Since 2014, a significant change has appeared in the manufacturing and supply chain operations. The primary planning methodologies of forecast driven MRP that was developed over 40 years ago to manage manufacturing and purchasing flows is causing high inventories, poor service levels and overcapacities issues in today’s VUCA world. Hence many companies now consider these techniques obsolete.
A new methodology born out of the US, called Demand Driven MRP (DDMRP), is providing major innovations by augmenting traditional MRP with techniques such as Lean, Theory of Constraints, Six Sigma and visual management. Many major companies around the globe have started using DDMRP and are switching to a demand driven operational model (DDOM) with impressive results. They are reporting 30-50% inventory reduction, 40%-60% customer lead time reduction, while at the same time exceeding 99% service levels.
Although DDMRP is not revolutionary, adopting a DDOM Model represents a major change for companies that have historically ‘grown up with MRP’ and have invested millions of $ or € in their forecast driven MRP processes, skills and systems. Having now worked with over 25 companies on their demand driven journey, these are my insights into what are the 4 keys stages that a company needs to go through to become demand driven.
Before you start, you need a strong leader that does not mind lonely places
Christopher Galvin wrote “Leading innovation can be a uniquely lonely and unpopular thing because most of the time, you have to stand by yourself saying. Everybody sees the world this way. I see the world another way”.
But, as many supply chain planning leaders know, once you have seen the light and taken the mental decision to change, it is very hard to return to a world of gathering forecasts you know are wrong, setting safety stocks you ‘plan never to use’ and then using these forecasts and safety stocks to push inventory into every corner of your supply chain.
The battle with the executives of the business to adapt to this new way of running the business; or with the IT departments to switch to yet another new ‘non-core’ technology; or with the sales team who cannot imagine a world without their forecast and safety (or comfort) stock driving the day-to- day replenishment decisions is a challenge that must be taken as going back to the old way is just not an option.
The First Stage: Training
I am a firm believer that education is key to any transformation process. Not only is it the first stage, but it should be an ongoing theme over the entire transformation process. It is extremely hard to get people to change if they don’t understand what the problem is or, even harder, if they don’t agree that there is a problem. In addition, do not underestimate the impact that a change in operating model will have on the business. To be truly successful in adopting a DDOM, business process, responsibilities, job functions, bonus structures, supplier relationships as well as all the KPI’s need to change and be adhered to. This level of change can only happen if the entire organization puts its weight behind the DDOM and that requires a well-crafted change management strategy that is re-enforced with training at every stage.
I believe the best approach is to provide 4 different training programs each aimed at a different group of people within the company.
Group 1: The Operators. These are the people you train first as they need to operate the engine of the DDOM. Typically, they are the current planners. They need to understand the pitfall of a forecast driven MRP model and how DDMRP uses lean, theory of constraints and six-sigma to create a demand driven model. They need to be able to do all the calculations and must be able to execute the model daily. The training I recommended for this group is the formal Demand Driven Planner (DDP) program as provided by the Demand Driven Institute®.
Group 2: The Drivers. These are the people that need to know how to get the best out of the new engine. Typically, they are the senior managers or leaders of the different departments. They need to be equipped to design the new demand driven organization and set the parameters of the model using DD S&OP. The training I recommended for this group is the formal Demand Driven Leaders (DDL) program as provided by the Demand Driven Institute®.
Group 3: The Executives. These are the executives of the business that have the power to overhaul the way the business connects strategy to operations and operations to strategy. By doing this they can dramatically change the trajectory of the organization. The training I recommend for this is the Adaptive S&OP workshop as provided by the Demand Driven Institute which is typically delivered on an in-house basis to the Executive team.
Group 4: The Passengers. And then, there is everyone else. For the DDOM to be truly successful, it is critical you involve people from Finance, Marketing, Sales, Production, Planning and Quality so that you break down silos, promote teamwork and get everyone in the company thinking about FLOW and DDMRP. The training I recommend for this group is the leading DDMRP management game called DDBRIX®. It is designed to let people play with Lego and to witness first-hand how demand-driven planning and execution will increase order fulfilment, stabilise production, reduce working capital and alleviate stress.
The timing of these training programs is also critical and I would recommend the following time-line. Step 1 is the DDP training as it introduces the key people in the organisation to the new model and equips them to run a pilot. Step 2 is DDBRIX®. Not only does this training re-enforce the learnings from the DDP program, but it also allows you to start introducing the concept to a broader audience. Step 3 is DDL. In my opinion this training is most effective when the operating model is up and running and you are now looking for the next level of improvements. And then finally Step 4 is the Adaptive S&OP training. This training does require a well-entrenched and maturing DDOM that is already supported by the executives.
The Second Stage: The Pilot
DDMRP is different. It challenges some deep truths that have been around for a long time. Undoubtedly training helps with understanding, but nothing helps more in winning over hearts and minds than demonstrable results.
And the best way to demonstrate results is with a Pilot Project. The obvious parts to pilot with are purchased or distributed parts, but more and more we are seeing pilots extend to cover a complete segment of the supply chain. In this way you can:
- Implement the full DDMRP workflow of ‘position, protect and pull’ across distributed, manufactured and purchased parts
- Produce new DDMRP replenishment orders for comparison with the current replenishment rules
- Execute against these DDMRP replenishment orders and analyze performance over time
- Introduce the users to the visual management of DDMRP with run-rate charts, order compliant metrics and simulations with your own data
Apart from demonstrating results, this pilot also affords you the opportunity to
- Understand what transformations will be requires
- Address master data deficiencies
- Design new process and workflows
- Identify training requirements
- Get the thought ware of the organization right
The Third Stage: Deployment
Armed with the learning from the pilots and the first-hand experience of running the new DDMRP engine, all that is now required is to expand the data set, train more colleagues and roll the DDOM out across the entire organization.
This all sounds quite easy, but it is at this stage that you will truly test the degree to which your organization has embraced this new model. Too often people paid lip service to what is needed to be done and now reality sets in.
Probably the 2 most important metrics of this stage are the (1) Order Compliance metrics and the (2) Stock Out with Demand (SOWD) metric. The first metric tracks the daily order suggestions of the DDOM and compares them to the actual orders placed. The summarized part of this metric shows you the number of orders suggested versus placed. The detailed view shows how a part moves over time from Blue (over-stocked), to Green (good), to Yellow (needs a replenishment) to Red (you are in trouble) and yet the planner has not placed an order. The second metric shows you how many buffers are broken resulting in a SOWD. Understanding why orders are not being placed and why buffers are breaking is critical to ensuring that the operating model is configured correctly and to address all the other reasons, like master data or general understanding, as to why the model is not been adhered to.
Don’t rush stage 3. Do it properly. In my experience making the DDOM stick long-term requires a business to adopt a framework of continuous improvement that meets regularly to focus on
- Enhancing the processes,
- Supporting the people,
- Fixing the data issues
- Ensuring the model adapts with the business
With this stage, remember the 3 most important success criteria…. training, training and training.
The fourth Stage: Adaptation
Stage 4 is where you will get your payback!
It is at this stage where you should have all the skills and business processes in place to continually tune the engine to get it preforming optimally. You should have identified the leaders and have given them the DDL training. However, in general, the organization should already be very familiar with all the parameters that drive the model. You should be focusing on KPIs like Decoupling Point Integrity, individual part Trading Velocity and Supplier Disruption Reports.
Your model should be providing you with working capital, capacity and labour projections and this should all be flowing into your DD S&OP process which is attended by senior executives. You should be starting to challenge any deep truths within the business like the need to keep MOQs (minimum order quantities) high in order to protect your OEE (Overall Equipment Efficiencies).
Engaging with suppliers is equally critical to success. No longer should suppliers focus on sending you what is late, they should be sending you what you need which is defined by your different buffers On-Hand Alert colors and penetration percentages.
Daily you should be using your six sigma run rate charts to analyze your parts that on average have too little or too much inventory then adapting the parameters of your operating model appropriately. Any deviation from the model should be captured using reason codes, and then these issues discussed and resolved in a monthly S&OP meeting.
In addition, you should be noticing that the number of parts with manually set policies should be reducing and planners should be spending less time reviewing order recommendations and a whole lot more time interacting with sales, production and suppliers.
Becoming demand driven does not mean forecasting is now dead. You should still be holding a monthly forecast meeting as it is still critical you have a forecast for your tactical decisions related to capacity, working capital and labour. You also need this forecast to right-size buffers going into seasons. Any known or expected large upswings in demand should be captured as an Event Order® (with expected date and salesperson’s name) and considered for replenishment by your planners. You should also be discussing new part introductions, supersessions and end of life parts.
The journey from forecast driven MRP to fully adopting a DDOM, is not always a simple one. Even though significant benefits can be achieved by just implementing the DDMRP engine in the planning department to make your replenishment demand driven, the full and sustained benefits will only happen if the entire organization from the CEO to the Shop floor puts their weight behind the DDOM.
To get this right requires a strong internal leader and a well-crafted change management strategy that is re-enforced with effective training and clear processes at every stage.