Danger Ahead! Inherent Challenges When you Need to Combine MRP & DRP Inventory Planning
Manufacturing companies need to be innovative and resourceful to compete in today’s global marketplace. More and more manufacturers not only produce goods used by other manufacturers, they also sell their products to distributors and consumers. The use of
e-Commerce has risen dramatically and so have the challenges for managing both production and finished goods inventories.
The on-going and ever-changing challenge:
Inventory management and planning is getting more difficult due to rapidly changing demand patterns, the ever-increasing numbers of SKU’s and higher transportation costs. Even more challenging is effectively planning items that are commonly used in:
- kits (kitting & assembly)
- distribution & retail
Production - Manufacturing Requirements Planning
- Based on known production master schedules, determine when to order inventory to support assemblies/production schedules.
- Traditional Material Requirements Planning (MRP) works very well with dependent demands from manufacturing orders only. It works with a time-phased planning approach to manage the back scheduling and creates an even flow of inventory.
- A major objective is the reduction of lead time for demand signals to traverse the internal supply chain.
- A second objective is prediction of major “bullwhips” when multiple locations submit nearly simultaneous replenishment orders to the same supplying warehouse, rather than spreading these orders out uniformly across time.
- There is a Parent\Child relationship that is inherent in the planning process. Additionally, Substitutes and Supersedes further complicate a difficult process. This is also generally true for “kitting”.
Inventory Planning for Finished Goods & Spare Parts
- Mostly, based on unknown (but forecasted) demands, determine when to re-stock items in inventory by location.
- MRP logic has been adopted for Distribution Requirements Planning (DRP), but it does not combine well with manufacturing needs due to:
- a mismatch of bucket sizes for production and distribution,
- lack of the planning horizon “look ahead” needed for the stocking quantity processing,
- and complexities in determining the order of processing,
- dramatic demand variability.
- Other inventory ranking type models, from ABC to Gordon Graham, developed in the early 1970’s are outdated with today’s technology advances and the need for more dynamic, demand sensitive planning.
- The ability to properly manage the bullwhip effect
The MRP Basics
The basic purpose of Material Requirements Planning (MRP) is determining how much of which products needs to be either manufactured or purchased based on it being a component or ingredient of another item. MRP also determines when the product is required. Every item can have either Independent Demand or Dependent Demand.
Independent Demand is based on an item being an end product of a manufacturing facility. Independent Demand would include end products that are sold directly to customers or distributors, spare parts that are sold to repair shops or customers, supplies that are sold directly, etc.
Dependent Demand is based on an item being used, in the manufacturing process of making other items. This might include raw materials, purchased parts, sub assemblies, or complex parts that are also themselves manufactured or assembled. The Parent (P) is the high level assembly and the Children (x) & Grand Children (y) are the components that are used to make the finished product.
- Forecasts are created for the finished goods. These forecasts can either be generated statistically from historic demand or as sales projections or both.
- Planned Orders are either firm sales orders from customers or other manufacturing orders requiring the product to be planned as an input
- Back-scheduling insures that the longest lead time of the components (children) are accounted for.
Bill of Materials (BOM) is the document that articulates each input item, along with a quantity and whether the item will be accounted for automatically issued for the production process.
"Recommended Production Schedule". This lays out a detailed schedule of the required minimum start and completion dates, with quantities, for each step of the Bill Of Material (BOM) required to satisfy the demand from the Master Production Schedule (MPS).
Finished Goods Inventory
The bullwhip effect is a supply chain phenomenon in forecast-driven distribution channels. Demand variability increases as one moves up the supply chain away from the retail customer, and small changes in consumer demand can result is large variations in orders placed upstream.
Eventually, the network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem from its own perspective. The bullwhip effect and has been observed across most industries, resulting in higher costs and poorer service.
Moving back in the supply chain from end-consumer to raw materials supplier, each supply chain participant has greater observed variation in demand and thus greater need for safety stock. In periods of rising demand, down-stream participants increase orders. In periods of falling demand, orders fall or stop, thereby not reducing inventory. The effect is that variations are amplified as one moves upstream in the supply chain (further from the customer).
Valogix has developed a specialized planning engine to more effectively manage this inventory issue. Called VALOGIX® DMRP Inventory Planner it simultaneously plans for items needed both in the manufacturing (production) process and sold separately as finished goods. This smooth-flow process is unique because it accurately plans the independent inventory based on its own parameters and demand. Most planning techniques for finished goods were borne out of the manufacturing process, which leave gaps in inventory coverage for distributors and retailers.
Charles Martin, PhD, Chief Scientist at Valogix explains, "with two years in development, the new robust planning engine capabilities result in high efficiency and rapid results. Most inventory planning solutions require extensive “expert systems” (if … then … else …) logic. Inevitably, this approach is difficult to maintain, lacks some important special cases, and confuses users. Valogix built sophisticated mathematical algorithms with broader application and simpler maintenance. These mathematical algorithms are sophisticated, but are the utmost in simplicity to use and understand for planners. Result: The optimization from the Exchange Curve Analysis removes the need for the buyer/planner guesswork.”