Consider applying the Demand Driven order policy to most commonly used purchased components.
Overview
“Strategic inventory” is a plan for reducing times to shipment using the least amount of inventory to do so. You decide which items are to be made or purchased Demand Driven and against those items you enter a Monthly Potential Demand and Supply Days target to replenish stock..
Reducing lead times
A To Order policy item is removed as a lead time contributor by reassigning it to the Demand Driven order policy. You can reduce pre-job Lead Days for your manufactured items by selectively removing contributor components, which enables jobs to be started earlier. Reassigning top-level M items to the Demand Driven order policy eliminates Time to Shipment altogether.
Target dates sequence and prioritize system activities
The “Big 3” lead time settings and two dynamic settings for lead time contribution determine your PO, job, and SO dates, which are perfectly aligned in the correct order of assembly. Take note that these are target dates, not literal dates, that sequence and prioritize system activities.
When items have highly unpredictable demand:
The Demand Driven order policy does not require a reliable or consistent demand pattern to be effective. When unexpected demand causes a shortage, MRP immediately generates new supply and prioritizes dependent jobs to get them back on schedule. When an unusually large sales order necessitates making the item to order, the Late Supply screen provides feedback from production, which helps sales establish a realistic Estimated Ship date for communication to the customer.
How to get your inventory under control
All material planning methods incur inventory because it is not practical to buy and make everything to order. The best inventory planning method, by far, is Demand Driven MRP, which is the basis of the Demand Driven order policy, a unique DBA innovation for smaller manufacturers. This simple planning method provides efficient ordering, rapid response to shortages, and eliminates overstocking.
The root cause of inventory problems
Other planning methods drive lower-level requirements from sales forecasts using linked jobs or BOM explosions. Top-down explosions cause the “bullwhip effect” where forecast errors amplify exponentially at each lower level whenever component quantities are multiples of the parent. Like the power of a bullwhip, minor planning errors at the top quickly grow into major errors at the bottom and inventory easily gets out of control.
Breaking the bullwhip effect
Demand driven planning has no bullwhip effect because lower-level items are planned individually instead of from a top-down explosion. New supply for any given item is triggered by total net demand instead of being linked to specific jobs or sales orders.
Each item is planned for potential demand
Demand driven planning does not forecast or explode future requirements. Instead, each item is planned for a Potential Demand rate, aided by a monthly usage graph, which is simply a possible demand scenario, not a forecast or prediction. It is entered as a monthly amount that gets translated into a daily rate.
The Potential Demand rate is applied to the item’s Replenishment Time (Lead Days + Job Days + MRP Interval) to calculate a dynamic Reorder Point, and a Supply Days interval target is specified to calculate a dynamic Min Order quantity.
NOTE: Make sure that item Lead Days and/or Job Days allocations are realistic. Padded or inflated lead times cause high Reorder Points that trigger excessive inventory.
New supply is triggered by firm demand
Demand driven planning never takes action on tentative demand from forecasts or explosions, which constantly changes over time. Instead, new supply is triggered solely by firm demand from sales orders.
During each MRP session, items are evaluated in a multi-level progression so that new jobs generated at each level create demand for components at subsequent levels. Whenever net demand (on hand + inbound supply - planning period demand) falls below an item’s Reorder Point, MRP generates a new job or PO for the item’s Min Order quantity or actual demand amount, whichever is greater.
Reordering is timely and efficient
Demand driven planning solves the universal problems of when to order and in what quantity. New supply is ordered early enough so that remaining supply covers daily Potential Demand over the item’s Replenishment Time. The Min Order quantity ensures efficient order sizes at consistent intervals.
You are pre-ordering for the next Supply Days interval
Like to order planning, new supply is only triggered by firm demand from sales orders or jobs. Instead of ordering for the sales order or job, however, you are pre-ordering for the next Supply Days interval, which eliminates lead time with relatively little inventory.
The item’s Potential Demand rate does not require precision or constant adjustments. When actual demand is greater than the Potential Demand rate, the item will be reordered sooner than its planned Supply Days interval. Conversely, when actual demand is less than the Potential Demand rate, the item will be reordered later than its planned Supply Days interval.
Nothing can fall through the cracks
Because each item is planned individually, there is no need for SO/Job linking or BOM explosions to ensure that material requirements are fully covered. Each item’s Reorder Point makes it impossible for any demand to somehow get missed or fall through the cracks.
Overstocking is eliminated
When inventory is “pushed” onto the system with top-down explosions or blanket POs, stock continues to accumulate unless constant adjustments are made to realign supply with actual demand. By contrast, demand driven planning “pulls” inventory into the system, triggered solely by firm demand from sales orders. Inventory for any given item can never exceed one Supply Days interval.
It’s the best way to plan P items with long lead times
Demand driven planning takes the risk and guesswork out of planning P items with extremely long lead times. Instead of less frequent, larger orders with high inventory cost and risk of lengthy shortages, the item Lead Days, Potential Demand, and Supply Days settings cause multiple POs to be triggered in demand driven intervals, which moderates inventory swings and minimizes the duration of any shortages.
Tasks
1. Plan Strategic Inventory for Stock Replenishment
(MRP - MRP Settings - Order Policy Screen)
Settings for P items with a Demand Driven order policy are entered in the Order Policy screen within the MRP Settings screen, which is accessed by clicking the button to the right of the Order Policy field.
Demand Driven Order Policy
Select this order policy when you intend to maintain stock on hand sufficient to cover a high probability of your potential demand scenarios. You will enter a Monthly Potential Demand value and a Supply Days target and the system will dynamically calculate the Reorder Point and Min Order quantity values that are used to generate demand-driven jobs or purchase orders.
How it works
The goal of the demand driven system is to trigger a new job or purchase order with enough time to replenish the stock before you run out. The Monthly Potential Demand value covers a high probability of anticipated demand scenarios. The Supply Days target helps govern the amount of time between your jobs and purchase orders.
You enter a Monthly Potential Demand value and a Supply Days target. The system will convert your Monthly Potential Demand value into a daily rate. The daily rate is multiplied by the item's Replenishment Time to come up with the Reorder Point and the daily rate is multiplied by the Supply Days value to come up with the Min Order quantity.
All jobs and purchase orders are triggered by actual demand. Whenever net demand (stock on hand + all inbound supply - actual demand within the item's planning period action window) falls below the item's Reorder Point, MRP generates a job or purchase order with a supply quantity equal to net demand or the Min Order quantity, whichever is greater.
What happens when actual demand differs from my Monthly Potential Demand entry
The item’s Potential Demand rate does not require precision or constant adjustments. When the actual demand (sales + job issues) is exactly equal to the Monthly Potential Demand rate then you would expect the time between jobs or orders to exactly equal your Supply Days interval. When actual sales/usage exceed your Potential Demand rate, the item will be reordered sooner than its planned Supply Days interval. Conversely, when sales/usage is less than the Potential Demand rate, your supply will last a bit longer than your Supply Days interval target. When you are fortunate enough to get sales that exceed your plan and you run out of stock for that item, MRP immediately generates new supply and auto-prioritizes dependent jobs to get them back on schedule. When an unusually large sales order necessitates making the item to order, the Late Supply screen provides feedback from production, which helps sales establish a realistic Estimated Ship date for communication to the customer.
When to use
Use for lean inventory planning
Use this order policy for lean inventory planning to achieve efficient utilization of inventory without shortages or over-stocking.
Use for most purchased components and subassemblies
You will want to place the Demand Driven order policy on all commonly used purchased components and subassemblies to have them on hand for immediate use in jobs.
Use for standard sale items
Assign a Demand Driven order policy to any top level M item where immediate shipment is a desirable marketing strategy or the item has frequent demand that makes it more efficient to replenish stocking at demand-driven intervals instead of making the item to each order.
Use for P items with long lead times
Assign this order policy to P items with long lead times. The Monthly Potential Demand rate and Supply Days interval calculate a Reorder Point and Min Order quantity that generate a supply pipeline of overlapping POs, each due to arrive at staggered intervals. A demand-driven PO pipeline is far more efficient than large and infrequent POs because more frequent replenishment eliminates the risk of lengthy shortages and excessive stock on hand.
Replace blanket POs with a supply pipeline
If you are using blanket POs with a set of scheduled deliveries, each such item should be assigned the Demand Driven order policy and the blanket purchase order should be replaced with a supply pipeline so that future POs are generated by MRP. Blanket POs are counter-productive because they require constant adjustments to avoid shortages and over-stocking when scheduled supply inevitably differs from actual demand. By contrast, MRP generates demand-driven purchase orders at self-adjusting intervals governed by our Supply Days target.
LInk:
MRP Guide - Long Lead Time Planning
Demand Driven Settings
Select the 'Demand Driven' option
In the Order Policy panel, select the Demand Driven option.
If you receive a Projected Shortage warning:
When you change an item’s order policy from To Order to Demand Driven, upon saving the program checks if stock on hand is sufficient to cover one planning period of forecast demand. If not, you receive a Projected Shortage warning that displays the projected shortage amount. This means that you will be unable to immediately begin issuing the item from stock. You are presented with two options:
Cancel Changes
With this option you leave the order policy as To Order for the time being and you create a manual job to cover the projected shortage. After the manual job is completed, change the order policy to Demand Driven.
Ignore Suggestion and Save Changes
With this option the order policy is changed to Demand Driven, even though initial shortages may occur. MRP will generate an immediate job to cover the projected shortage, but that job will be late relative to its required date if any current demand exists or materializes in the near future.
1. Enter a Monthly Potential Demand value
Enter a Monthly Potential Demand value, which reflects monthly sales + usage in jobs. You can use past history for reference by reviewing recent trends in the Average Monthly Trend panel at left, view the Monthly Trend graph, or by reviewing monthly averages in the Monthly Historical tab in the lower panel. The goal is to have sufficient stock on hand to meet a high probability of your potential needs.
The monthly rate is a general trend, not a precise forecast
Unlike a forecast, which is a precise prediction of future demand, the Monthly Potential Demand rate represents a general trend in demand and does not need the precision of a forecast. Enter a "ball park" monthly demand rate that covers a high probability of your potential demand scenarios.
General Guidelines
•For items with a fairly consistent usage pattern, you can review the Monthly Trend graph and choose a Monthly Demand value that covers most historical scenarios. When you enter a Monthly Demand value, you will see a horizontal line in the graph.
•The Monthly Trend data panel provides averages, standard deviations, and peak usage for trailing 90, 180, and 360 Days. The average + 1 standard deviation covers 84% and the average + 2 standard deviations covers 97.5% of scenarios for the date ranges specified. The peak value represents the highest 30 day bucket within the 3 date range columns. You can use the selection arrow to the right of any numeric value to auto-fill the Monthly Demand entry field.
•If the item does not have a consistent pattern of usage, yet you still want to carry inventory, choose a target monthly value that you wish to cover.
•If the item is new and does not have any historical data, apply a common sense monthly value that is consistent with your usage of similar items.
The Reorder Point is dynamically calculated
The item's Reorder Point is dynamically calculated as follows:
Variables
Monthly Potential Demand / 30 = Daily Demand
Replenishment Time = Lead Days + Job Days + MRP Interval + Non-Shop Days
Formula
Daily Demand * Replenishment Time = Reorder Point
If the item’s Monthly Potential Demand, Lead Days, or Job Days gets changed, the Reorder Point is automatically recalculated so that it always reflects your current planning settings.
The Reorder Point is a trigger point, not a stocking level
The Reorder Point is a trigger point for job or PO generation and is not a stocking level. A trigger point has no obvious meaning in itself and should not be of concern when it has a high value. An item with an extremely long lead time, for example, will have a high Reorder Point value, but job or PO quantities are determined by actual demand and the Min Order quantity and will be a much lower amount.
2. Enter a Supply Days interval target (Calculated Min Order)
Supply Days entry
In the Min Order panel, select the Calculated option. Enter a Supply Days interval, which is the planned number of days to be supplied by each replenishment job or PO
For example, if you plan for a job or PO to be generated twice a month, enter a Supply Days interval of ‘15’. If you plan for a job or PO to be generated once a month, enter a Supply Days of ‘30’.
Use smaller intervals for lean inventory
The Supply Days interval is a powerful tool for lean inventory planning. To keep inventory as lean as possible, use smaller Supply Days intervals to generate smaller and more frequent jobs or POs. Smaller and more frequent replenishment minimizes stock on hand and reduces the duration of shortages.
The Min Order quantity is dynamically calculated
The item’s Min Order quantity is calculated as follows:
Variables
Potential Monthly Demand / 30 = Daily Demand
Formula
Daily Demand * Supply Days = Min Order
If the item’s Monthly Potential Demand or Supply Days gets changed, the Min Order quantity is automatically recalculated so that it always reflects your current planning settings.
Generates a PO pipeline for P items with long Lead Days
The Supply Days interval is ideally suited for P items with long lead times when combined with the Demand Driven order policy. The Monthly Potential Demand, long standard Lead Days, and Supply Days interval calculate a Reorder Point and Min Order quantity that generate a supply pipeline of overlapping POs, each due to arrive at staggered intervals. A demand-driven PO pipeline is far more efficient than large and infrequent POs because more frequent replenishment eliminates the risk of lengthy shortages and excessive stock on hand.
LInk:
MRP Guide - Long Lead Time Planning
Settings provide planning logic transparency
The big benefit of a calculated Min Order quantity is that the settings from which it is derived – the item’s Monthly Potential Demand and its Supply Days interval – are visible and transparent. This enables the planner and others in the company to be fully aware of the logic being used for inventory planning.
Review Demand Driven settings on a periodic basis
Review Demand Driven settings on a periodic basis to ensure that monthly potential demand rates remain valid. You can use the MRP - MRP Analysis Codes screen to assign and schedule sets of items for periodic review. See the following chapter for reference.
MRP Guide - Using MRP Analysis Codes
2B. Manual Min Order entry option
As an alternative to the Calculated option, you can select Manual and enter a value directly in the Min Order quantity field to determine the minimum job or purchase order quantity.
•With M items a manual entry is typically used as an economical order quantity to generate job quantities sufficiently large enough to justify machine setups or to match quantities In with machine sizes.
•With P items a manual Min Order quantity may be needed when the default supplier has a minimum order policy or offers a significant quantity price break. A minimum order size can also reduce unit shipping and handling costs and can reduce the frequency and number of POs that get generated.
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