How to Understand DDMRP as Yet Another Repackaging of JIT and Lean

What This Article Covers

  • Ridiculous Orlicky’s 3rd edition MRP Book
  • The Most Accurate Way to View The 3rd Edition of Orlicky’s MRP
  • The History of JIT and Lean
  • How JIT and Lean are Incorporated into Systems
  • Articles on DDMRP

Introduction

In this article, we will analyze proposals made about something called DDMRP.

DDMRP is an adjustment to MRP that is proposed to greatly improve MRP systems outcomes. I will begin by analyzing a book which helped kick off the DDMRP craze.

Ridiculous Orlicky’s 3rd edition MRP Book

Joseph Orlicky was one of the originators of MRP. Orlicky wrote the first book on MRP in 1975, when MRP was just beginning to be known. Orlicky died in 1986. In 1994 a 2nd edition of Orlickly’s MRP was written/adjusted by George Plossl. I am not a big fan of 2nd edition of books being written by authors other than the original author. This is clearly an attempt by the publisher to extend a popular book to a new group of buyers. However, George Plossl is probably my favorite inventory management authors. George worked with Orlicky, so the second edition was quite consistent with the first edition.

Curiously, the 3rd edition of Orlicky’s Material Requirements Planning book was published in 2011. That is right; we are now releasing new editions of books 25 years after the author has passed away.

This book was written by anyone who worked with Orlicky, but instead by Carol Ptak and Chad Smith, who also wrote the book DDMRP.

When I read 3rd edition of Orlicky’s MRP book back in 2012 (according to my Amazon account), I noticed that it did not appear to have much correspondence to the 1st or 2nd editions. Furthermore, I don’t even think that Orlicky would have agreed with much of the material presented in the third edition of “his” book.

Therefore, the 3rd edition is only “Orlicky” in name only. It is neither written by him nor inspired by him.

The Most Accurate Way to View The 3rd Edition of Orlicky’s MRP

In my view, Orlicky’s MRP 3rd edition is simply a way for JIT/Lean proponents to worm their way into MRP and to try to get companies to change their MRP systems into order to conform with JIT and Lean principles.

To explain why this is so problematic, we need to revisit the history of JIT and Lean briefly.

The History of JIT and Lean

JIT was first introduced outside of Japan in the 1980’s. JIT was a highly inaccurate presentation of parts of the Toyota Production System. At the time Toyota (as well as other Japanese manufacturers) were attaining quality levels that no other automobile manufacturers from other countries could match (and continue to maintain). The TPS developed during the postwar period and is based upon very low levels of waste. However it was brought over to countries outside of Japan by consultants, and consultants grossly oversimplified the TPS and JIT. Important things that the TPS/JIT consultants left out included the following:

  1. Unionization and Empowerment of Factory Workers: Toyota plants were highly unionized. This means empowered workers that could stop the line to keep quality levels high. Consultants knew that US executives detested unions, so this feature of the TPS was entirely left out of the books on the TPS at the time.
  2. Supplier Inventory Location: Much was made of keeping low inventories in the factory. However, JIT consultants left out the fact that Toyota suppliers were closely located to Toyota factories. Therefore, the inventory was normally “right around the corner” although not on Toyota’s books. When the math did not add up, companies that moved to such low inventories based upon faith in JIT consultants experienced reduced production capabilities.
  3. Stable Production Schedule: Quite the opposite of “Flexible Manufacturing” Toyota, in the 1970’s and 1980s at least, had a stable production schedule for one month out. This meant low material variability and a strong ability to coordinate deliveries with suppliers. Knowing that this would infuriate US executives who like a very unpredictable production schedule (outside of manufacturing) the consultants “left that little part out.”

With JIT consulting the name of the game was sounding leading edge and esoteric — not communicating the true nature of TPS and JIT as practiced in Japan.

JIT eventually developed such a bad reputation that JIT consultants and consultancies knew they had to make a change. Drunk on their own Kool-Aid, the answer was not going to be to include more accuracy in their consulting. That is to make it representative. Instead, they opted for a name change.

JIT became Lean — and the unsupported claims resumed. It resumed to this day. Today you can receive all manner of certificates on Lean, most of which simply consists of imposing unrealistic proposals onto manufacturing and inventory management. I have never seen any of these certificates, any Six Sigma plaque, Lean plague, or other merit badges to have any relationship with better outcomes for inventory management in companies. Yet in operations, having them often makes the difference in getting jobs or not getting jobs.

How JIT and Lean are Incorporated into Systems

JIT and Lean consultants like using Japanese words. They like saying Sensei and Kopai. They like to talk about Toyota….as often as humanly possible. Lean has its rituals and in this way is quite similar to the Crossfit cult.

However, what JIT and Lean proponents don’t like to address is that JIT and Lean capabilities have resided in software since supply and production software was first introduced, and before that in inventory formulations. I propose using some of these approaches as well. They are outlined in my books Lean and Reorder Point Planning and Multi-Method Supply Planning in SAP APO (where “Lean” methods and forecast based planning are mixed by product location in SAP, as well as multiple forecast based procedures are mixed in).

I cover how to assign product location combinations to reorder points, min-max, etc.. based on a concept called forecastability. I have a forecastable/non-forecastable formula at the following link.

The matter is rather simple.

  • Some items can be reliably forecasted — and for those, it makes sense to use a forecast based supply planning method. MRP is one of these available in the software.
  • For items that cannot be reliably forecasted, it makes sense to use consumption-based methods.

All of this can be set up in supply planning systems. It does not require donning a kimono or learning Japanese. It does not require an APICS certification. And it requires no colored belts of any kind. It is the application of basic inventory management knowledge.

DDMRP proposes using MRP as a non-forecast based planning approach — which makes little sense.

To explore why I have included quotations from several articles on DDMRP.

Articles on DDMRP

The article Demand Driven Material Requirements Planning (DDMRP) in Linkedin, makes the following points.

“DDMRP is a revolutionary planning method that is designed to meet the needs of the modern day market. Compared to MRP, DDMRP generates orders based on actual sales orders, rather than forecast.”

That does not make any sense. This is because MRP is a forecast based planning method. One can, of course, decide to only feed an MRP system sales orders — but as covered in the book Replenishment Triggers: Setting Systems for Make to Stock, Make to Order & Assemble to Order, the vast majority of companies cannot move to make to order environments. The lead times just don’t work out. Therefore, right off the bat this explanation of DDMRP essentially pitches fools gold to executives.

“This allows for much higher customer service levels, lower costs in expedite, and the right levels of inventory.”

Why is any of that true? Why does basing MRP on sales orders allow for higher customer service levels? If, as in most cases, the environment cannot be made make to order, service levels will decline. In fact, the company will experience stock-outs and lost sales.

Secondly, how does basing MRP on sales order reduce the cost of expedite? It would be the opposite. Also, it does not lead to the “right levels of inventory.” This will only be the case if the environment is, in fact, make to order.

“MRP hasn’t changed since its inception and this is where DDMRP was designed to tackle all the critical issues in order to maintain a healthy production environment.”

Well, the math may not have changed, but modern MRP systems are a lot better than the MRP systems that were first introduced. When MRP was first introduced, it was run off of a computer tape. That is, MRP pre-dated disk storage.

“Today, there are more complex and planning scenarios than before. The past is no longer a predictor of the future.”

This all sounds quite sexy. But the reason for this has more to do with companies increasing their SKU count (with supermarkets in the US having roughly 40,000 to 50,000 SKUs. This lowers forecast accuracy. But even though products are becoming less forecastable, it does not mean that DDMRP is the answer. The problem is that again; it is not feasible to run planning off of sales orders.

“Achievement of 98% customer service levels
Revenue maximization
Inventory reduction by 40%
Expense minimization
Cash flow”

This is where the author is moving into exaggeration (Hasso Plattner style exaggeration in fact – which is a higher level of exaggeration than Larry Ellison or Steve Jobs).

No inventory method or technique on planet Earth is designed for the “achievement of 98% customer service levels.” The service level achieved depends on the input and the situation.

Does DDMRP maximize revenue? Hard to see how that would turn out to be true. Companies that only base MRP on sales orders will be in for a world of customer disappointment.

Why is inventory reduced by 40% exactly? Why not 35% or 45%? This seems to be directed towards hooking executives by telling them what they want to hear.

“DDMRP is also a new way of planning and control, which shifts from a forecast driven model to a sales order driven model. In MRP, requirements are calculated based on the forecast, which eventually becomes irrelevant as time moves on.”

This is a highly uninformed statement. Forecasts will in almost all circumstances have an error.

  • Low errors are good.
  • High errors are bad.

However, this does not mean that forecasting is invalid.

And once again, as customers demand products more quickly than they can be produced, make to stock environments are the most common environment to be found. Only a very small percentage of business is true make to order. Make to order means that no procurement orders are created, until the sales orders is received. Probably less than 5% of businesses can work this way. Defense contractors being a perfect example of this. Construction projects are another.

The article Why DDMRP Is A Necessary Condition For Industry 4.0 To Deliver On The Promise makes more bizarre contentions about DDMRP.

“This vital element is the use of the Demand Driven Operating Model and the related planning methodology Demand Driven MRP (DDMRP). This is currently the only approach that allows to effectively synchronize supply and demand across complex and volatile supply networks.”

Let’s not hyperventilate too heavily DDMRP proponents! I know that there are projects to be sold, but let us keep it within the realm of sanity.

So according to this quotation, only DDMRP can synchronize supply and demand over volatile supply networks. This is quite interesting because MRP is not the most sophisticated method of matching supply and demand. Inventory optimization and multi-echelon as a planning method is far more advanced than MRP.hass

Unlike MRP it has the math to compare stocking locations across the network and can set stocking positions while cognizant of the stocking locations around the stocking location. Overall, it is quite inaccurate to say that DDMRP is “the only way” to connect supply and demand.

“For instance, one of our clients recently reported to us that from the moment they have changed their distribution planning using DDMRP they completely eliminated shipments between distribution centers. This used to be a major supply chain expense before, due to inventory being in the wrong place. During the same period inventories went down by 20% and service levels improved. Meanwhile, order stability achieved perfection: not a single supply order has been changed once placed to the sourcing plant.”

This anecdote could only be true if this company is a make to order environment.

However, if this company is a make to order company, why was it performing redeployment in the first place?

The authors in DDMRP seem continually confused as to why inventory is carried in the first place. No one wants to carry inventory. But that is what the lead times that companies face are required to do.

This misunderstanding extends to comments made in the article.

“Thanks Patrick for This excellent article. … 85% of forecast accuracy means that at least 15% of mistakes are propagated throught all the supply chain ! Is it good enough to reach more than 98% of service rate ? … probably no.”

Once again, unless you can hit 99% to 100% service levels, forecasting is a waste of time because of “propagation” according to nascent DDMRP experts!

In another article titled When SAP will include a DDMRP solution in the existing supply chain solution? The proposal is that SAP must offer DDMRP. This is an attempt to move MRP into software before it is proven as an approach.

Conclusion

The false statements regarding DDMRP come hot and heavy from DDMRP proponents.

  1. Misleading Book: Orlicky’s 3rd edition has very little to do with Orlicky, and in my view, Orlicky would disagree with much of it. If the authors wanted to promote DDMRP, they could have done this through their book which has that title. Why infiltrate a pre-existing book that does not have much to do with what you are promoting?
  2. Accuracy Issues: Statements made by DDMRP proponents are highly inaccurate in the articles that I have analyzed — many of the statements presenting a lack of knowledge about how supply planning systems function.
  3. Plain Old MRP Was not Demand Driven?: The term DDMRP or demand driven MRP used to differentiate it from plain old MRP is nonsensical. MRP is a forecast based supply and production planning method. As such it is already demand driven. The opposite of demand-driven would be supply driven. This is where the supply side is the focus of production and distribution. There are many environments that not only should be supply driven but have to be supply driven. This is covered in the article The Forgotten Supply Driven Supply Chains. However, plain old MRP is not “supply driven.” It can’t be as MRP not a constrained method of planning. MRP always runs as if supply is unconstrained (something which is addressed in a later planning run called capacity leveling). MRP can only incorporate supply limitations through the use of min lot sizing. Therefore it is illogical to try to cast “plain old MRP” as something which is supply sided. This is what “demand-driven” MRP seems to be doing. A more accurate name would have been sales order based MRP.
  4. But Wait, The Ginsu Knife Also Comes With…: DDMRP has a bunch of other areas to it, including sizing inventory buffers. Upon review, it is difficult to see how this adds value over the traditional methods of stock level setting. It is different, and therefore more difficult to validate, but is it better? Overall DDMRP has really nothing that strikes me as having made a contribution to inventory management — so why would this area be anything but more unrealized promises?
  5. Following the JIT/Lean Playbook of Exaggerated Claims: Much of the exaggerated claims, as well as the idea that forecasts cannot be trusted, is right out of the JIT/Lean playbook. However, after some decades now, JIT/Lean has produced very little in the way of improvement in inventory management. The reason is simple. JIT/Lean proponents are more concerned with making an impression and a “splash” than in presenting what is actually true. DDMRP will end up being simply more of the same.

Questions Answered

This is a response to a question asked by Sanjeev Gupta on LinkedIn. I could not fit the response into the LinkedIn comment box without breaking in into too many comments. I think Sanjeev’s questions is very important, so I am profiling it here.

Potentially useful back and forth between Shaun and Carol/Chad!

I don’t think it matters whether DDMRP repackaging of JIT and Lean or not (sometimes truth is eternal, sometimes old truths are new fallacies), whether Orlicky would have agreed with DDMRP or not (he wasn’t God and even God can be wrong), and whether MRP is Pull or Push (that is just semantics).

My limited experience is that many supply chains struggle with high inventories and unavailability as well as firefighting, and I believe all that matters is, “Does DDMRP result in higher availability with lower inventories and less management effort?”

Carol/Chad: Is it possible to provide a mathematical proof of this, something that is not just qualitative cause-and-effect? Conversely, Shaun, can you provide a mathematical proof that DDMRP does not yield better results than old MRP? – Sanjeev Gupta

My Answer(s)

Sanjeev is actually asking several questions. For clarity I have created a topic heading for each answer topic. These topics are as follows:

  • Does a Mathematical Proof Answer the Question of DDMRP?
  • Admitting When Things Do Not Work
  • A Mathematical Test for DDMRP Versus MRP?
  • The Problem with Investment Prioritization

Does a Mathematical Proof Answer the Question of DDMRP?

Sanjeev,

You are proposing that there is a single way to determine whether DDMRP is an improvement over MRP. And that the way is a mathematical proof. I can provide several reasons why that is not true. (I am not trying to pivot away from your primary question as I have researched this topic and I will refer you to a study that does what you describe.)

  • Example 1: It is often the case that a new and complex forecasting method/mathematics is introduced, that it can outperform less complex forecasting methods in a laboratory environment. However, in actual practice, the more complicated forecasting method which is “mathematically superior” will often lose against more simple methods. Forecast papers often test small data sets and are willing to put a lot of effort into improving forecast accuracy. But real supply chain departments do not work like that. This is because in real-world environments there is a very limited amount of effort that can go into maintenance of the forecasting system. I covered this topic in detail in the following article Complex Versus Simple Forecasting Methods. This is a concept promoted by strong evidence by Armstrong in his excellent book Principles of Forecasting 2001.
  • Example 2: Inventory Optimization and Multiechelon (MEIO) is more mathematically sophisticated than MRP. In fact there is nothing in MRP beyond arithetic (the procedure itself, not the parameters). MEIO can build inventory to match a service level (the inventory optimization mathematics) and it is aware of the stocking position of locations around it (the multiechelon mathematics). Therefore MEIO is better right? Well it depends. MEIO is too complicated for the level of investment that most companies are prepared to make into their supply planning systems.

Is the Criticism of DDMRP Being Repackaged JIT and Lean Relevant to its Probably Improvement Over MRP?

JIT and Lean proponents have a decades-long established history at this point of exaggerated claims. Of using hyperbole such as “forecasts are wrong” and Toyota “did this or that” and they have rebranded themselves once before, that is when they moved from JIT to a new name (with a new bunch of books called Lean). Do these proponents really need me to trot out simple minded books like “Zero Inventory” or the books that misrepresent what Toyota did, and to go over the terrible exaggerations and mistakes made by following JIT and Lean consultants? Is this really some mystery at this point? It is indisputable that JIT/Lean has been littered with exaggerations as I cover in How the Toyota Production System Was Misrepresented to US Audiences. Deloitte JIT/Lean consultants told one of my accounts to break up their inventory into multiple stocking locations in the factory — which surprise lead to a major increase in inventory. They told them Toyota did this and that it was a “Supermarket.”

Actually, it is strange that I would be making this argument because I am a major proponent of turning off forecasting for product/locations that are deemed as non-forecasted — as the following article Forecastable Non-Forecastable Formula.

The majority of companies I have consulted with are forecasting items and putting effort into improving the forecast for items with no discernable pattern. (that is they are assigned to a Level forecast by a best-fit algorithm). Turning off forecasting for products that cannot be effectively forcasted is an important strategy in both improving stocking positions, but also in allocating the scare time available in over burdened forecasting departments.

But JIT/Lean proponents move far beyond the judicious use of consumption based techniques, and into diminishing all supply planning procedures, and sell companies on the idea of moving to make to order environments that can’t I refer to this as The Make to Order Illusion and it has been proposed to by many JIT/Lean consultants to many soft target executives with predictable results. JIT/Lean proponents should be held to account for these inaccuracies. But they will have none of it, they are interesting in hiding these failures, and going to make more projections. It would certainly be the ultimate dream of every JIT/Lean proponent to undermine procedure based planning. And DDMRP gives them a cover to do this. So we should be suspicous of their intentions.

If people misrepresent their history of success and then rename their methods into something that is the opposite of this type of planning, then this is quite germane to the discussion of the validity of what they propose. And this gets to the topic of honest in recognizing the failures or shortomings of your approach.

Admiting When Things Do Not Work

I come from a background of advanced planning. I was very excited in my mid to late 20s in working in advanced planning, and I drank some (although not all) of the Kool Aid served by my employer, i2 Technologies. However I observed from working on projects that the optimization projects I worked on did not match the sales that we presented to customers. The media gave i2 Technologies the typical unquestioning coverage and for several years everyon wanted to “do optimization.” How i2 Technologies was able to “corner the market” on optimization is another story, because optimization had been kicking around in academics for years and no one “owned” anything all that proprietary when it came to optimiztion.

Yet, with my background I am one of the only, and probably most well-published critics of how badly cost optimization failed to add value to companies.

While i2 Technologies eventually fell, major companies are still trying to get a flawed optimization approach to work in SAP that will never work, which you can read about in detail in the article The Problem with SNP Optimizer Flow Control. 

I say this as a longtime consultant in SAP, but the SAP is ripping off accounts and lying to them about the benefits they can obtain from a system I have extensively tested, and essentially does not work. SAP charges somewhere around $450 per hour to a group of Ph.D.s in Waldorf that must be seriously laughing at these customers who can’t put 2 and 2 together that the applications needs to be deactivated. And these are big name brand companies using this solution you would recognize. If you like you can hire SAP consultants to “improve your SAP optimization” and you will not hear a peep from these consultants about the history of cost optimzation.

Many SAP consultants have reached out to me in private not speak and write about these things. They have asked that I air my issues in private, that to do so in public creates “bad feelings” and reduces the optimism about cost optimization. And you should have optimism about something if a major entity proposes that it is true, and if you can bill hours for selling the illusion and hiding the truth.

So my point being, I have a track record of being honest when things that I have worked in don’t work. But I can’t see where I have seen JIT/Lean proponents do that. They shy away from telling the truth of what happens on projects. There are certificates to be attained, various colored belts to receive and various trendy items to placed onto resumes, but little time to determine if things things actually work.

So hopefully that explains why I do think the issues I have brought up are relevant to whether or not DDMRP will produce real benefit. I have used the same techniques of skepticsm to make previous predictions on SAP, and have so far batted 1000 on my SAP predictions. Of course one’s accuracy improves if you don’t get paid by the entity for which you make projections.

Now, let us switch gears.

A Mathematical Test for DDMRP Versus MRP?

There is a single published study I was able to find which tests DDMRP. It is titled MRP vs. Demand Driven MRP: Towards and Objective Comparison and published by the Institute of Electrical and Electronic Engineers in 2015.

I don’t want to give away everything in the study, as the researchers deserve compensation for their work. And furthermore, the conclusion is a bit of a mixed bag so one really has to read it for oneself. In the conclusion the authors stated that DDMRP performed a little better in one area and a little worse in another. And the study points out that if the demand had been made more variable, the results might have been better for DDMRP.

So the results would seem inconclusive, however, I found something that the study did not highlight. And that is that DDMRP requires a lot of investment and a lot of change regarding working in the DDMRP paradigm. New inventory buffers must be calculated and maintained; there are new seasonal factors, planning adjustment factors to be incorporated, and so on.

In reading the study, which did a fine job of explaining what had to be done I began to wonder where the funding for all of this effort is going to come from. The MRP systems that I have seen at companies are held together with glue and tape. Multinationals with billions in revenues tend to want to invest as little as possible in their MRP systems. The planners tend to be poorly paid. Many of the directors of supply chain don’t even understand how MRP works (I have even seen people come over from sales to head supply chain departments — how can that end well?). Many speak in platitudes about high service levels and come up ideas like “how about we move to daily forecasting!” At one company where there was virtually no budget for MRP improvement I was shown the stock sales of company insiders which ranged from $2 million to up to $36 million. So lets face it, MRP investment is a distant second to exercising stock options apparently.

The Problem with Investment Prioritization

I came up with an inexpensive way to optimize supply planning/MRP parameters. I am often told there is no budget and is there something their planners can do to get the same benefit, like maybe reading some of the books or reading some articles or going to APICS, all while some analytics project that often has little output ends up with plenty of funding. People have frequently told me “it’s just too complex.” Read it for yourself at 3s – Safety Stock and Parameter Setter.

Well if parameter optimization — which does not change the MRP process in any way — is just too complex and too time-consuming — where is the funding and motivation for a large effort like DDMRP going to come from? I recently worked as a sub-contractor for a consulting company that had won a contract in my area, but had no reason to have received the contact for this work. I realized they had received the work because they exaggarated and “sold” the account.

It makes me wonder if this is where we are with DDMRP? Does one have to oversell, to propose amazing outcomes in order to get investment for MRP improvement? Is this why money is flowing to DDMRP projects?

Question Conclusion

So to answer your question, I only know of one study on DDMRP and please read the study for yourself, but the study appears inconclusive. Chad Smith has been very vigorously promoting the case studies that show DDMRP success. And I am not trying to be difficult or contrary, which seems to be the view of a few commenters, but the indisputable fact is that companies don’t publish their failures. If customer provided published information was reliable, then we would have to accept that every single case study published on every vendor and every consulting website is true. Secondly, it is very rare for companies to have good metrics on their supply chain. Companies routinely overestimate their forecast accuracy, because most do not know that the only relevant forecast error measurement has to be at the product location (and not at a higher level of aggregation), research shows that they think they deliver around a 7 percentage point service level than they actually do, and there is virutually no funding for such measurement. The business is normally just trying to keep up with their normal planning work. If I could personally measure these benefits it would mean something. But self reported benefits from companies that aren’t very good at measuring and don’t follow a scientific approach does not mean much to me.

References

https://www.linkedin.com/pulse/demand-driven-material-requirements-planning-ddmrp-scm-company/

https://www.linkedin.com/pulse/why-ddmrp-necessary-condition-industry-40-deliver-promise-rigoni/

https://www.linkedin.com/pulse/truth-ddmrp-implementation-patrick-rigoni/

https://www.amazon.com/Orlickys-Material-Requirements-Mechanical-Engineering-ebook/dp/B005EPVDL6

https://www.amazon.com/Demand-Driven-Material-Requirements-Planning-ebook/dp/B01IBWY806/ref=pd_sim_351_1?_encoding=UTF8&psc=1&refRID=YG87C613J68SYFWBM7GS

https://www.amazon.com/Replenishment-Triggers-Setting-Systems-Assemble/dp/1939731550

The Forgotten Supply Driven Supply Chain

http://www.orlickysmrp.com/

https://www.amazon.com/Demand-Driven-Material-Requirements-Planning-ebook/dp/B01IBWY806/ref=pd_sim_351_1?_encoding=UTF8&psc=1&refRID=YG87C613J68SYFWBM7GS

https://www.linkedin.com/pulse/truth-ddmrp-implementation-patrick-rigoni/

https://www.linkedin.com/pulse/when-sap-include-ddmrp-solution-existing-supply-chain-eric-fromentel/

https://www.linkedin.com/pulse/eight-reasons-why-ddmrp-isnt-lean-rob-van-stekelenborg/

Lean and Reorder Point Planning Book


Lean and Reorder Point 2

Lean and Reorder Point Planning: Implementing the Approach the Right Way in Software

A Lost Art of Reorder Point Setting?

Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?

Implementing Lean in Software

All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.

Are Reorder Points Too Simple?

Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.

There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.

Rather than “picking a side,” this book shows the advantages and disadvantages of each.

  • Understand the Lean Versus the MRP debate.
  • How Lean relates to reordering points.
  • Understand when to use reorder points.
  • When to use reorder points versus MRP.
  • The relationship between forecastability and reorder points.
  • How to mix Lean/re-order points and MRP to more efficiently perform supply planning.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: The Lean versus MRP Debate.
  • Chapter 3: Where Supply Planning Fits Within The Supply Plan
  • Chapter 4: Reorder Point Planning
  • Chapter 5: Lean Planning.
  • Chapter 6: Where Lean and Reorder Points are Applicable
  • Chapter 7: Determining When to use Lean Versus MRP
  • Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning

Repairing the MRP System Book

MRP System

Repairing your MRP System

What is the State of MRP?

MRP is in a sorry state in many companies. The author routinely goes into companies where many of the important master data parameters are simply not populated. This was not supposed to be the way it is over 40 years into the introduction of MRP systems.

Getting Serious About MRP Improvement

Improving MRP means both looking to systematic ways to manage the values that MRP needs, regardless of the MRP system used. It can also suggest evaluating what system is being used for MRP and how much it is or is not enabling MRP to be efficiently used. Most consulting companies are interested in implementing MRP systems but have shown little interest in tuning MRP systems to work to meet their potential.

The Most Common Procedure for Supply and Production Planning?

While there are many alternatives to MRP, MRP, along with its outbound sister method DRP, is still the most popular method of performing supply, production planning, and deployment planning. In the experience of the author, almost every company can benefit from an MRP “tune up.” Many of the techniques that the author uses on real projects are explained in this book.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: The Opportunities to Improve MRP
  • Chapter 3: Where Supply Planning Fits Within the Supply Chain
  • Chapter 4: MRP Versus MRP II
  • Chapter 5: MRP Explained
  • Chapter 6: Net Requirements and Pegging in MRP
  • Chapter 7: Where MRP is Applicable
  • Chapter 8: Specific Steps for Improving MRP
  • Chapter 9: Conclusion
  • Appendix A: Calculating MRP

Service Level and Safety Stock Foresight Presentation Announcement

What This Article Covers

  • My Presentation on Nov 15th, 2017
  • The Topic of the Presentation
  • The Level of Detail of the Presentation
  • How Supply and Production Planning Implementations Tend to Play Out
  • The Benefits of the Information Provided in the Presentation

Introduction

I am presenting at the November Foresight Conference. In Raleigh, NC on Wednesday, Nov 15th. The topic of my presentation will be A New Approach to Safety Stock and Service Levels.

On Service Level and Safety Stock Setting

As those that have read my supply chain articles previously, you may know that I have concluded there are far more effective ways to manage service levels and safety stock than is normally accomplished in companies. And to understand why it means getting into some background regarding how service levels and safety stock are set at companies.

If one analyzes supply and production planning systems ranging from ERP to specialized external systems (which we have as implementers for some time), it becomes readily apparent that most of the effort goes into what is referred to as the “method.”

The following are the method available in supply and production planning.

  • MRP
  • DRP
  • Heuristic
  • Allocation
  • Cost Optimization
  • Inventory Optimization and Multi Echelon

How Supply and Production Planning Implementations Tend to Play Out

There tends to be a great focus on the method used for supply and production planning. On most projects, that I have either implemented or evaluated, most of the resources and emphasis goes into setting up the method, training users on the user interface, building data interfaces, etc.. What time is left over on the implementation goes to parameter setting? How many times has a company made no addition in head count to manage parameters, expecting the software they purchase to do this automatically for them?

When companies move from one method to a more sophisticated method (for instance, MRP to cost optimization) it is usually the case that the company will have not yet mastered their parameters. This means that they will, I think in the vast majority of cases, have not come close to optimizing the software they currently use, before moving onto the next software package.

However, outside of inventory optimization and multi echelon (which is still lightly installed) none of the planning methods do anything to help set those parameters. This does not mean the functionality does not exist to do this — it does. But the software expects intelligence from the implementing company to setup the software to do so.

Safety stock and service levels are two of the most important of these supply and production planning parameters.

In the presentation, I will provide the following:

  1. The Appropriate Context: The background for the reasons that safety stock and service level, as well as the other parameters, end up, so sub optimized.
  2. Improvement Opportunities and Rought Effort Estimates: How to improve this condition at a reasonable expense of time and money.
  3. Actual calculations: I will show calculations that explain how this can be accomplished using several test cases that can meet all of the objectives that I layout at the beginning of the presentation.

Conclusion

This will be the first time I have presented this method and the calculator. It should be a lively debate and it will be interesting to receive feedback from a larger group that I have in the past when presenting to clients.

To find out more about the Foresight Conference see this link.

Trendiness in Supply Chain Management

What This Article Covers

  • George Plossl’s View on the Trendiness of Supply Chain Management
  • The Difficult Spot that Consultants Often put Companies in as they Move from one Trend to the Next.
  • Illogical Supply Chain Management Trends
  • How an Infatuation with Trends Undermines Sound Planning

Background on Supply Chain Management Trends

With terms like JIT, TQM, Lean, B2B marketplaces, Kanban, optimization, supply chain management is filled with trendy concepts that influence decision makers (a strangely high percentage of which are Japanese in origin for some reason). In fact, for an area of study that is supposed to be more of a science than an art, supply chain management has been remarkably trendy.

I have previously described the fact that approaches applied to supply chain software very frequently do not have to pass any logical test. As I stated in response to a comment on demand sensing being a method to primarily fake forecast accuracy:

One consultant I was working with stated that company XYZ was reported to have success with the approach. I had just come from that exact company, and my experience with them was they neither their executives nor their IT group knew anything about forecasting, and this multi-billion dollar company could not do the most elementary forecasting functions. Actually, very few companies can be used as models for forecasting excellence. Most companies do a horrible job of taking advantage of systems to improve their forecast.

However, if a big consulting company does something, or a big client does something, that seems to be sufficient evidence that other people should do it as well. I think the first question needs to be “does it make sense?” and secondly, “have we tested it?” The fact that a consulting company or a client did this or that really means nothing. Very few executives call in journalists into their office to report that they completely bombed on their IT implementation because they were ripped off by Accenture who lied to them about what software could do for them and this caused them to miss their quarter. This is called reporting bias, and obviously must be adjusted for.

Illogical Supply Chain Management Trends

Observing the illogical nature of many supply chain management trends was noticed and written about decades ago by George Plossl. George Plossl was very focused on practical and often mathematical approaches managing the supply chain, and therefore many of the trends in a supply chain, most of which have failed to pay dividends must have struck him is strange as they strike me.

Probably the greatest misconception is that the job of effective planning and control is primarily technical. The literature of the technical societies and the words of a few consultants have led many managers to believe that all they need for control are the right techniques in a system. Overselling sound and necessary techniques like MRP has certainly been a great disservice to hard-pressed managers. Interest in new techniques flares up like fads in clothing and sports. Too many managers seem to believe that they can buy their way out of trouble quickly by adopting the Japanese “Kanban” technique or the Israeli super mathematical “Optimal Production Technology.” Over-simplified solutions to complex problems, like jogging for better health and fad diets, continue to beguile many people unwilling to adopt the necessary changes in life-style so needed for achieving their real goals. Sound planning, effective execution of the plan and adequate control requires more than techniques and computer programs however elegant and expensive these may be. – George Plossl

In this quote, George Plossl does a good job of explaining the penchant for trends that he saw in his consulting work.

References

“Production and Inventory Control: Applications,” George Plossl, George Plossl Education Services, 1983

To get a good basis in supply planning, see my book on supply planning software.

Supply Planning Book

SUPPLY

Supply Planning with MRP, DRP and APS Software

Showing the Pathway for Improvement

Supply planning software, and by extension supply planning itself, could be used much more efficiently than it currently is. Why aren’t things better?

Providing an Overall Understanding of Supply Planning in Software

Unlike most books about software, this book showcases more than one vendor. Focusing an entire book on a single software application is beneficial for those that want to use the application in question solely. However, this book is designed for people that want to understand supply planning in systems.

  • What methods fall into APS?
  • How do the different methods work and how do they differ in how they generate output?
  • What is the sequence of supply planning runs?

These types of questions are answered for readers in this book.

This book explains the primary methods that are used for supply planning, the supply planning parameters that control the planning output as well as how they relate to one another.

Who is This Book For?

This book as a practical primer for anyone looking to perform a supply planning software selection, any person beginning a supply planning project, or anyone who just wants to understand supply planning software simply better.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: Where Supply Planning Fits Within the Supply Chain Planning Footprint
  • Chapter 3: MRP Explained
  • Chapter 4: DRP Explained
  • Chapter 5: APS Supply Planning Methods
  • Chapter 6: APS for Deployment
  • Chapter 7: Constraint-based Planning
  • Chapter 8: Reorder Point Planning
  • Chapter 9: Planning Parameters
  • Chapter 10: How MRP, DRP, and APS Relate to One Another
  • Chapter 11: Supply Planning Visibility and Master Data Management
  • Chapter 12: Understanding the Difference Between Production Versus Simulation

 

The Problem With Frequently Updating the Supply Planning Process

What This Article Covers

  • A False Belief of Responsive Supply Chain and the Frequently Updating the Planning Process
  • The History of Supply Chain Planning
  • The Issue of Lead Times in Supply Planning

A False Belief of Frequently Updating the Planning Process for Responsive Supply Chain

In many companies, a mantra has developed that it was important to be able to reflect the most recent updates into the planning process. What this results in are frequently last minute updates to the forecast and a very short or non-existent frozen period. This is promoted as forward thinking when in fact it is quite regressive.

The History of Supply Chain Planning

Planning has always existed in one form or another, however, it developed in conjunction with the rise of computers. There is no doubt in my mind that grain warehouse managers in ancient cultures performed some planning for managing the creation and inventory management of anything from grain stores to stones at a quarry. There is no doubt that planning took on enhanced capability with computers providing the ability to manage large amounts of data necessary to perform detailed planning. However, while many companies purchased supply chain planning software, far fewer internalized the concepts and discipline of planning. For this reason, the vast majority of supply chains are reactively managed, and many people in high levels of companies such as Vice Presidents and Directors of Supply Chain do not appreciate or have even studied supply chain planning at any level of detail. For many of them, the planning systems they are simply things to be manipulated to meet their short term goals.

Responsive Supply Chain Concepts

Many think that the more they interfere with the system and the more responsive they make the system; the better the results will be. Thus, few organizations make much progress with their supply chains from year to year, because they lack the knowledge and discipline among their leadership ranks of how to effectively manage the systems they have purchased to achieve the organizations’ supply chain objectives.

The Issue of Lead Times and Responsive Supply Chain

The problem with this idea is that it can be easily contradicted by looking at lead times. That is changes to forecast cannot realistically be expected to be effectively managed if they come in within total manufacturing or procurement lead times. However, the response one gets is that materials can be expedited. What would seem too desirable is for companies to build in flexible lead time capabilities into their products so that different lead times could have different costs associated so that the model could pick the best most appropriate lead time. However, the problem with this is most companies don’t know the actual costs of expediting products, and secondly, they have a big enough problem managing the master data of the lead times that they already maintain.

Conclusion

The concept of planning systems with regards to lead times is simple. The lead times entered are to be the company’s best guess as to the time required to perform different tasks. Planning systems are deterministic in that they produce a plan based on these lead times, and they need a sufficient lead time to do their job. If you interfere with their operation by forcing a broken and undisciplined forecast process onto the supply and production planning system, negative consequences will occur.

References

Replenishment Triggers Book

Replenishment Triggers

Getting the Terminology Right

The terms make to order and make to stock roll quickly off of people’s tongues regardless of their knowledge of other supply chain conditions. Many executives speak about “moving to make to order environment.” For most companies, this simply is not realistic. And many businesses that say they do make to order/configure to order/engineer to order are doing assemble to order planning.

The Universality of The Manufacturing Environment Type

These terms are specific types of manufacturing environments. They are embedded in almost all supply planning applications ranging from the most basic ERP to the most sophisticated advanced planning system. However, each manufacturing environment leads to some implications, implications that are most often not completely understood.

Getting Clear on Requirements Strategies

Requirements strategies are what control what drives the replenishment of supply in systems. In most cases, the need strategies control whether the forecast or the sales order triggers replenishment.

This book cuts down the amount of time that is required for people in companies to understand the relationship between manufacturing environments (the business) and requirements strategies (the technology setting in the supply planning application).

By reading this book you will learn:

  • What are the major manufacturing environments and what determines which manufacturing environment a company follows?
  • How do the different manufacturing environments impact how inventory is carried?
  • How are the various production environments configured in software?
  • What is mass customization, and how accurate is useful is this concept in real life?
  • What is the interaction between variant configuration and the manufacturing environment and the bill of materials?

Chapters

Chapter 1: Introduction
Chapter 2: The Different Manufacturing Environments
Chapter 3: Triggering Replenishment
Chapter 4: Requirements Strategies
Chapter 5: The Make to Order Illusion
Chapter 6: The Limitations to the Concept of Mass Customization
Chapter 7: Forecast Consumption
Chapter 8: Variant Configuration in SAP ERP
Chapter 9: Conclusion

Why Magical Ideas Are More Appealing than Standard Supply Planning

What This Article Covers

  • Introduction to Magical Ideas in Supply Chain Management.
  • Why Dynamic Safety Stock is Not Held.
  • Why Lean is Magical Thinking
  • The Relationship Between Education and Magical Beliefs.
  • Proponents of Lean Supply Chain

Introduction to Magical Ideas in Supply Planning

There are several magical ideas which are extremely popular currently in supply chain management. The concept of Lean — which has been popular for some time, and demand sensing, which has recently become quite popular. Both ideas are primarily attractive to executives and have little to do with making supply chain planning work in systems. For instance, there is no setting in any supply chain system that one can activate if a decision maker wants to enable Lean.

Proponents of Lean Supply Chain Management

Proponents of Lean like to propose that one should only reduce inventory on “faith,” and this is due to some combination of stock being inherently evil, and some vague background story of how Toyota follows Lean principles — and therefore it must be good. The truth is that low inventories can only be held, without imposing even greater costs on the rest of the system by having lowered variability in the system (for instance lower procurement lead time variability and lower forecast variability). If lower variability is achieved, the system will naturally require less inventory. But one cannot put the cart before the horse – which is what most Lean proponents would have companies do.

Why is Lean Magical Thinking

Lean is magical thinking because it provides little evidence — unless one considers unproven anecdotes about Toyota as evidence, and is inherently illogical — relying upon the listener to have a limited and second-hand grasp on supply chain principles. Demand sensing is another magical belief that changes the rules of the game by allowing the forecast to be changed within lead time — which does no one any good. Demand sensing is equivalent to changing one’s bet at the halftime of the SuperBowl. Certainly, it improves forecast accuracy — but only if one accepts the assumption that predictions can be modified when it’s too late to place a bet. Vegas bookmakers require you to solidify your bet before the game starts.

Why Dynamic Safety Stock Is Not Held

While many people attempted to list the standard safety stock formulas, I think what need to be discussed is why the dynamic safety stock calculation are not used in companies. Rather than spending more time on reiterating involved safety stock formulas, the question needs to be asked: “why.” I believe the answer lays with the high forecast error that most companies have. Because most companies have a problem mastering statistical forecasting systems for supply chain management and because they make their demand history as un-forecastable as possible by doing things like not performing historical substitution, not accounting for promotional sales. It is a highly rare company — like Trader Joe’s, that makes its decisions with an eye towards how it will impact the supply chain. The higher the forecast error, the less likely the company will be willing to carry the safety stock as calculated by the dynamic safety stock formula.

A poor quality forecast increases the safety stock — but does not decrease the necessity to carry the calculated safety stock. This reality is covered in this article. The dynamic safety stock calculator is available at this link. This is a common problem with supply chain planning generally — that excuses are given as to why the standard formulas should not be followed.

The Relationship Between Education and Magical Beliefs

The fact is very few people that work in supply chain either have education in supply chain management or operations research, and this makes them far more susceptible to “magical” ideas. Look at what is emphasized. As an example, many more people that work in supply chain management can explain to you what “Lean” versus the difference between make to order, make to stock and assemble to order. There is no “Lean” setting in any system. Therefore, trendy concepts that have far less importance than the real substance of inventory management are over emphasized. Companies that cannot master the actual content — are quick to move to trendy concepts. This is true for not only supply planning but demand planning and production planning.

Around 1/2 of the general US population believes they have a personal angel. This belief diminishes with the more education as the person has and in particular, the more exposure to science that that person has. Some schools have grown their curriculum to have either minor in supply chain management of majors in the topic. Either these programs are too few (and they must be as accounting and marketing programs are nearly universal in colleges) or the education that students are receiving is ineffective. Of course, a supply chain management degree is not the only level that should provide sufficient background to allow a person to question things like Lean and demand to sense.

For instance operations research is even more widely taught than supply chain management and covers some of the same principles. This is not working. Another major problem is that it is not merely a feature of one’s knowledge. Ideas become trendy, and then it is necessary to move against the notion — when it has taken root at the executive level. Many people have the appropriate training but are more focused on their career than what is true or false. For this reason, plants have been run inefficiently, and reduced supply planning has been employed because it is simply too risky to challenge the status quo. Magical beliefs are appealing because thy hold the promise of vast improvements — with little work.

Conclusion

The fact is that the vast majority of supply chains are inefficient and wasteful — and while money has been expended on applications — the performance is not improving very much because improvement requires a lot more than only buying software and hiring a consulting company to implement supply chain software.

References

Lean and Reorder Point Planning Book


Lean and Reorder Point 2

Lean and Reorder Point Planning: Implementing the Approach the Right Way in Software

A Lost Art of Reorder Point Setting?

Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?

Implementing Lean in Software

All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.

Are Reorder Points Too Simple?

Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.

There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.

Rather than “picking a side,” this book shows the advantages and disadvantages of each.

  • Understand the Lean Versus the MRP debate.
  • How Lean relates to reordering points.
  • Understand when to use reorder points.
  • When to use reorder points versus MRP.
  • The relationship between forecastability and reorder points.
  • How to mix Lean/re-order points and MRP to more efficiently perform supply planning.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: The Lean versus MRP Debate.
  • Chapter 3: Where Supply Planning Fits Within The Supply Plan
  • Chapter 4: Reorder Point Planning
  • Chapter 5: Lean Planning.
  • Chapter 6: Where Lean and Reorder Points are Applicable
  • Chapter 7: Determining When to use Lean Versus MRP
  • Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning

How to Best Understand PutAway and Goods Receipt

What This Article Covers

  • Goods Delivery the Putaway Process and Goods Receipt, Received Goods and Goods Received
  • Loading Bay or Loading Dock and the Staging Area
  • Confirmed Goods Received, Confirm Goods Receipt, Receipt of Goods and Inventory Receipt
  • Post Goods Issue and Post Goods Receipt
  • Putaway and the Putaway Process
  • The Receiving Department and the Shipping Department

Goods Receipt

Introduction

A goods receipt is the process of receiving goods into a facility. A goods receipt is performed both physically and in the computer system. Receiving goods is part of one of the major processes in a warehouse and factory. In this article, we will cover goods receipt from multiple dimensions in this article.

Goods Delivery the Putaway Process and Goods Receipt, Received Goods and Goods Received

The putaway process is the activity in a warehouse or factory of taking the stock and “putting it away” into the stocking bins, or otherwise repositioning the stock into the facility. The putaway process takes the stock from a staging area and moving the goods received its final storage location.

The costs or impacts of increased frequency of goods delivery on putaway, goods receipt, received goods and goods received costs are something to consider, that is nearly always ignored by proponents of JIT.

Loading Bay or Loading Dock and the Staging Area and Storage Location

The received goods are taken in from the loading bay or loading dock either to two potential areas in the facility. One is to the staging area to the final storage location. One can skip the staging area and take the received goods directly to the final storage location.

Confirmed Goods Received, Confirm Goods Receipt, Receipt of Goods and Inventory Receipt

  • Part of goods receipt to confirmed goods received is the confirmation of the receipt of good and the inventory receipt.
  • So confirmed goods receipt and confirmed goods receipt are part of the result of the goods issue and goods receipt process.
  • This confirmation to confirm goods received is to mean a “receipt” generated. The receipt process transfers the ownership between entities.
  • The receipt signifies the movement of the material from one set of books to another. However in the computer age, little of these receipts are paper.

Post Goods Issue and Post Goods Receipt

Posting goods issue is the computer reaction to the physical goods receipt process. When you post goods issue, the inventory decrements (increases) by the goods receipt amount. Goods receipt, which increments the inventory works the same way but in reverse.

Post goods issue or post good receipt will normally have a lead time associated with it. This means that the goods issue or goods receipt and the inventory do not increment or decrement until the lead time has passed.

The Receiving Department and the Shipping Department

Goods receipt and goods issues are managed by the receiving department, which is the contrary to the shipping department.

Conclusion

Goods issue and goods receipt are two sides of the same coin. This the movement of goods both physically between buildings or locations and the accounting entry which records the receipt of goods. The confirmed goods received that is placed into both the receiving system and the issuing system.

This the movement of goods both physically between buildings or locations and the accounting entry which records the receipt of goods. The goods issue and goods receipt process are not instantaneous which is where both goods issue and goods receipt lead times are used.

References

Lean and Reorder Point Planning Book


Lean and Reorder Point 2

Lean and Reorder Point Planning: Implementing the Approach the Right Way in Software

A Lost Art of Reorder Point Setting?

Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?

Implementing Lean in Software

All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.

Are Reorder Points Too Simple?

Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.

There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.

Rather than “picking a side,” this book shows the advantages and disadvantages of each.

  • Understand the Lean Versus the MRP debate.
  • How Lean relates to reordering points.
  • Understand when to use reorder points.
  • When to use reorder points versus MRP.
  • The relationship between forecastability and reorder points.
  • How to mix Lean/re-order points and MRP to more efficiently perform supply planning.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: The Lean versus MRP Debate.
  • Chapter 3: Where Supply Planning Fits Within The Supply Plan
  • Chapter 4: Reorder Point Planning
  • Chapter 5: Lean Planning.
  • Chapter 6: Where Lean and Reorder Points are Applicable
  • Chapter 7: Determining When to use Lean Versus MRP
  • Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning

Software Ratings: Supply Planning

Software Ratings

Brightwork Research & Analysis offers the following free supply planning software analysis and ratings. See by clicking the image below:

software_ratings

How to Best Understand Just In Time Inventory

What This Article Covers

  • JIT Definition or JIT Meaning
  • Just in Time Inventory or JIT Inventory
  • JIT Delivery and Higher Ordering Costs, Delivery Costs, Receiving Costs and Put Away Costs and Delivery Frequency
  • Goods Delivery
  • Just in Time Manufacturing, JIT Manufacturing or JIT Production
  • JIT Inventory System
  • Just in Time Supply Chain
  • Misinformation on Inventory Conceptually Because of Lean

JIT Inventory

Introduction

Just in Time Inventory or JIT inventory have been influential concepts in both just in time manufacturing and in inventory management generally and has been used as philosophical support for reducing the stocking level.

In this article, we will cover all the ways that just in time supply chain has been applied.

JIT Definition or JIT Meaning

The JIT meaning or JIT definition is the reduction of inventory so that the new inventory that replenishes the stocking level right before it is to be depleted. There is some debate as to technically this is when this happens. That is after safety stock has been partially depleted, but there are many different JIT practitioners, and they have differing opinions.

The JIT definition of JIT meaning has several sub-areas. These JIT definition or JIT meaning includes just in time inventory and just in time manufacturing, JIT manufacturing or JIT production, which we will discuss further in the article.

While many people do not know the specifics of the JIT definition or JIT meaning, most do know that JIT results in lower inventory. But what is not at all well known is the method by which JIT proponents arrive at their proposal of stocking level is philosophical and based on the anecdotes of experience in inventory management from Japanese manufacturers.

Just in Time Inventory or JIT Inventory

Just in time inventory or JIT inventory is the minimization of inventory based on the concept that smaller stocking level can be maintained and an increase in delivery frequency performed. Quantification of the extra costs of the JIT inventory system is not part of the JIT method. The just in time inventory system or JIT inventory system is based upon philosophy, not based upon developing a body of evidence to support the move away from traditional inventory management.

JIT Delivery and Higher Ordering Costs, Delivery Costs, Receiving Costs and Put Away Costs and Delivery Frequency

Extra costs of the JIF inventory system include higher ordering costs, higher delivery costs, higher receiving costs and

  • Higher Ordering Costs
  • Higher Delivery Costs
  • Higher Receiving Costs
  • Higher Put Away Costs

Put away is the process of moving and stocking the inventory at its stocking place. Put away follows goods receipt.

One of the primary reasons why JIT proponents don’t calculate the ordering costs, delivery costs, receiving costs or put away costs is that if this were done, the overall costs would necessarily look higher. The reason for this is that the inventory carrying cost is far lower than all of the transactions that make up the stocking level.

Delivering in small quantities with high delivery frequency is called JIT delivery. Many shipping companies specialize in JIT delivery frequency to meet the market demand. JIT delivery can be driven my JIT or Lean thinking, or it can apply to factories in congested areas that lack sufficient stock space.

The EOQ formula produces an order quantity based on a trade-off between inventory holding cost and inventory ordering cost. In such a formula, the ordering cost costs, delivery costs, receiving costs and put away costs could all be placed into the ordering cost category. JIT inventory management does not support the concepts of such mathematical determinations.

Just in Time Manufacturing, JIT Manufacturing or JIT Production

JIT primarily came from Japanese manufacturers, through US consultants and to global companies. Although the greatest JIT craze was probably in the US. Just in time manufacturing, JIT manufacturing or JIT production means JIT applied to manufacturing. Therefore, JIT is a manufacturing inventory concept that came from factories and was then applied to the overall supply chain.

Just in Time Supply Chain

Just in time supply chain is simply applying just in time manufacturing, JIT manufacturing or JIT production principles to supply chain, which means to inventory management outside of the factory. Just in time supply chain supports seeing the overall supply chain as if every stocking position and every stocking level is a short lead time product location that is no different than a manufacturing facility that is lucky enough to be able to be continuously replenished under the Toyota, inventory model.

JIT Inventory System

A JIT inventory system is simply a method that applies JIT. Any supply planning or MRP/ERP system can be made to operate under JIT principles. This typically results in the system being set to work on consumption based planning using methods like reorder points. JIT is opposed to forecasting philosophically, considering it too unreliable. The problem is that while this may apply to a stocking level or stocking position, it is not possible to apply consumption based planning in all circumstances. And the longer the lead time.

Misinformation on Inventory Conceptually Because of Lean or JIT

Lean is just rebranded JIT. Since at least the 1980’s a philosophy of keeping low inventories has gone by various names. At one time it was JIT, and then it became Lean. JIT was based upon low inventories that the Japanese were able to keep. But without understanding, that Japanese companies work more collaboratively than US companies. Second that many industrial areas in Japan have suppliers located close to their customers. The US does not have the same supplier network setup that Japanese companies do. Also, if simply a supplier is maintaining your inventories, than the overall system inventories are not lower. This distinction was left out of most of the explanations provided to US companies by JIT/Lean consultants.

Lean is primarily a philosophy which is based on taking a concept from production planning that works in specific circumstances. Lean does make sense when it uses an analytical approach to segment the product location database and converts some of the unforecastable product locations to reorder point planning. 

Conclusion

Just in time inventory rose from just in time manufacturing or JIT production to be highly influential in inventory management coming to be known as just in time supply chain. JIT and lean are non-evidence based approaches to inventory management that are based upon philosophy and anecdotal evidence.

References

Lean and Reorder Point Planning Book


Lean and Reorder Point 2

Lean and Reorder Point Planning: Implementing the Approach the Right Way in Software

A Lost Art of Reorder Point Setting?

Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?

Implementing Lean in Software

All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.

Are Reorder Points Too Simple?

Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.

There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.

Rather than “picking a side,” this book shows the advantages and disadvantages of each.

  • Understand the Lean Versus the MRP debate.
  • How Lean relates to reordering points.
  • Understand when to use reorder points.
  • When to use reorder points versus MRP.
  • The relationship between forecastability and reorder points.
  • How to mix Lean/re-order points and MRP to more efficiently perform supply planning.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: The Lean versus MRP Debate.
  • Chapter 3: Where Supply Planning Fits Within The Supply Plan
  • Chapter 4: Reorder Point Planning
  • Chapter 5: Lean Planning.
  • Chapter 6: Where Lean and Reorder Points are Applicable
  • Chapter 7: Determining When to use Lean Versus MRP
  • Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning

Software Ratings: Supply Planning

Software Ratings

Brightwork Research & Analysis offers the following free supply planning software analysis and ratings. See by clicking the image below:

software_ratings

How To Use ABC Inventory Classification

What This Article Covers

  • ABC Classification, ABC Inventory or ABC Inventory Classification
  • ABC Analysis, ABC Analysis of Inventory
  • ABC Inventory Control

ABC Classification

Introduction

ABC classification is probably the most common way of performing segmentation of an inventory database. In this article we will find all about ABC classification.

ABC Classification, ABC Inventory or ABC Inventory Classification

One way of looking at inventory is by ABC classification, ABC inventory or ABC inventory classification. ABC classification is where inventory is segmented by valuation or volume or both. ABC inventory classification sets up three divisions or segments.

  • A Items: These are the products or the product location combinations that are the most expensive, and or that have the highest sales.
  • B Items: These are the products or the product location combinations that are the medium expensive, and or that have a medium level of sales.
  • C Items: These are the products or the product location combinations that are the least expensive, and or that have the lowest sales.

ABC Analysis, ABC Analysis of Inventory

In order to use ABC classification an ABC analysis or ABC analysis of inventory is necessary. Some ERP systems like SAP ECC have transactions where this can be automatically calculated, and this is one reason that explains why ABC classification, ABC inventory or ABC inventory classification are so frequently used.

ABC analysis or ABC analysis of inventory is not as straightforward as it sounds. If only sales quantities are used, then the most important items, which are often the highest sales priced items are not captured. If only sales dollar amounts are used, then the volume is left out. If the volume X sales price is used, then the highest value items will dominate the ABC inventory results.

ABC Inventory Control

There is no ABC inventory control “setting” in supply planning systems. Rather ABC inventory control is simply controlling inventory on the basis of the ABC analysis of inventory. For instance, one could set C items to be consumption planned while A and B items would be driven by the forecast. There are many examples, but it would simply mean changing the settings in the supply planning system to correspond to ABC.

Conclusion

Therefore ABC analysis of inventory is much easier to talk about in the abstract than it is to implement. In US companies for every one worker who actually performs the calculation, there may be 5 or 6 people throwing the term around and offering their opinion on it. Books that cover ABC inventory analysis will almost always underestimate the difficulty in using ABC inventory classification.

References

I cover inventory and safety stock in the following book.

Safety Stock and Service Level Book

Safety Stock

Safety Stock and Service Levels: A New Approach

Important Features About Safety Stock

Safety stock is one of the most commonly discussed topics in supply chain management. Every MRP application and every advanced planning application on the market has either a field for safety stock or can calculate safety stock. However, companies continue to struggle with the right level to set it. Service levels are strongly related to safety stock. However, companies also struggle with how to set service levels.

How Systems Set Safety Stock

The vast majority of systems allow the setting of safety stock by multiple means (static, dynamic, adjustable with the forecast in days’ supply, etc..). However, most systems do not allow the safety stock to be set in a way that is considerate of the inventory that is available to be applied.By reading this book you will:

  • Understand the concepts and formula used for safety stock and service level setting.
  • Common ways of setting safety stock.
  • Service levels and inventory optimization applications.
  • The best real ways of setting both service levels and safety stock.

Chapters

Chapter 1: Introduction
Chapter 2: Safety Stock and Service Levels from a Conceptual Perspective
Chapter 3: The Common Ways of Setting Safety Stock
Chapter 4: The Common Issues with Safety Stock
Chapter 5: Common Issues with Service Level Setting
Chapter 6: Service Level Agreement
Chapter 7: Safety Stock and Service Levels in Inventory Optimization and Multi-Echelon Software
Chapter 8: A Simpler Approach to Comprehensively Setting Safety Stock and Service Levels

Software Ratings: Supply Planning

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How Best to Perform Inventory Valuation

What This Article Covers

  • Introduction to the Cost of Inventory
  • The Types of Inventory Cost
  • Inventory Cost, Inventory Price, Inventory Valuation Methods and the Valuation of Inventory
  • Inventory Accounting with the LIFO Method or Last In First Out Method, FIFO Method or First In First Out Method
  • Inventory Accounting with the Weighed Average Method, Average Cost Method and the Costs of Goods Sold
  • The Concept of Average Inventory Formula

Inventory Accounting

Introduction

In this article, we will cover the cost of inventory. The cost of inventory is critical to both how inventory is managed as well as the final determination of the profits of a company. And the calculation method of the cost of inventory must be setup within the inventory management and financial system or systems of the entity.

There are many methods of determining the cost of inventory that relates to the inventory accounting, inventory valuation, etc.

The Types of Inventory Cost

The types of inventory cost are related to things like the purchasing cost of the inventory. However, other types of inventory cost are absorbed into things like facility costs. This is included in the carrying cost formula that is used at many companies to estimate the cost of holding inventory for a year or a month.

Other types of inventory cost include obsolescence and breakage. The types of inventory cost are quite numerous and impact a balance sheet in a multitude of ways.

Inventory Cost, Inventory Price, Inventory Valuation Methods and the Valuation of Inventory

Inventory will almost always have an inventory cost and sometimes and inventory price if the inventory is a finished good. That is an inventory price is only necessary for inventory that is sold. And the margin is determined by subtracting the inventory cost from the inventory price when the same items are purchased and sold. But this becomes more complex when a material is converted into a finished good and then sold. In that case, the combined costs of goods sold that went into the finished good must be estimated. This means subtracting the inventory cost of various materials from the final inventory price of the finished good.

This means using inventory valuation methods that allow an entity to determine the valuation of inventory. Inventory valuation methods are constrained by the tax laws of the particular country, but typically there are some standard inventory valuation methods to choose from in almost every country.

An inventory cost or inventory valuation is necessary for all of the inventory that a company maintains.

Inventory Accounting with the LIFO Method or Last In First Out Method, FIFO Method or First In First Out Method

An entity will normally choose an inventory accounting method and then configure their system to operate that way. One of the complexities is that costs change over time. Therefore, raw material “A” may cost $20 on Jan 20th, but cost $25 on Feb 25th.

  • If the raw material is issued on Feb 26th, then what is the correct cost of the raw material? When inventory is recorded in a location, it is not serialized (in most cases). Therefore the inventory at a location virtually “blends.”
  • This makes the assignment of a cost to the material difficult as 1/2 of the inventory may have been purchased at the cost of $20, and the other half at the cost of $25.

Two of the most common inventory accounting valuation methods are LIFO Method or Last In First Out Method, FIFO Method or First In First Out Method.

  • The LIFO Method or Last In First Out Method: This method values the inventory at the cost which goes to the last item cost received. So in the example above the $25 per unit cost would be used.
  • The FIFO Method or First In First Out Method: This method values the inventory at the cost which goes to the first item cost received. So in the example above the $20 per unit cost would be used.

Inventory Accounting with the Weighed Average Method, Average Cost Method

Another inventory accounting method are to now use a specific price, but rather the weighed average method or average cost method.

  • Weighed Average Method or Average Cost Method: This method values the inventory at the cost which is an average of the cost received. So in the example above the ($25 + $20),/2 or $22.5 would be the cost used.

Overall the weighed average method or average cost method has the advantage of being far less complex than the LIFO method or the FIFO method.

The Concept of Average Inventory Value

Average inventory value means taking an average of the inventory holding position and then applying a particular value (as determined as explained above). Average inventory value is used to improve the value determined in the system. The article up to this point has focused on the average inventory value for a specific product or product location combination. However, average inventory value also applies to the overall product database. The average inventory value for the overall product database is then typically tracked by companies and compared against a maximum stock level that the company wants to hold.

Cost of Goods Sold

Apparently, these various inventory accounting methods are used to determine the cost of goods sold. The costs of goods sold in total combined with the administrative and overhead will serve as the cost basis for the company.

Inventory Value

While the inventory value is the average cost of the materials time the number of materials, the term inventory value can mean several things. Any one item can have an inventory value. Or the overall system or network-wide inventory can have an inventory value, or the inventory value can be just of the materials kept at a particular distribution center.

Most companies try to cap the overall inventory value at a specific number. Such as no more that $100 million in inventory.

Conclusion

Inventory valuation works behind the scenes in inventory but drives many decisions. At this point, most ERP systems have strong capabilities for the valuation of inventory. Once the ERP system is configured properly, the valuation of inventory is automatic. Most ERP systems have the ability to show the inventory valuation at any point in time.

Another important factor related to inventory valuation is sales and operations planning. This is where the company projects supply and demand, and the impact on the overall inventory valuation of the planned inventory to be carried.

References

I cover inventory in the following book.

Safety Stock and Service Level Book

Safety Stock

Safety Stock and Service Levels: A New Approach

Important Features About Safety Stock

Safety stock is one of the most commonly discussed topics in supply chain management. Every MRP application and every advanced planning application on the market has either a field for safety stock or can calculate safety stock. However, companies continue to struggle with the right level to set it. Service levels are strongly related to safety stock. However, companies also struggle with how to set service levels.

How Systems Set Safety Stock

The vast majority of systems allow the setting of safety stock by multiple means (static, dynamic, adjustable with the forecast in days’ supply, etc..). However, most systems do not allow the safety stock to be set in a way that is considerate of the inventory that is available to be applied.By reading this book you will:

  • Understand the concepts and formula used for safety stock and service level setting.
  • Common ways of setting safety stock.
  • Service levels and inventory optimization applications.
  • The best real ways of setting both service levels and safety stock.

Chapters

Chapter 1: Introduction
Chapter 2: Safety Stock and Service Levels from a Conceptual Perspective
Chapter 3: The Common Ways of Setting Safety Stock
Chapter 4: The Common Issues with Safety Stock
Chapter 5: Common Issues with Service Level Setting
Chapter 6: Service Level Agreement
Chapter 7: Safety Stock and Service Levels in Inventory Optimization and Multi-Echelon Software
Chapter 8: A Simpler Approach to Comprehensively Setting Safety Stock and Service Levels

Software Ratings: Supply Planning

Software Ratings

Brightwork Research & Analysis offers the following free supply planning software analysis and ratings. See by clicking the image below:

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How to Best Calculate Lead Times

What This Article Covers

  • What Lead Time Means and a Lead Time Definition to Define Lead Time
  • Lead Time in Supply Chain and Lead Time Supply Chain
  • Supply Lead Time and Customer Lead Time
  • Lead Time in Inventory
  • Lead Time Analysis
  • How to Calculate Lead Time, Lead Time Calculation and a Build a Lead Time Calculator

Calculate Lead Times

Introduction

In this article, we will cover lead time in several dimensions. We will start off with the lead time definition and the lead time in the supply chain.

Lead Time in Supply Chain or Lead Time Supply Chain

The lead time in supply chain or lead time supply chain relates to lead times specific to supply chain are terms that describe lead times specific to supply chain management, as lead times are a general term that can apply to non-supply chain topics.

What Lead Time Means and a Lead Time Definition to Define Lead Time

The lead time definition is required to define lead time.

What lead time means is the time required to complete a supply chain process required to provide product to a customer ultimately. Common lead times include:

  • Supplier Lead Time or Supply Lead Time
  • Manufacturing Lead Time
  • Purchasing Lead Time
  • Shipping Lead Time

Customer Lead Time and Order Lead Time

Additionally, there are lead times from the demand side. This includes:

  • Customer Lead Time
  • Order Lead Time

Lead Time in Inventory

Lead time in inventory is the portion of inventory that is correlated directly to the lead time. Lead time in inventory is made up of the inventory without variability.

Safety stock for the lead time in inventory would then be where the variability (always higher as only the variability above the baseline is what is calculated in safety stock) of the lead time is maintained.

Lead Time Analysis

There is a lead time analysis that can be performed to determine the position in the lead time in inventory. This lead time analysis can divide the product database by lead time length. But this required performing a lead time calculation.

How to Calculate Lead Time, Lead Time Calculation and Build a Lead Time Calculator

How to calculate lead time or perform a lead time calculation means knowing how lead time is added together.

The various lead times connect in the following way:

For Manufactured Products

Replenishment Lead Time = Manufacturing Lead Time + Procurement Lead Time (for raw materials, components, and subassemblies) + Shipping Lead Time

For Procured Products

Replenishment Lead Time = Procurement Lead Time (for raw materials, components, and subassemblies) + Shipping Lead Time

Often what is desired is a total lead time, and this means having a lead time calculator that combines multiple component lead times as is shown above.

There is often discussion of expediting the various lead times, but in many cases, the only lead time that is reasonably capable of being expedited is the shipping lead time. The shipping lead time can only be accelerated at considerable expense (unless the product in question is of high value and low weight)

Conclusion

In this article, we define lead time and we covered lead time analysis which requires lead time calculation. But to calculate lead time and develop an accurate lead time calculator and perform a lead time calculation means knowing the independent lead time components. These include things like the manufacturing lead time, procurement lead time, supply lead time, etc..

Lead time in supply chain or lead time supply chain declare lead time separately from other types of non-supply chain lead times.

References

Replenishment Triggers Book

Replenishment Triggers

Getting the Terminology Right

The terms make to order and make to stock roll quickly off of people’s tongues regardless of their knowledge of other supply chain conditions. Many executives speak about “moving to make to order environment.” For most companies, this simply is not realistic. And many businesses that say they do make to order/configure to order/engineer to order are doing assemble to order planning.

The Universality of The Manufacturing Environment Type

These terms are specific types of manufacturing environments. They are embedded in almost all supply planning applications ranging from the most basic ERP to the most sophisticated advanced planning system. However, each manufacturing environment leads to some implications, implications that are most often not completely understood.

Getting Clear on Requirements Strategies

Requirements strategies are what control what drives the replenishment of supply in systems. In most cases, the need strategies control whether the forecast or the sales order triggers replenishment.

This book cuts down the amount of time that is required for people in companies to understand the relationship between manufacturing environments (the business) and requirements strategies (the technology setting in the supply planning application).

By reading this book you will learn:

  • What are the major manufacturing environments and what determines which manufacturing environment a company follows?
  • How do the different manufacturing environments impact how inventory is carried?
  • How are the various production environments configured in software?
  • What is mass customization, and how accurate is useful is this concept in real life?
  • What is the interaction between variant configuration and the manufacturing environment and the bill of materials?

Chapters

Chapter 1: Introduction
Chapter 2: The Different Manufacturing Environments
Chapter 3: Triggering Replenishment
Chapter 4: Requirements Strategies
Chapter 5: The Make to Order Illusion
Chapter 6: The Limitations to the Concept of Mass Customization
Chapter 7: Forecast Consumption
Chapter 8: Variant Configuration in SAP ERP
Chapter 9: Conclusion

Software Ratings: Supply Planning

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Brightwork Research & Analysis offers the following free supply planning software analysis and ratings. See by clicking the image below:

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