This n e w type o f lead-time, stocked. If a planner/buyer is tasked with positioning the 'how
k n o w n as ASR lead-time, is likely m o r e realistic - that is, much' and 'when' inventory, one could argue that they have
the longest unprotected lead-time - see Table 2. already been set up to fail, if the 'where' question has not

P o o r i n v e n t o r y p e r f o r m a n c e This is characterised as having already been answered which is a strategic multifunctional

t o o much of the w r o n g , while at t h e same t i m e having t o o decision. DDMRP ends the typical bi-modal distribution for

little o f the right. H o w often d o y o u hear people saying: the parts/SKU that matter and brings it into the desired
10 alignment - see Figure 2.
' H o w c o m e w e have so much inventory yet w e can't ship?'
Figure I shows t h e bi-modal distribution that many At the same time, it is also extremely wasteful to not carry
companies find themselves in w i t h regard t o their most inventory. When companies reduce inventory too much,
important parts. Inventory is waste under t w o conditions: frequent shortages can result. I recall a comment from Richard
w h e n t h e r e is t o o little, it translates directly t o missed sales Wilding from my days back in Cranfield that sums up the
and expedites; o r w h e n there is t o o much, it means that situation beautifully: 'You need to be lean, but not anorexic!'
excess w o r k i n g capital and capacity is tied up in things that When companies experience shortages they are forced to
are n o t required. In many companies, t h e parts o r SKU that spend additional time, effort, money and capital in order to
matter t h e most spend t h e majority of their time in o n e o f
resolve the problem, and significant market opportunities can be
these t w o e x t r e m e positions o r oscillating quickly b e t w e e n
missed. Agility is not synonymous with zero inventories. The
both sides - that is: T h e inventory pendulum swings
key to leveraging effectively the working capital and capacity
backwards and foPA/ards f r o m t o o much t o t o o little.''
commitment inherent in inventory is to find the places where
that inventory can make the biggest impact and therefore
provide the greatest return. Upstream from the plant, the logic
sits well with the time to replenish reliably (TRR) methodology
described by the Goldratt lnstitute'^ which is basically a
two-buffer demand pull system that uses the customer's
consumption of material as authorisation to ship that exact
quantity to replenish their inventory. Inventory can decouple
otherM/ise dependent events so that the cumulative effects of
Typical bi-modal distribution
variation are not passed and/or amplified between the
Figure I
dependencies. Inventory can be a breakwall against the
variability experienced from either supply (externally and
internally) or demand variability. But, like any breakwall they are
only effective if placed and sized properly.

Thus, the first question to ask is: where? Then the second
question - H o w much? - can be answered. So how is this
replenishment buffer breakwall/firewall different from safety
stock? Safety stock is almost like a fire-extinguisher, a
supplementary inventory position designed to make up for
DDMRP strategic inventory realignment misalignments between planned orders, actual demand and
Figure 2 ^ ' supply orders; replenishment buffers advocated in the DDMRP
Operations Management Number 6
\/vww. iomnet.org. uk 2012

logic are a strategic and primary inventory position designed to


decouple areas in order to compress lead-times and dampen Demand Driven Material Requirements Planning
variability. ..
strategic Demand Vis ble and
Buffei Profiles Dynamic
There are six critical positioning factors in determining where Inventory Collaborative
Adjustments
Positioning Planning Execution
to properly place inventory:

Customer tolerance time - the time the typical customer


is willing to wait

Market potential lead-time - the lead-time that will allow an Mi>delin^>'Re-modeHng the Environment Plan Execute
increase of price or the capture of additional business either
through existing or new customer channels Five Steps of DDMRP
Figure 3
Variable rate of demand - the potential for swings and
spikes in demand that could overwhelm resources, such
as capacity, stock or cash even the largest provider have software developers with any
Variable rate of supply - the potential for and severity of real-world experience of utilising the tools they are building. The
disruptions in sources of supply and/or specific suppliers big ERP software companies cannot and will not solve a
problem they cannot see. I believe it is only a matter of time
Inventory leverage and flexibility - the places in the
before the major ERP developers are incorporating these
integrated bill of material (BOM) structure - the Matrix
techniques in their planning logic. One ERP producer, SabeSoft,
BOM - or the distribution network that leave a company
already includes complete integration of the DDMRP calculation
with the most available options, as well as the best
logic in its product.
lead-time compression to meet the business needs

The protection of key operational areas - it is particularly


MRP needs to change to embrace DDMRP
important to protect critical operational areas from
At its core, DDMRP uses a new type of strategically positioned
disruption.
and dynamically managed stock position to dampen variability,
These factors must be applied systematically across the entire compress lead-times and reduce working capital requirements
BOM, routing structure, manufacturing facilities and supply chain while ensuring unprecedented levels of service see Figure 3. n
to determine the best positions for purchased, manufactured The positions dramatically alter the planning and execution rules
and finished items, including service parts. The bigger the system of conventional MRP The five steps of DDMRP are all
to which these factors are applied, the more significant the prerequisites; you cannot choose just a few of them.
results can be. Early adopters are getting significant results with
A future article will illustrate examples of setting buffer levels and
DDMRP without compromises.
zones to determine the planning equation.
How has software progressed over the past 30 years? Software
providers, consultants and the academic community have had In summary
ample opportunity to fix MRP's shortcomings, so why has it not
DDMRP is an unprecedented, no-compromise fusion of
progressed? Some have even questioned if the software is
relevant MRP and DRP tactics, combined with the pull-based
necessary at all. There are many knowledgeable experts in
approaches and signals of lean and the Theory of Constraints. It
demand-driven techniques like lean and the Theory of
includes planning and execution innovations for better lead-time
Constraints. Unfortunately, many of these experts do not compression and execution visibility. It takes lean's waste
understand the role that planning technology must play to bring reduction focus and visibility for execution and combines it with
those techniques to full realisation across a complex enterprise a new set of demand-driven planning tactics that provide
and supply chain. Many of them advocate the elimination of unprecedented planning visibility across an enterprise and supply
technology as the true measure of success and they do so under chain - see Table 2.
the simplicity banner This potential for oversimplification is a real
danger in this more complex world. To compound this, we are DDMRP uses new rules and corresponding tools and moves

starting to suffer from what could be described as an MRP lost formal planning logic from the world of 'push and promote' to
'position and pull'. It is a multi-echelon methodology that
generation' The generation that developed MRP - the giants - is
integrates multiple tiers in the supply chain, including BOM, in
all but lost. Today, the majority of people that still have an
order to provide end-to-end planning and execution visibility so
in-depth knowledge of how it really works are not in software
that flow can be improved and better managed.
companies or academia, but are seasoned planners working in
private industry. These people are busy propping up the current Note. The Certified Demand Driven Planner (CDDP) program
systems and processes. They have limited ability and inclination was created by a global partnership between the International
to reach out and force wide-scale change. They know there is a Supply Chain Education Alliance (ISCEA) and the Demand
problem, but in many regards their hands are tied. It is nearly Driven Institute (DDI). There will be an opportunity for UK
impossible for these people to effect change across the industry. practitioners/consultants/trainers to undertake the CDDP
Even some of the largest ERP software companies have only a programme in London in March 2013.
small number of people - sometimes only two or three - who
Further information, website:
truly understand what MRP is and how it works. Rarely does
http://demanddriveninstitute.com/about.html I^P]
Could demand-driven MRP be the
solution we have been looking for?

DDMRP uses new rules and corresponding tools and moves formal planning
logic from the world of 'push and promote' to 'position and pull'. It is a
multi-echelon methodology that integrates multiple tiers in the supply chain,
including BOM, in order to provide end-to-end planning and execution
visibility so that flow can be improved and better managed.

A b o u t t h e authors

L indsay Harding MIOM CMILT holds an MSc in Logistics & Supply Chain Management from Cranfield University and is APICS-certified in
CPIM, CIRM and CSCP He is the founding Director of Hilf Supply Chain Solutions Ltd the APICS Authonsed Education Provider (AEP) for
Great Britain, being recognised by APICS as a Master Instructor for CPIM. Contact: info@hilf.co.uk

C arol Ptak is co-founder and partner at the Demand Driven Institute (DDI). Along with her DDI co-founder Chad Smith, she co-authored
the third edition of Orlicky's Material Requirements Planning. Prior to DDI, she spent five years at Pacific Lutheran University as Visiting
Professor and Distinguished Executive in Residence. She has served as the Vice-President and Global Industry Executive for manufacturing and
distribution industries, PeopleSoft, She is a past President and CEO, American Production and Inventory Control Society (APICS), She has
authored several books on topics including MRP ERP Lean and Theory of Constraints,

References
1. Demand Driven Institute, Standing on the shouiders of a Giant to see the future of formal planning', white paper, August 201 1

2. Demand Driven Institute, 21st century supply chains require new demand driven ruies and too/s, white paper, April 201 I
12 3. PTAK, CAROL and SMITH, CHAD, Orlicky's Material Requirements Planning, third edition, McGraw-Hill Professional, 201 I,
www.oriickysmrp.com

4. Aberdeen Group, Demand Management, November 2009

5. RALSTON, D O N 'Brief HISTORY OF MANUFACTURING CONTROL SYSTEMS: PART 2' Control, vol 22, no 6, July/August 1996,
Institute of Operations Management

6. RELPH, GEOFF and IRWIN, ROBERT Who Murdered MRP? An Industrial Mystery, 2008

7. 'The demand-driven supply chain: A holistic approach', an Oracle-sponsored report by The Economist Intelligence Unit, 2009

8. SURI, RAJAN, Quick Response Manufacturing: A Companywide Approach to Reducing Lead-times, Press, 998

9. HARDING, LINDSAY 'QRM: an enabler on the road to agility, part 2', Control, vol 28, no 5, June 2002, Institute of Operations
Management

10. 'SCHITT JEFFREY H and MOORE, THOMAS A, 'Pathway to Producing to Demand-Arrive at a high-velocity, low-cost supply chain',
APICS Magazine, vol 21 no 3, May/June 201 I

I I .LAUNCHBURY, KEITH Business Intelligence: Lessons Learned from the Oxymorons at Work (The Real World secrets they don't teach
you at Business School), 2012

12. AGI Goldratt Institute, Velocity Case Study (Corning Display Technologies Suppiy Cham Success Through Demand Pull)

Interested in this topic?

V V '^y '^^^ f''^'^ o'J'' more about MRP using the Institute's Knowledge Centre?
MATIRIAL
Orlicky's Materials Requirements Planning RnCliJIREMENTS
PLANNINQ

Author: Ptak, Carol: Smith, Chad ISBN: 9780071755634 Price: 41,39 plus 3 postage and packing (UK)

A fully revised and updated edition of the landmark work on material requirements planning (MRP), Orlicky's Material Requirements Planning,
Third Edition focuses on the new rules required to effectively support a manufacturing operation using MRP systems in the twenty-first century.
This authoritative resource offers proven solutions that help you gain the competitive edge through strategic lead time reductions, substantial
reductions in total inventory investment, and significant increases in service levels. This is an indispensable tool for manufacturing practitioners
and anyone preparing for CPIM certification.

Contact: The Knowledge Centre. Tel: 01536 740105. Email: books@iomnet.org.uk


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