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2015

Recently, in working with a client that was already well into a Lean initiative, we were helping them try to understand the differences between a Kanban approach to managing inventory DDMRP Buffer Calculation.jpgbuffers versus strategic buffers designed in accordance with demand driven MRP principles.

 

Without getting into the details about the various approaches that might be used to determine the size for each SKU’s Kanban total quantity and signal points (e.g., empty bin being KT – BQ, where KT = Kanban total quantity and BQ = Bin quantity), it is safe to say that the following differences (among others) exist:

 

1.  Kanbans, in themselves, provide a demand-driven signal, but provide with it no clear signal to establish priorities between demand signals that rely upon the same resource

In the absence of specialized software or other mechanism that is not standard to most Lean implementations, Kanban signals tell producing or procurement resources that SKUs must be produced or purchased, but these signals generally do not tell the supplying resource the priorities for the various demand signals. The demand signals are not linked to “due dates” (an unreliable predictor of actual priority in any event), and the fact that two Kanban bins are empty for one SKU and only one Kanban bin is empty for another SKU may also not represent the true priority for action.

 

By contrast, a DDMRP (demand driven MRP) environment accompanies each demand signal with two meaningful pieces of data:

      • A color code (typically, yellow or red) that indicates the general priority level
      • A buffer penetration percent value (e.g., 23%, 41%, 53%)

Operators in a DDMRP environment always know that RED is always worked on before YELLOW, and that always before GREEN. Operators also know that they work on those items with the highest percent of buffer penetration first, and work their way down through the stack in descending order. (In our example, the SKU with 53 percent buffer penetration would take priority over the SKU with 41 percent buffer penetration if they both fell in the same color-code group.)

 

2.  Lean approaches tend to make all demand independent, so the linkages between higher level demand (e.g., higher BOM levels, finished goods) are lost

The strategic development of an overall scheme of DDMRP buffers (called positioning) never loses sight of where each stock position falls in the BOM or BOMs in which any given SKU falls.

 

3.  Typically, no formal strategy exists to determine which Kanban’s produce measurable ROI at what average QOH (quantity on-hand)

Because the strategic modeling of the DDMRP environment helps supply chain executives and managers look at how each stock position (i.e., buffer) affects lead times, and there is a cohesive methodology for determining average stock position for every buffer, careful modeling and re-modeling of the environment can prove-out the ROI value of each buffered stock position. This is nearly an impossibility given typically Kanban planning methods.


4.  Kanban sizes are not typically dynamically managed on a day to day basis, but are generally subject to only periodic review

One of the great weaknesses of many Kanban systems is their lack of system support for dynamic day-to-day management of Kanban design quantities. In fact, because Kanbans are typically tied to visual signals—like labels on bins—dynamically managing Kanban sizes becomes a practical impossibility when attempted with any frequency.

 

5.  There is seldom a formal mechanism for automating planned adjustment factors to adjust Kanban design quantities up or down based on external factors (e.g., seasonality, product end-of-life, new product introductions, other known or predicted changes in market conditions)

Again, because Kanbans are so typically linked to visual signals that are “hard-coded” into objects like physical bin sizes, labels on bins, and so forth, managing Kanbans dynamically for things like changes due to seasonality, build-up and build-down cycles, or other temporary or permanent forecast changes in demand can be costly and time-consuming. These hurdles lead to procrastination, avoidance or firefighting, but seldom to effective and smooth operations.

 

We would like to hear about your experiences with Kanbans and other demand-driven methods you have tried to implement—successfully or unsuccessfully. Leave your comments below.

 

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Vikas Chandra Team Wins NITIE Prize.jpgI'd like to offer my sincere congratulations to Vikas Chandra and his fellow students at NITIE (National Institute of Industrial Engineering) (Mumbai) for winning the ITC Interrobang Season 5 Case Challenge for 2015-16.

 

Some weeks ago, I was contacted by Vikas Chandra via LinkedIn. He posed some questions to me about demand driven MRP (DDMRP). He and a team of students at NITIE were involved in a competition sponsored by ITC (Indian Tobacco Company). Vikas had seen some of my articles on DDMRP, and thought I might be able to give him and his team some guidance.

 

So, via email, I worked with Vikas to help him understand DDMRP principles. The team worked diligently to develop a spreadsheet model to simulate DDMRP versus traditional MRP. The results were outstanding, in my view, and apparently to the competition's judges, as well.

 

Today I received notice that Vikas and his team had won first place in the competition while recommending that ITC pursue a supply chain strategy based on DDMRP principles and practices.

 

Congratulations, Vikas! The value of DDMRP is proven once again!

 

Questions? Contact me.

Many of you will be somewhat familiar with the so-called “Toyota House.” The Toyota Production System (TPS) “house” is built upon the foundation of the Toyota Way Philosophy, with its second foundational level being “Visual Management,” followed by standardized processes and heijunka, or leveled production.DDMRP House.jpg

 

At the core of the TPS lies the concept of continuous improvement, and at the top—the outcomes—lie “best quality,” “lowest cost,” “shortest lead time,” “best safety,” and “high morale.”

 

You can read more about the TPS and find a diagram of the TPS House in Jeffrey Liker’s book Toyota Production System.

 

This approach has, over the last 60+ years, taken Toyota from a weak and struggling firm emerging from the ashes of a war-torn Japan, to the pinnacle of the automotive industry worldwide. By 2003—more than a decade ago, Toyota’s annual profits were already greater than the earnings of General Motors, Chrysler and Ford combined.

It is difficult to argue with that kind of success.

 

Yet, Toyota’s methods have proven to be effective in organizations around the world when adopted as “the whole house”—from the foundation up.

 

Those methods have been far less effective when attempts were made to isolate Lean “tools” and “practices” from the foundation and implement just “the practices.”

 

New Tools for the Supply Chain

 

Now, in recent years, exciting new tools and philosophies about to make supplies chains more effective have emerged. There are many similarities to the TPS house found in the truly demand-driven supply chain approach.

 

I emphasize the word “truly” as the adjective for “demand-driven,” because so many have adopted the term “demand-driven” to suggest that somehow improving forecasting methods and algorithms can convert a “forecast-driven” operation into a “demand-driven” operation. I, personally, do not believe that is true.

 

For me, truly demand-driven means that, while planning may be forward-looking and even driven (as it often must be) by forecasts, all execution in the supply chain is derived from signals flowing from actual demand.

 

Taking the concepts that are so well articulated in two books you (the reader) ought to own, I have created the new DEMAND-DRIVEN SUPPLY CHAIN HOUSE (see illustration). Here are the two books:

 

The Demand-Driven Supply Chain House

Flow as the foundation

 

In the demand-driven supply chain house, we begin with FLOW as the foundation. There is, of course, a philosophical base for choosing flow, but it is articulated from various sources—not the least of which is the Toyota Production System itself.

 

In the demand-driven supply chain, we agree with this foundational principle:

 

All benefits will be directly related to the speed of flow of materials and information.

 

However, we add a simple caveat:

 

All benefits will be directly related to the speed of flow of relevant materials and relevant information.

 

When the system is producing goods that are not needed based on wrong forecasts, this is plainly a depiction of the flow of irrelevant materials based on the flow of irrelevant information (wrong data is always irrelevant). From such activity, only costs result. There is no durable benefit accrued to the system from this.

 

Pillar Number 1: Decoupling

 

Inventory in the supply chain always decouples demand from supply. So, here we are not speaking decoupling in general. Instead, in the demand-driven supply chain, decoupling should be done strategically, in order to maximize the return on capital invested in the inventory stocked at any given point in the supply chain.

 

Pillar Number 2: Actual Demand

 

In order to facilitate and accelerate the flow of relevant materials, we need the flow of relevant information. Therefore, we need a way for the system (the supply chain) to sense and respond to actual demand. Strategically placed inventory buffers fulfill that very requirements. Actual demand—and changes in actual demand—can be sensed by the supply chain by observing the condition of the buffers and their changes over time.

 

The Core: Buffers and Buffer Status

 

At the core of assuring and accelerating the flow of both relevant materials and relevant information, then, are the buffers. Included in the buffers is information about minimum order quantities (if applicable) and lead times, as important factors in the dynamic management of the buffers themselves.

 

At the Top of the House: The Results

 

At the top of the Demand-Drive Supply Chain House we find all of the benefits accruing:

  • Fewer expedites (less fire-fighting)
  • Lower inventories
  • Dramatically improved customer service levels
  • Increased (and, increasing) return on investment

 

Who would not want to live in a house like that?

 

You can!

 

Becoming demand-driven is all about installing new “thoughtware,” just like real success with implementing the Toyota Production System (Lean) requires an overhaul in the underlying philosophy of operations.

 

Stop pretending your operations are “demand-driven,” and enter the real world where benefits are constantly accruing from the FLOW of relevant materials and relevant information.

 

Leave a comment below (or contact us directly) with your stories—good and bad—about attempts to become demand-driven.

 

We look forward to hearing from you.

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