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Everything you need to know about DDMRP

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Brison St Innocent 28.05.2010

 

 

Dynamic Inventory Management with DDMRP

Interview of J.P.Bernard, Associate Consultant at ProCC, by Flore RIGOT, Marketing & Communication Operator at SILVERPROD.

 

 

 

FR: Many companies face a cash flow challenge, and financial experts always point out negatively the cost of inventory.  Can you propose a solution for this issue ?

JPB: All my customers are business-driven, i.e. they work in project management mode with a strong parallelisation of businesses. One of the main difficulty is inventory management : we don’t know exactly when the P.O. arrives and when the project starts. Thus, we supply in advance and in big quantity to avoid delay and supply chain shortage along the project.  We get overstock of many parts which generates a strong cash immobilization and a big financial hole in the company’s cash flow. Therefore, there is a solid demand from customers to optimize dynamically the management of inventory.

 

FR: What are the difficulties to solve this problem ?

JPB: The first obstacle lies in the approach : which method shall we use to optimize inventory?

The second obstacle is the tool : is the chosen method implemented in my ERP system ?

Most of the IT management tools offer only the replenishment mechanism of reorder point. This is like the gas tank in your car : when your fuel gauge reaches the minimum threshold, its light blinks and you drive to the nearest gas station to fill up your gas tank. In short, you oscillate between the minimum and the maximum. Ditto in a company with its inventory management.

The DDMRP method offers some technics to calculate the reorder point and to manage dynamically the stock : it removes the first obstacle. However, the current ERP tools do not yet implement this method and do not offer this solution to their clients.

 

FR: Why this rapprochement with SILVERPROD ?

JPB: SILVERPROD is an international software company, famous for its manufacturing ERP tools.  We have noticed the same customer approach and the same statement regarding the client’s need. We have consequently defined a joint project : develop a « Dynamic Inventory Management » extention software based on the DDMRP method, to be plugged in the ERP tools proposed by SILVERPROD.

 

FR: Could you tell me more about DDMRP ?

JPB: Let’s clarify this acronym :

DD means «Demand Driven», i.e. pulled by the customers.

MRP means «Material Requirements Planning» : this is a scheduling method created in the USA in the 60s/70s. This comes from a top/down approach where the top  management of the company defines its famous annual or multiannual S&OP plan (Sales & Operations Planning). This method implies that the long term forecasts are pretty stable : hierarchical management and push process. The computerization of this method has led to MRP softwares or ERP with MRP-engine softwares. These MRP systems are widely used in the USA, because the size of this market and the companies.  In Europe, MRP is not so much used since JIT (Just-In-Time) is largely developed and outsoutsourcing widely used, making this method and system a little bit obsolete.

DDMRP is a US american method introducing Pull Process technics in a Push Process system, i.e flexibility in a rigid system, invented by 2 famous American supply chain experts : Carole PTAK and Chad SMITH. In particular, they have described an attractive dynamic inventory management method, well suited for the US market which overflows with MRP systems.

 

FR: What is the TOC and its link with DDMRP and inventory management?

JPB: TOC means Theory Of Constraints, introduced by the famous Israeli scientist Eliyahu GOLDRATT in the 90s. The Theory Of Constraints results in several efficient management applications :

DBR  (Drum-Buffer-Rope) in production management :

The production flow is represented by a chain of workstations. The production throughput is limited by the slowest workstation, identified as the weakest link of the chain. Then the constraint restricting the pace is identified and cured with appropriate action. Thus, this link is no more the weakest one and an iteration is made to locate the new bottleneck…This is clearly a continuous improvement method. When everything has been improved, the production throughput is clocked by the weakest link and rhythmed by its drum. This one is protected from its upstream neighbor by a safety buffer. All the workstations of the chain are linked together (the rope) and commanded by the weakest link.

CCPM (Critical Chain Project Management) :

In a project, several activities are processed simultaneously and several branches are carried out in parallel. The longest branch triggering the final delivery is identified as the critical path taking into consideration the alloted resources (critical chain). At project portfolio level, the company’s constraint has to be identified, i.e. the pool of resources which limit the execution of projects.

TOC and BOM

A product to manufacture is described by its BOM (Bill Of Material). This BOM lists the components needed to reach the final product and also its fabrication and/or assembly levels. If we add a time axis and we spread the BOM over time using the supply and assembly delays, we obtain a production schedule in a format similar to a GANTT chart : thus we can search the critical path and chain.

DDMRP

The critical path becomes the Lead Time of the product, i.e. the delay necessary to produce and deliver the client. It is calculated using assembly, fabrication and supply delays. To shorten it, we detect the sensible links in the BOM  and we position safety buffers isolating these links from the upstream and/or downstream fluctuations : the delay perceived by the client is then reduced. DDMRP is the Theory Of Constraints applied to the BOM and the BOM management : BOM management is Inventory Management !

 

FR:Concretely, how to manage all the component stocks ?

JPB: The originality of DDMRP is as follows : the buffers are classified in a list of 54 types, and a method of buffer calculation is provided. An audit of the company is necessary to classify the stocks of the BOMs in the relevant category, then to determine each buffer’s parameters (Lead Time, Average Daily Usage, Variability, replenishment frequency…). The stock buffer is built-up by stacking red, yellow and green zones sized by buffer parameters and DDMRP equations. While watching the stock status, we see immediately if it is green, yellow or red, and the appropriate action is recommended.

 

FR: How to implement this method in an IT tool ?

JPB : We plan to implement the types of buffer and their parameters, the alarms, the DDMRP equations and a visual tool displaying the stocks and their alarms. This software extention will be plugged into the softwares provided by SILVERPROD : Microsoft Dynamics AX, SAGE X3, SILVERCS

 

FR: Where does your expertise about the Theory of Constraints come from ?

JPB: My associate, Isabelle ICORD, and I were trained by Dr. GOLDRATT during his various workshops in France, USA and Israël. Then, we have put into practice his concepts and techniques in our respective organizations in the electronic sector. A couple of years ago, we created our consulting company to support firms about Project Management, Portfolio Management and Production Management. As we keep us posted about applications using the TOC, we have been following the development of the DDMRP method.

 

J.P.Bernard is Associate Consultant at ProCC, consulting firm specialized in applications of the Theory of Constraints. Thanks to 25 years of international management in the electronics industry (Europe, USA, Israël, India, Korea), he has acquired some extensive experience in international projects and outsourcing. He is also Associate Professor of Management at Grenoble Graduate School of Business (France). He is the author of several books about management, including one with Isabelle ICORD «CRITICAL CHAIN IN PRACTICE: Using the Theory of Constraints to Manage Projects & Portfolios», ISBN 978-2-35422-244-4

 

Learn more : frigot@silverprod.fr

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