You know, medicine is not an exact science, but we are learning all the time. Why, just fifty years ago, they thought a disease like your daughter's was caused by demonic possession or witchcraft. But nowadays we know that Isabelle is suffering from an imbalance of bodily humors, perhaps caused by a toad or a small dwarf living in her stomach. Theodoric of York (Saturday Night Live) as quoted in Factory Physics (p. 205)

Future Reality Tree (FRT) Supply Chain Improvement

 

Some have accused adherents to demand-driven methods, as articulated by the Demand Driven Institute, of being followers of a “new religion” in supply chain management. In part, I suspect, this aspersion is cast against these folks because demand-driven concepts and realities expose the weaknesses in the other “belief systems” found in the supply chain management world.

 

These other supply chain belief systems include an unfounded faith in the ability of ever-increasing expenditures in better forecasting systems or the inclusion of more big data will fix supply chains and make them work.

 

This faith in the ability of more powerful computer systems and improved algorithms to successfully prognosticate future outcomes reminds me of the anecdote where, in the 1970s, meteorologists working for the federal government were predicting that more powerful computers would lead to the time when weather could be predicted with absolute certainty.

 

What they have discovered, instead, is that the more they attempt to create models to predict future outcomes of weather patterns, the more factors they find influence the outcomes. The growth of knowledge (and discovery of lack of knowledge) about influencing factors overwhelms gains made in computing power and software sophistication.

 

The failure of traditional MRP isn’t new

Wallace J. Hopp and Mark L. Spearman, writing in the outstanding work Factory Physics – Third Edition, spend the first several chapters tracing the history of manufacturing in America. They talk about the Second Industrial Revolution, the introduction of scientific management methods, and the rise of the modern manufacturing organization. The review in considerable detail various inventory control methods, and then launch into a discussion on the evolution of MRP, MRP II, ERP and supply chain management.

 

Then, Hopp and Spearman insert chapter 5, entitled “What Went Wrong?”

 

After so much "progress," why does "Newton's law of consultants," which states that

For every expert there is an equal and opposite expert.

still remain in force? [p.176]

 

Writing regarding MRP specifically, Hopp and Spearman highlight the apparent dichotomy between the “success” of being widely purchased, implemented, and accepted, and the all too prevalent lack of positive return on investment (ROI) from its deployment.

 

From at least one perspective, MRP was a stunning success. The number of MRP systems in use by American industry grew from a handful in the early 1960s to 150 in 1971 (Orlicky 1975). The American Production and Inventory Control Society (APICS) launched its MRP crusade to publicize and promote MRP in 1972. By 1981, claims were being made that the number of MRP systems in America had risen as high as 8,000 (Wight 1981). In 1984 alone, 16 companies sold $400 million in MRP software (Zais 1986). In 1989, $1.2 billion worth of MRP software was sold to American industry, constituting just under one-third of the entire American market for computer services (Industrial Engineering 1991). By the late 1990s, ERP had grown to a $10 billion industry--ERP consulting did even bigger business--and SAP, the largest ERP vendor, was the fourth-largest software company in the world (Edmondson and Reinhardt 1997). After a brief lull following the Y2K nonevent, ERP sales picked up, exceeding $24 billion in revenue in 2005. So, unlike many of the inventory models [discussed in earlier chapters], MRP was, and still is, used widely in industry.

 

But has it worked? Were the companies that implemented MRP systems better off as a result? There is considerable evidence that suggests not.

 

First, from the macro perspective, American manufacturing inventory turns remained roughly constant throughout the 1970s and 1980s, during and after the MRP crusade. (Note that inventory turns did increase in the 1990s, but this is almost certainly a consequence of the pressure to reduce inventory generated by the JIT movement, and not directly related to MRP.)….

 

At the micro level, early surveys of MRP users did not paint a rosy picture either. Booz, Allen, and Hamilton, in a 1980 survey of more than 1,100 firms, reported that much less than 10 percent of American and European companies were able to recoup their investment in an MRP system within 2 years (Fox 1980). In a 1982 APICS-funded survey of 679 APICS members, only 9.5 percent regarded their companies as being class A users (Anderson et al. 1982). Fully 60 percent reported their firms as being class C or class D users. To appreciate the significance of these responses, we must note that the respondents in this survey were all both APICS members and materials managers--people with a strong incentive to see MRP in as good a light as possible! Hence, their pessimism is most revealing. A smaller survey of 33 MRP users in South Carolina arrived at similar numbers concerning system effectiveness; it also reported that the eventual total average investment in hardware, software, personnel, and training for an MRP system was $795,000, with a standard deviation of $1,191,000 (LaForge and Sturr 1986).

 

Such discouraging statistics and mounting anecdotal evidence of problems led many critics of MRP to make strongly disparaging statements. They declared MRP the "$100 billion mistake," stating that "90 percent of MRP users are unhappy" with it that "MRP perpetuates such plant inefficiencies as high inventories" (Whiteside and Arbose 1984). [pp. 183-184]

 

You don’t need to be told

Of course, if you work in supply chain management or operations, you don’t need to be told about the fact of the failure of traditional MRP systems to deliver effective results in today’s world. The plethora of spreadsheets, whiteboards, home-grown applications, and other work-arounds you have in your offices are clear evidence already of the failure that is part of your everyday life.

 

We just wanted to let you know that it isn’t just DDMRP (demand-driven material requirements planning) “fanatics” who articulate the failure of traditional planning approaches.

 

Why the failure?

A big reason for the failure of traditional MRP systems to deliver return on investment is because nothing in attempts to improve forecasting or tweak MRP truly addresses the root causes of the failure.

 

As the logic tree in the accompanying figure shows so clearly, the two changes that will lead to improved ROI are 1) reducing the negative impacts of variability on the supply chain, and 2) reducing cycle times. The latter improves agility—already recognized as a crucial factor to supply chain improvement; and the former leads directly to lower inventories, improved product quality, and increase throughput.

 

Neither traditional MRP methods, nor an emphasis on improved forecasting will deliver improvements at these root-cause levels. At a minimum, you would have to engage in MRP plus something else (such as Lean, Six Sigma, or other).

 

With DDMRP, you are directly attacking the root cause of the negative effects of variability using strategically positioned and sized buffers. And, as the buffers begin to have the calming effect and excess inventories are eliminated from the supply chain, cycle times (the other root cause) automatically improve as well.

 

So, stop relying on the “success” of widespread acceptance of systems that are also widely recognized as failing to deliver effective ROI. Instead, cast off your old “belief system” and try a new religion: DDMRP. Become a truly demand-driven supply chain.

 

It seems to me, you really have nothing to lose, and a lot to gain.

 

 

We would be delighted to hear from you. Leave your comments below, or feel free to contact us directly, if you prefer.

 

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