What happens if we compare the Demand-Driven Operating Model (DDOM) with what a typical ERP (enterprise resource planning) system is able to do employing more or less standard methods for inventory management and replenishment? let’s take a look.
The Demand-Driven Operating Model (DDOM)
For those of you not familiar with the Demand-Driven Operating Model (DDOM), I would suggest that you review the details and concepts made available to you on the Demand Driven Institute’s website.
For a quick summary, suffice it to say that the DDOM divides each stock buffer into three main zones or segments:
- GREEN ZONE – basically, the replenishment zone
- YELLOW ZONE – the working stock (on-hand quantities typically spend most of their time somewhere in this zone)
- RED ZONE – the “safety” or “warning” zone
Comparisons to typical ERP inventory management methods
It may be a little difficult to make out the connections between the DDOM zones and the traditional nomenclature clearly in the accompanying figure. So, we will try to make the connections and relationships clear in our explanation. Here goes.
Typically, among the available traditional or standard methods found in ERP systems, the min/max method comes closest to the way the DDOM buffers are managed and replenished. Therefore, as you see in the Sage 500 | Inventory Replenishment portion of the accompanying figure (used as an example of a traditional ERP system), the reorder method is set to “Min/Max.”
The min/max method typically means the following replenishment process is followed: when the replenishment position falls below the minimum quantity, a suggested order will be generated to replenish back to the maximum position.
Since in the DDOM, the GREEN ZONE is the “replenishment” zone, then the difference between the maximum level and the minimum level is roughly equivalent to the DDOM GREEN ZONE.
At the other end, the DDOM RED ZONE may be roughly equated with traditional safety stock.
Sitting between the RED ZONE and the GREEN ZONE is the DDOM YELLOW ZONE. Therefore, in traditional ERP parlance, the quantity lying between the top of safety stock and the minimum quantity is equivalent to the DDOM YELLOW ZONE.
Using the values for the “Gateway400C” SKU in the accompanying figure, we have the following calculations:
- SAFETY STOCK (RED ZONE) QTY = 15 units
- MIN QTY – SAFETY STOCK QTY (YELLOW ZONE) = 20 – 15 = 5 units
- MAX QTY – MIN QTY (GREEN ZONE) = 60 – 20 = 40 units
In typical DDOM fashion, we calculate as follows:
- TOP of RED = 15
- TOP of YELLOW = 15 + 5 = 20
- TOP of GREEN = 20 + 40 = 60
So far, so good!
It almost sounds like we can just shift over to the DDOM using our traditional ERP system’s replenishment methods.
But, here’s the problem.
What’s missing in your traditional ERP replenishment system?
First of all, a great many standard ERP systems don’t really know anything about dynamic buffer management. In many of them, the quantities set for safety stock, minimum and maximum levels are fixed until someone changes them—manually.
I can’t tell you how many clients’ offices I have been in, and been told something like this: “Oh, those quantities were set—oh, I don’t know—about six years ago, and the guy that did it doesn’t even work here anymore. I don’t know how they were set or calculated.”
That’s a dangerous position to be in, I believe.
Fortunately, using Sage 500 (as in the example), there are three levels of automation that will help make at least the safety stock portion of the replenishment parameters somewhat dynamic. Those levels are these:
- Projected Demand (what the DDOM calls, average daily usage or ADU) may be calculated by extrapolating from historical demand (and may include both past and future demand adjustments)
- Projected Lead Time may also be calculated by looking at historical lead times (but only for purchases from the “primary vendor”)
- Projected Safety Stock may be calculated by formulas that may include both Projected Demand and Projected Lead Time as factors in the calculation
That’s better than nothing, but it does nothing for dynamically adjusting the minimum and maximum stock quantities. In Sage 500 and many other traditional ERP systems, these must be manually adjusted.
Furthermore, in Sage 500, the calculations listed to make Projected Safety Stock dynamic must be initiated manually, and the calculations only consider historic demand by inventory period. So, if your “Inventory Period” is set to a calendar month (as is quite typical), no changes are recognized until 1) the prior inventory period is closed, and 2) inventory replenishment factors are manually recalculated.
This is a big limiting factor, especially when added to the fact that minimum and maximum quantities are not dynamically adjusted at all.
And, what about the rest of the DDOM?
Given that it is not overwhelming task to automate, in accordance with the DDOM principles, the process of making buffer management dynamic in Sage 500 or many other ERP systems, is it safe to say that implementing the DDOM may be accomplished in this way?
The answer to that questions is both “yes” and “no.”
Yes, that automation may accommodate one aspect of the DDOM. But the DDOM is not merely one aspect.
To be truly effective, the DDOM includes at least five crucial elements:
- Strategic inventory positioning – deciding where to place inventories in your supply chain in order to maximize return on investment (ROI)
- Establishment of buffer profiles and levels – setting buffer profiles allows SKU-locations that behave similarly to be managed similarly without manually setting each buffer size
- Dynamic buffer management – this is the dynamic adjustments to buffer zone sizes based on the latest actual demand information available
- Demand-driven planning – this is a whole new approach to planning and execution that is driven by actual demand without excluding the influence of forecasts (where necessary) and without becoming make-to-stock
- Visible and collaborative execution – this adds a whole new set of metrics that help keep your whole cross-functional supply chain management team focused on the right priorities all of the time
By enhancing traditional min/max inventory management with safety stock, we may be able to approximate portions of steps 2 and 3, but doing so still leaves us far from becoming truly demand-driven.
If you’re interested in learning more about how to become demand-driven, we would suggest getting and reading two new books on the subject:
- DDMRP – Demand Driven Material Requirements Planning by Carol Ptak and Chad Smith
- Demand-Driven Supply Chain Management: Transformational Performance Improvement by Simon Eagle
And we can help you get started. Leave a comment below, or feel free to contact us directly, if you prefer. As always, we would be delighted to hear from you.