React to the Firm, Protect for the Future
A manufacturing miracle can be yours
A manufacturing miracle – high throughput, efficient inventory, and lean staffing – can be yours if you adhere to a simple planning principle. React to the firm, protect for the future.
It is our nature to visualize the future
As humans, we have an innate desire to visualize the future, which is why we love forecasts, even when they are wildly innaccurate. Most planning methods project future demand on a calendar so that it can be visualized and covered by jobs and POs. Planners fill in the calendar with sales projections, placeholder jobs, BOM explosions, job linking, blanket purchase orders, “gut feel” intuition, and other such methods, often well out into the future.
Tentative demand is an illusion
Most of the demand you see on the planning calendar looks real on paper, but it is an illusion because future demand is not knowable until it happens. All demand originating from sales projections is tentative demand that changes as it firms over time. When you fill in the calendar with planned supply to cover tentative demand, shortages and overstocking are inevitable.
Supply gets misaligned with demand as sales orders are received
As sales orders get received from customers, firm demand replaces tentative demand and differs from original projections. Jobs and POs that were created to cover tentative demand get misaligned with firm demand, which is the root cause of shortages and overstocking.
The “bullwhip effect” amplifies misalignments
When BOM explosions and job linking drive lower level demand, supply misalignments get much worse. Component quantities are typically multiples of the parent quantity, which causes a phenomenon known as the “bullwhip effect.” Like the power of a bullwhip, misalignments increase with the length of the planning period and amplify at each lower BOM level, whichis how inventory easily gets out of control.
Jobs and POs require constant revisions
With calendar planning methods, jobs and POs require constant revisions to realign planned supply with demand as it firms over time. By the time misalignments are detected at upper levels, lower level jobs and POs are often already received or in progress and it is too late to avert shortages and overstocking. Blanket purchase orders are problematic because if they are not carefully monitored and periodically adjusted, stock continues to accumulate.
Overstaffing is inevitable
Calendar planning methods are silo solutions walled off from outside scrutiny and input. When planning has no transparency, other departments are forced to devise defensive silos to get products out the door. Silo solutions benefit individuals, but penalize throughput and always require extra staffing and higher overhead cost.
Revitalize your business with Demand Driven MRP
Demand Driven MRP, which is the basis of our DBA Manufacturing software package, enables you to revitalize your small business with high throughput, efficient inventory, and lean staffing. This manufacturing miracle derives from a simple principle – react to the firm, protect for the future.
React to the firm
Instead of reacting to tentative demand, you only react to firm demand. Each item has its own “action window”, which covers the time it takes to make or buy the item. MRP only reacts to demand within the action window, which is firm demand. Any demand outside the action window is tentative demand that is incomplete and highly likely to change as it firms over time.
Reacting to the firm yields miraculous benefits. Planned supply is always aligned with firm demand, which eliminates the misalignments that are the root cause of shortages, overstocking, and the need for constant job and PO revisions. Each item is planned individually, which eliminates the bullwhip effect from BOM explosions and job linking that amplifies misalignments at lower levels.
Protect for the future
Instead of using inventory to cover tentative demand projections, inventory is used to protect against future demand. Each item (other than to order items) is given a value that covers potential monthly demand. The monthly potential demand is applied to the item’s replenish time to calculate a dynamic reorder point. Whenever net demand within the item action window falls below the reorder point, MRP triggers a job or PO early enough to replenish stock before it runs out.
Overstocking is eliminated because new supply only gets triggered by firm demand and cannot keep accumulating. Throughput increases with consistent and efficient order quantities and run sizes. Even though the majority of items are planned for stocking, most companies experience a dramatic reduction in overall inventory. And if you do happen to sell or use more than your potential monthly demand rate, the system priority will automatically put the item at the top of the work center queues to get you back on track.
“Pull” planning is widely accepted as the superior method
Demand driven MRP is a “pull” planning method whereby inventory is pulled into the system by firm demand. By contrast, filling in the calendar to cover tentative demand is a “push” planning method whereby inventory is pushed onto the system. The core problem with push planning is that it is quite easy to push too much or too little, exacerbated by the bullwhip effect. Across the manufacturing world, pull planning is widely accepted as the superior method.
Gain market share with faster time to shipment
Demand Driven MRP dramatically reduces lead times with efficient inventory and high throughput. Each item is given a lead time for procurement or production and an order policy that determines lead time contribution to higher-level items. These settings enable you to plan a time to shipment strategy for gaining market share over less efficient competitors.
Eliminate silos and overstaffing
Item lead time, order policy, and replenishment settings are open and transparent and reflect a shared time to shipment strategy across all departments. An open and collaborative system eliminates the need for defensive silos and extra staff.
Revitalization is a choice
Calendar planning methods are comfortable because they enable us to see the future, but it is a costly illusion that guarantees low throughput and overstaffing. Reacting to the firm and protecting for the future with Demand Driven MRP is the best way to revitalize your small business and ensure its long-term viability.
