I interviewed Chad Smith, Dr. Charles Watts and Carol Ptak who discussed Demand Driven Material Requirements Planning at the Certified Demand Driven Planner (CDDP) Event in Chicago on June 1st.
Chad Smith: Why does MRP really need to change?
Dr. Charles Watts: In my mind I was thinking about 25 years ago being in a plant when the person would pull out a piece of paper in their back pocket. You would ask them how they are doing on inventory and there is some guy on the floor with a piece of paper he follows. I think it was a problem then. Now the dynamics of the whole environment have changed so much I don't even think people can use the sheet of paper in their back pocket anymore.
Carol Ptak: It just doesn't update fast enough! The reality is that when you first looked at computers when they were first invented people used them for tracking people (for census) and we tracked inventory. Therefore, the whole MRP planning line was built on the fact of inventory at the core. I think that is what is really rotten at the core today. For a company to be successful it isn't about inventory. It is about a new core of demand. It is about the customer, about what I need, when I need it, at a price I want to pay to be able to compete globally by being able to be faster and more efficient with the use of my resources to get a better return on capital employee.
Chad Smith: I think that is a great point. Companies focus on inventory and working capital as the primary issue and it has a bunch of disastrous bi-products. What we are saying here is to focus on demand, service and what matters, which is customers. The bi-product of that is actually lower working capital. It seems almost counter intuitive. If you focus on the working capital you don't get good service. If you focus on service Demand Driven MRP is going to let you get lower working capital.
Carol Ptak: Absolutely, because when you look at it and just say you are going to cut inventory, the easiest way to cut inventory is to reduce the inventory levels on the parts you are selling the most of, which sets you up for having a lot of shortages which means it is going to impact your revenue. You are reducing your inventory. It is dead inventory so it is really hard to reduce. You end up doing the exact opposite of what you are looking for.
Dr. Charles Watts: Some people say they think they will go to make to order. It is not 'make to order' it is 'make to demand'. It doesn't mean you make everything once the order comes in. There is a much different way and I think the Demand Driven MRP (DDMRP) system captures all of that.
Carol Ptak: It is that ability to sense and adapt more quickly to what is going on in the marketplace.
Chad Smith: What is different in DDMRP? From my perspective, one of the first things we are starting out with is re-thinking where to place inventory, what to do with inventory, where can we break apart processes in a sensible manner to protect and compress lead times, to absorb or dampen variability? When we do those things good things happen with working capital like reductions and customer service.
I think another fundamental break we are having with the past is that we have a new demand component. If you try to run MPR today with sales orders you get into trouble. But we know that sales orders are much more reliable forecast than orders. DDMRP creates a mechanism in which you can actually run the sales orders through those places where we place that inventory to get the good lead times.
Finally, a big point for me is the idea of the execution side of the orders. They are moving the industry away from priority my due date and moving them into priority by buffer status. The fact that it is a mirage where priority and due date actually correspond with each other. In fact, most senior buyers and planners know that some things are due after others are actually more important today. With the MRP today you can't see it! All you get is a date.
Carol Ptak: Not only do you only get the date but you also very hidden on some things which are critically important, like I might have one part that is coming in late but I don't know it if I am the planner for the matching part. So I am here expediting and spending a lot of dollars, time and effort to try to get this thing in and it is sitting in inventory with dust collecting on the box while I am still waiting for this part to come in. The horizontal dependency is hidden in the current MRP.
Dr. Charles Watts: I think one of the things I like about this too is that I used to always kid around and tell people that if your boss is asking you what you are doing you tell him/her you are balancing inventory. The joke was that people would put the inventory to balance it across all of the things. What I like about DDMRP is that it picks those strategic points where to hold inventory. It tells you that inventory here and inventory there isn't the same thing.
Having a little bit of everything everywhere doesn't necessarily solve the problem. Having those strategic inventory positions that DDMRP does is really the key.
Carol Ptak: I think the biggest thing that changes with DDMRP is that it solved the problem that companies are really facing today which that whole issue of material synchronization. It is not just about balancing, it is how do I synchronize it such that I can change and adapt to the marketplace. It answers that issue. Those are tools we couldn't even perceive and we didn't need before. We are managing an entirely different environment today than when MRP was invented.
Chad Smith: Yes, we have more problems, more complex product structures, much more complicated supply “webs”...
Carol Ptak: Shorter customer tolerance, shorter product life cycles, more complicated products, more variety in products...
Chad Smith: The same synchronization issue becomes the real limitation. Conventional MRP was never conceived with these kinds of issues and requirements in mind. The next question is what has been the reaction from your perspective on the book and the method?
Carol Ptak: The reaction from the book at the method is that all of a sudden we have gone from being heretics to being mainstream. The number one reaction that I get from people is “well, we do part of that”. I think for the first time what is happening is there is a methodology that matches for the first time a planner's situation.
Chad Smith: Exactly, that is a good thing right. That means if you say you do some of that means you are experienced and goes according to your intuition. Now you need a codification for it. It needs to be transferable within the organization. We need to have some standards so that development can continue on. It can't just be isolated in a spreadsheet or a person who has 25 years of experience in their head. It is time to take the intuition and harvest it, and put it into a defined method.
I think the DDMRP at least from what I have seen, planners take to it very quickly because it does coincide with their intuition. Also, they can do more in less time.
Carol Ptak: It is. It is easy to understand. Everyone in the world understands red, yellow and green. Red in one country does not mean speed up. Green doesn't mean slow down. Those colors are well understood. It is very intuitive. It is matching some of the some of the things these companies and planners have been doing for years just to survive. They have been fighting against the current system because the current system doesn't do it the way they are doing it. They know if they do it according to the rules in the current system they are going to die.
Dr. Charles Watts: I was telling Carol, what I like about your approach is that you have systematically gone through with the lean and six sigma. We had done it by intuition. We knew we were combining all of these things but we never looked at each step and figured it out. That is what I like about what you have done, systematically gone and justified why you are doing every one of these things.
Chad Smith: Why do we call it Demand Driven MRP? I think it is first and foremost a planning solution. It still does generate material requirements planning but it does it in a much different way than conventional MRP. It is MRP but it is not conventional MRP.
Carol Ptak: I think the important thing is also that it is not just planning, it is also execution, which is a big difference between MRP, MRPII or ERP. None of those cover the execution side. The big key with Demand Driven MRP is that it is a closed loop fully codified approach to handling both planning and execution.
Charlie: I think it is great because when it is all together (I have done this before where we used the MRP materials but worked ways around that and used middle ware to pass information in and out). I think it is better if you can have it all integrated into one system that does your MRP and your Demand Driven part.
About Chad Smith
Chad Smith was a co-founder of a company called Constraints Management Group in 1997. Before that he worked directly for Dr. Eli Goldratt. He has his roots planted firmly in the Theory of Constraints. As they grew the firm and took on larger clients they were forced to deal with the formal planning side because it was the number one impediment. They knew they couldn't just wipe it out. They had to solve the puzzle about how to make it work in a totally new environment centered around actual demand.
Just last year Chad and Carol Ptak founded Demand Driven Institute in anticipation of the book 'Orlicky's Material Requirements Planning, Third Edition (McGraw-Hill 2011)' coming out, as well as anticipation of people wanting to know more.
About Carol Ptak
Carol started out in manufacturing at minimum wage on the shop floor. She worked up to being a supervisor and finally a manager. Carol then left production and went into the consulting area for awhile. She ran into issues involving the fighting of the software. Then she went back work for a while at a software company – at IBM in technology and sales. She was then hired by Peoplesoft as their Vice President and Global Industry Executive being responsible for the company's entire software strategy where they coined the term 'Demand Driven' in 2003. They spent a great deal of money marketing the term, not that they had a fully baked solution underneath it. But they knew the direction of the solution.
Carol and Chad came together in 2007 when she was at the university teaching. They married the work that CMG was doing with some of the things in the market around Demand Driven and came up with an interesting solution writing the book together.
Prior to this Carol wrote a book on MRP and co-wrote one on ERP with Eli Goldratt. She took what she learned from that book and put it into the ERP book and they bought Demand Flow Technology. At the time she was at Peoplesoft Carol wrote a book on Lean called 'Quantum Leap, The Next Generation'. She pulled all of this work together which leverages all of those giants to stand on their shoulders to write the latest book 'Orlicky's Material Requirements Planning, Third Edition (McGraw-Hill 2011)'
About Dr. Charles Watts:
Charlie has been a college professor for 30 years and entered the field by working at manufacturing businesses. He never realized that Orlicky's book written in 1975 because he used it in 1976 in college. He has been the executive director of education certification as ISCEA for roughly 8 years.
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