Manufacturing Superstars Use Strategic Stocking
The fatal flaw with traditional MRP is that it is forecast-driven. MRP plans for multiple time buckets into the future where actual demand is not fully known and therefore forecasts are used to fill in the calendar. Item sales demand is projected for each time bucket and then MRP explodes forecast demand down through all levels of the BOM structures.
Forecasting can never be accurate enough
In theory, MRP would work perfectly fine if forecast demand could precisely align with actual demand. But forecasting can never be accurate enough to avoid introducing errors into the master production schedule. Forecasting is never precisely accurate and worsens the farther out projections are made.
Even when the forecast for a top level item is only slightly off, errors amplify at each lower level because subassembly usage quantities multiply the usage quantities at the next lower level, which multiply the usage quantities at the next lower level, and so on. This error amplification is a well-known phenomenon called the “bullwhip” effect.
Forecasting is much more difficult with today’s products
Forecasting was somewhat easier in the 1960’s when products were highly standardized and relatively simple. Today, forecasting is far more challenging because products have many variations and are often customized with unpredictable specifications.
Forecasting propagates shortages and over-stocking
Forecast-driven planning is counter-productive because it propagates shortages and over-stocking.
- When forecast supply for an item is less than actual demand, a shortage occurs.
- When forecast supply is greater than actual demand, over-stocking occurs and continues propagating unless scheduled quantities are reduced in coordination with suppliers. Inventory easily gets out of control.
Manual planning methods have the same problems
Many small businesses avoid traditional MRP because of its complexity and the constant adjustments required to synchronize the production schedule with actual demand. Manual planning methods are often forecast-based, however, and have the same inherent flaws as forecast-driven MRP.
Future jobs are often used as a forecast to explode lower level demand with the same bullwhip effect that amplifies errors at lower levels. Future jobs are tentative and subject to frequent quantity changes, date changes, cancellations, and BOM specifications changes. Modifying or cancelling jobs can be highly problematic because of interdependencies with other jobs and purchase orders that may already be in progress.
Blanket purchase orders are forecasts by another name and are highly problematic because they require constant monitoring and frequent adjustments in coordination with suppliers to stay synchronized with actual demand. If such adjustments are not made, over-stocking can easily propagate over time.
Manufacturing superstars use strategic stocking instead
Manufacturing superstars understand that the fatal flaw with traditional MRP or any manual simulation is forecasting itself. Even with the most sophisticated software tools and algorithms, forecasting can never be accurate enough to avoid multi-level shortages and overstocking.
So instead of attempting to forecast future demand, superstars use strategic stocking whereby sufficient buffer stock is maintained against an item to cover any actual demand that is likely to occur.
Stock replenishment is triggered by actual demand
Buffer stock replenishment is triggered by actual demand at regular intervals using dynamic reorder points and minimum order quantities for supply pipeline planning. A monthly sales or usage rate and safety factor are incorporated into the reorder point and a supply days interval is incorporated into the minimum order quantity.
A supply pipeline is self-adjusting
Unlike forecast-driven planning, a supply pipeline is self-adjusting in response to actual demand.
- When actual demand for an item is greater than the monthly demand rate and safety factor, replenishment is triggered earlier than the supply days interval, which minimizes the duration of any shortage that may occur.
- When demand is less than the monthly demand rate and safety factor, replenishment is delayed until it is needed, which automatically caps stock on hand and prevents over-stocking.
The bullwhip effect at lower levels is avoided
With strategic stocking, jobs are only generated in response to actual demand from sales orders or other jobs. Dependent jobs and purchase orders at lower levels are also triggered by actual demand instead of the forecast demand that creates the bullwhip effect.
Time to Shipment MRP is the alternative to traditional planning
If you would like to liberate yourself from all the problems with forecast-based planning and replace forecasting with demand driven, strategic stocking, you should investigate Time to Shipment MRP included with DBA Manufacturing. It is much easier to use than any forecast-based planning system and is far more effective at reducing lead times with efficient utilization of inventory.