Demand-Driven Material Requirements Planning (DDMRP) – The new paradigm in Supply Chain Planning
Today’s challenges in supply chain planning
In traditional MRP systems, supply orders are created based on demand forecasts and, thus, rely on a stable and predictable business environment. However, this environment has changed since the introduction of MRP systems in the 1950s. Increasing network complexity and enlarged product portfolios result in higher planning effort. Furthermore, shorter product lifecycles and higher customer expectations with respect to delivery periods lead to increasing volatility and uncertainty. In such an environment, demand forecasts are always wrong and often deviate by more than 50% from the actual demand. Consequently, the wrong quantities are sourced, made or shipped to the wrong places resulting in low customer service levels. In order to avoid such problems, companies often spend a lot of money and time moving products and materials through their factories and supply chains, resulting in high inventories. However, companies still often fail to meet the target service levels.
In order to face these new challenges, the Demand-Driven Requirements Planning (DDMRP) concept has been developed by the Demand Driven Institute (DDI). Compared to traditional planning systems, decisions are not based on error-prone forecasts. Instead, DDMRP uses strategically positioned buffers to decouple the supply chain and a pull replenishment strategy that is based on customer orders. This allows the flow of material to be stabilized and variability to be significantly reduced in the supply chain. Furthermore, the provisioning of appropriate inventory levels can be achieved as inventory is replenished after usage. This replenishment strategy results in a reduction of cost and capacity intensive corrective measures to achieve the agreed service level targets.
The five steps of the DDMRP-concept
Each cycle of the DDMRP concept comprises five steps that are cyclically executed. It includes the strategic positioning of decoupling points (“Position”), the definition of buffer levels (“Protect”), as well as the actual planning and its execution (“Pull”)
The strategic decoupling in the first step of the DDMRP approach aims at selecting those stages of the considered supply chain at which inventories of finished products, components, and materials are held. In addition to the minimization of cost, the underlying algorithm accounts for additional factors and considers, for example, the impact of variabilities. Thus, it differs from other topical multi-stage planning algorithms. After the selection of decoupling points, the so-called decoupled lead time is derived for each of them. It equals the sum of all individual lead times between two decoupling points and is used as input in the calculation of the buffer sizes.
The second step of the DDMRP concept (buffer levels and profiles) includes the adequate sizing of the buffer positions identified in the previous step in terms of maximum inventory levels. Thereby, an intuitive color scheme is used that categorizes buffers in red, yellow, and green zones based on the different purposes of inventory. The red zone represents the embedded safety in the buffer and serves to overcome highly fluctuating and unexpected demand in the supply chain. The yellow zone corresponds to the cycle stock and balances the expected demand. Supply orders are generated based on the green zone, which determines their frequencies and size.
Dynamic adjustments in the third step of the demand-driven operating model allow the previously calculated buffer zones to be modified. This allows the knowledge and experience of the planners to be considered as well as other changes and short-notice adjustments of input parameters. The planners’ input is especially relevant in order to react to dynamic market effects like trends, seasonality, or significant promotions. The first three steps of the DDMRP concept include the overall parameterization of the supply chain and, thus, set the framework for further operational planning and execution. Therefore, they are crucial for the successful application of the DDMRP methodology.
The purpose of the demand-driven planning in the fourth step of the DDMRP concept is the generation of supply orders at each decoupling point that depend on the current net flow position and the buffer levels defined in the previous steps. At each decoupling point, the net flow position equals the sum of the on-hand inventory and open supply orders that is reduced by the so-called qualified demand. This qualified demand includes all demand orders that are due today or in the past, as well as order spikes that are demand orders with due date in the future exceeding a given threshold. If the net flow position drops into the yellow or red buffer zone, an order is generated that increases the net flow position up to the top of the green zone.
In the last step of the DDMRP concept (visible and collaborative execution), the planner is given execution support in terms of a prioritization of production orders. In contrast to referring to due dates, this prioritization is conducted based on the buffer status. The buffer status relates the current inventory to the buffer levels and, thus, the prioritization guarantees that stock buffers that are more depleted than others will be given higher priority. This simple approach provides clear guidance to the planner and minimizes manual effort as well as workarounds.
State-of-the-art IT system support
In order to successfully implement the DDMRP concept, IT systems have to be enhanced and tailored to support all steps of the new planning approach. Thus, SAP and Camelot ITLab developed as collaboration partners the solution “DDMRP for SAP IBP” that extends SAP Integrated Business Planning (IBP). This extension enables all five steps of the DDMRP concept and has been certified as “DDMRP compliant” by the Demand Driven Institute (DDI).
The solution “DDMRP for SAP IBP” consists of two components. The first component, the “DDMRP for SAP IBP” enhancement module, is implemented in the SCP (SAP Cloud Platform) and incorporates all features that cannot be implemented using IBP standard functionalities. This includes the strategic positioning of decoupling points and the dynamic calculation of decoupled lead times in the first two steps of the DDMRP approach. Steps 3 to 5 of the DDMRP concept are implemented in the “DDMRP for SAP IBP” configuration module and have been built completely using IBP standard functionalities. The actual planning is based on preconfigured planning views in MS Excel using the SAP IBP Excel add-in, as well as on dashboards and alerts using the SAP IBP web interface. This allows for planning in a standardized and commonly used IT system landscape. As SAP IBP is cloud-based solution, the integration of existing on-premise ERP and APS systems is possible without any problems by applying HANA Cloud Integration Data Services (HCI-DS).
Benefits of a DDMRP implementation
Today, the DDMRP concept is already applied by major companies throughout the world in many different industries. By introducing Camelot’s solution “DDMRP for SAP IBP”, they gained very positive experience and achieved outstanding results that include a significant reduction of variability and a balanced material flow in their supply chains. Thus, customers benefit from increased service levels and a higher agility of the supply chains, which are based on a lead time reduction of up to 50%. Additionally, inventories can be reduced by up to 40% and cost up to 20%.
The innovative DDMRP concept represents the biggest paradigm shift in supply chain planning in the last decades. In the solution “DDMRP for SAP IBP”, the concept has been implemented by Camelot using SAP’s latest and state-of-the art planning technology SAP IBP. This solution is being continuously improved and enhanced by additional functionalities. Hence in addition to DDMRP, “Demand-Driven Supply Chain Management” (including Segment & Strategize, Flow Metrics, and DDS&OP, for example) will be available in future. Thus, Camelot offers an implementation of the DDMRP concept on all major SAP platforms (SAP SCM, S/4HANA, and SAP IBP) as part of its “Demand-Driven LEAN Planning Suite for SAP”. This combination of a revolutionary concept and state-of-the-art technologies offers considerable added value to the customers. They benefit from the conceptual advantages of the demand-driven planning approach, significant competitive advantages based on comprehensive efficiency enhancements, a trendsetting solution, and thus, from investment reliability.
Author: Florian Sämann, Head of Competence Center Integrated Business Planning, Camelot ITLab GmbH
Published in Logistik für Unternehmen 11/12-2017