The evolution of planning tools, from inventory management packages in the early 60s to material requirements planning (MRP) in the 70s and now demand-driven material requirements planning (DDMRP), demonstrates technological change to meet changing business needs. For most companies today, DDMRP is the most effective option as it offers higher performance for a lower price than MRP. DDMRP solves the traditional issues that have burdened its predecessor while maintaining some relevant aspects of material requirements planning (MRP) and distribution requirements planning (DRP).
MRP has been on the market for a long time and has only seen minimal improvements since it started getting used in the 70s. Since MRP has been embedded in practically all commonly available planning software, including the most advanced ones, most companies still apply MRP in their processes today. Many companies have started to embrace DDMRP because of the numerous benefits and advantages it brings to enterprises compared to MRP. In this article, we explain the key differences between DDMRP and MRP, and we discuss both methodologies’ advantages and disadvantages to guide you on what can be ideal for your company.
Material Requirements Planning (MRP) calculates the requirements of each level of a bill of material, using end item demand as an input. The calculated requirements are then enacted as purchase orders (for purchased raw materials or external components) and manufacturing orders for internally manufactured products. Since the cumulative lead times to procure and manufacture the goods are typically much longer than what the customers are willing to wait, MRP forces the user to use forecasted demand as an input. In addition, MRP uses safety stocks for finished products and/or raw materials to secure the availability of materials at all times. In MRP, safety stocks are not planned to be consumed; thus, in its attempt to maintain the safety stock levels at all times, MRP will propagate (and often amplify) the demand variability back to the suppliers, contributing to the bullwhip effect. MRP is a perfect make-to-order calculator and does a poor job of managing inventory.
DDMRP combines the best concepts of MRP, DRP, Lean Manufacturing and Theory of Constraints. DDMRP creates independent planning horizons by decoupling the supply chain with dynamic inventory buffers. Each DDMRP buffer will trigger its replenishment based on the current stock level, the existing open supply orders and the qualified demand. Demand driven planning uses sales orders or actual consumption as a demand signal input and then propagates it through the supply chain using pull signals from one stock position to the next up the chain.
Unlike safety stocks, stock buffers are intended to absorb variability from both directions and stop the propagation of the bullwhip effect. All orders generated in a DDMRP system are firm, will not change and can be easily prioritized. This creates a very stable, reliable and actionable production plan.
Let’s dig more in-depth about what sets DDRMP apart from MRP.
Traditional MRP as a planning method does an excellent job of planning the materials and resources needed to build a product as long as the following three assumptions are fulfilled:
While these conditions may have been partially fulfilled in the 60s, they are no longer valid today with our long-extended and highly volatile supply chains. Since medium-term forecast accuracy is typically very low, enacting the MRP plan means committing material, labor, space and capacity to buy and build products that won’t be needed down the road. This leads directly to the situation where companies have plenty of excessive inventory while stocking out of what the market requires. To make things worse, the entire plan changes as the demand input in MRP is updated, and MRP is re-run. This creates a lot of instability in the manufacturing environment. If you are suffering from low service levels and lost sales while having excessive inventory at the same time and are constantly fire-fighting in emergency mode, then you are living in a hell created for you by your MRP.
Industries with large fluctuations in demand will benefit the most from a demand driven supply chain.
DDMRP is specifically designed to protect availability at all levels. The stock buffers create fixed and reliable lead times and protect each other by dampening the propagation of variability and bullwhip. The demand signals are now accurate and do not change, there is enough time to fulfill the production plan within the shorter lead times created by the buffers, and both materials and capacity are much more likely to be available when required by the plans.
Additional benefits are: stock buffers are dynamic and are adapted as demand evolves, including seasonality and promotions; DDMRP gives an unprecedented level of visibility in execution, providing clear priorities based on actual needs; It significantly increases resilience which allows companies to recover much faster from disruptive events; Inventory is better aligned to actual needs: less overstock, fewer stock-outs, and typically 20-40% inventory reduction overall with higher service level and much fewer emergencies; As a planning process, DDMRP is intuitive, technically easy to implement and there is plenty of software available for it.
The major drawback of DDMRP is not technical; it is mental. It’s a different way of designing and running a supply chain, and it may be challenging for many seasoned planning professionals to make the mental switch necessary to take this step. To implement DDMRP, a company will require strong leadership and a serious investment in education and training, but it will be worth it.
It really depends on the needs of your business.
But if you’re planning to grow your business and want to get the most bang for your buck in terms of efficiency and visibility, DDMRP is your best choice. A planning system based on traditional MRP is of limited value in our volatile and uncertain world. DDMRP has been proven to work very well in retail, distribution, and manufacturing industries, from Engineering-to-Order to Make-to-Stock and everything in between. Its benefits can help virtually any business properly value its inventory, optimize its supply chain, and achieve operational excellence.
If you want to learn more about DDMRP and how you can adapt it to your business and organization, connect with Patrick Rigoni, DDMRP, Lean Six Sigma Master, with over 20 years of experience in the supply chain industry. Patrick recently explained about DDMRP in-depth in an interview feature (read the whole interview here), and he can give you more detailed information about DDMRP for your business.
Get more information on our DDMRP PAGE here, and book a time to consult with Patrick Rioni today.