The Manufacturing Miracle
React to the Firm, Protect for the Future
React to the Firm, Protect for the Future
A manufacturing miracle – high throughput, efficient inventory, and lean staffing – can be yours if you adhere to a simple planning principle. React to the firm, protect for the future.
As humans, we have an innate desire to visualize the future, which is why we love forecasts, even when they are wildly innaccurate. Most planning methods project future demand on a calendar so that it can be visualized and covered by jobs and POs. Planners fill in the calendar with sales projections, placeholder jobs, BOM explosions, job linking, blanket purchase orders, “gut feel” intuition, and other such methods, often well out into the future.
Most of the demand you see on the planning calendar looks real on paper, but it is an illusion because future demand is not knowable until it happens. All demand originating from sales projections is tentative demand that changes as it firms over time. When you fill in the calendar with planned supply to cover tentative demand, shortages and overstocking are inevitable.
As sales orders get received from customers, firm demand replaces tentative demand and differs from original projections. Jobs and POs that were created to cover tentative demand get misaligned with firm demand, which is the root cause of shortages and overstocking.
When BOM explosions and job linking drive lower level demand, supply misalignments get much worse. Component quantities are typically multiples of the parent quantity, which causes a phenomenon known as the “bullwhip effect.” Like the power of a bullwhip, misalignments increase with the length of the planning period and amplify at each lower BOM level, which is how inventory easily gets out of control.
With calendar planning methods, jobs and POs require constant revisions to realign planned supply with demand as it firms over time. By the time misalignments are detected at upper levels, lower level jobs and POs are often already received or in progress and it is too late to avert shortages and overstocking. Blanket purchase orders are problematic because if they are not carefully monitored and periodically adjusted, stock continues to accumulate.
Calendar planning methods are silo solutions walled off from outside scrutiny and input. When planning has no transparency, other departments are forced to devise defensive silos to get products out the door. Silo solutions benefit individuals, but penalize throughput and always require extra staffing and higher overhead cost.
Demand driven MRP, which is the basis of our DBA Manufacturing software package, enables you to revitalize your small business with high throughput, efficient inventory, and lean staffing. This manufacturing miracle derives from a simple principle – react to the firm, protect for the future.
Instead of reacting to tentative demand, you only react to firm demand. Each item has its own “action window”, which covers the time it takes to make or buy the item. MRP only reacts to demand within the action window, which is firm demand. Any demand outside the action window is tentative demand that is incomplete and highly likely to change as it firms over time.
Reacting to the firm yields miraculous benefits. Planned supply is always aligned with firm demand, which eliminates the misalignments that are the root cause of shortages, overstocking, and the need for constant job and PO revisions. Each item is planned individually, which eliminates the bullwhip effect from BOM explosions and job linking that amplifies misalignments at lower levels.
Instead of using inventory to cover tentative demand projections, inventory is used to protect against future demand. Each item (other than to order items) is given a safety factor that covers potential monthly demand. The safety factor is applied to the item’s replenish time to calculate a dynamic reorder point. Whenever net demand within the item action window falls below the reorder point, MRP triggers a job or PO early enough to replenish stock before it runs out.
Protecting for the future yields miraculous benefits. Shortages are easily avoided simply by increasing the safety factor. Overstocking is eliminated because new supply only gets triggered by firm demand and cannot keep accumulating. Throughput increases with consistent and efficient order quantities and run sizes. Even though the majority of items are planned for stocking, most companies experience a dramatic reduction in overall inventory.
Demand driven MRP is a “pull” planning method whereby inventory is pulled into the system by firm demand. By contrast, filling in the calendar to cover tentative demand is a “push” planning method whereby inventory is pushed onto the system. The core problem with push planning is that it is quite easy to push too much or too little, exacerbated by the bullwhip effect. Across the manufacturing world, pull planning is widely accepted as the superior method.
Demand driven MRP dramatically reduces lead times with efficient inventory and high throughput. Each item is given a lead time for procurement or production and an order policy that determines lead time contribution to higher-level items. These settings enable you to plan a time to shipment strategy for gaining market share over less efficient competitors.
Item lead time, order policy, and replenishment settings are open and transparent and reflect a shared time to shipment strategy across all departments. An open and collaborative system eliminates the need for defensive silos and extra staff.
Calendar planning methods are comfortable because they enable us to see the future, but it is a costly illusion that guarantees low throughput and overstaffing. Reacting to the firm and protecting for the future with demand driven MRP is the best way to revitalize your small business and ensure its long-term viability.
Learn more about DBA with our web-based sales resources:
If for any reason DBA is not for you, return the software within 180 days and we will send you a full refund of all monies paid.