How to Model Inventory Level Changes from Reduced Stock Locations

Executive Summary

  • How can one model the effect on inventory from a change in the stocked locations?
  • We cover two approaches.

Introduction

We received this question, so we thought we would place the answer and the question into an article.

Question #1

Is there an industry standard way to think about the number of source points impact on Case Fill Rate? For example, we are considering reducing our stocking points for a volatile customer like Amazon, to just 2 DC’s (east & west coast) versus our normal 6 regional DC’s. Wondering if this consolidation of inventory and demand variability could account for some calcuable improvement in CFR?

Answer #1

There is no heuristic to answer this question as it really depends upon the exact math.

However, this can be modeled. Two approaches come to mind.

Scenario 1: The Simpler Approach

  1. Step 1: Calculate the total stock and safety stock for the two or more locations that you have currently.
  2. Step 2: Find a similar item with a very similar demand that is stocked at few locations.

Then calculate the difference. You have to use real data because any assumption is going to change based upon the specific math. This is ok as a first cut, but it is not going to be very accurate.

Scenario 2: The Overall Supply Network Modeling Approach

  • Step 1: Take a sample of product locations that you intend to change the number of stocking locations.
  • Step 2: Calculate the as is stock and safety stock.
  • Step 3: Change (reduce) the locations for the second product location upload.
  • Step 4: Calculate the new stock and safety stock.

A Good Use for the Brightwork Explorer

When I do modeling like this, I have a tool that I use that makes this easy.

This allows me to upload scenarios and this shows the total system inventory that is calculated. The safety stock calculation is a modification of the standard dynamic as the standard dynamic is not accurate and is not used. So this adjusted formula gives a realistic service level adjustable safety stock output.

This allows for modeling given service level assumptions. This is important because the service level assumptions have to be kept constant for the comparative analysis to have any meaning.

Brightwork MRP & S&OP Explorer

Improving Your Supply Planning, MRP & S&OP Software

Brightwork Research & Analysis offers the following supply planning tuning software, which is free to use in the beginning. See by clicking the image below:

 

References

Questions Around S&OP, MPS and Capacity Planning

Executive Summary

  • The following are questions and answers around S&OP.
  • These questions highlight the confusion around these planning topics.

Introduction

These questions were asked and answered on the topic of S&OP.

Question #1

I am not understanding how S&OP is technically done (at the supply side). There are so far three different approaches I found. But I am not sure if I correctly understood them.

To calculate at product Family Level with simple spreadsheet use (according to Wallace How-To Handbook on Sales and Operations Planning). And afterwards, compare or disaggregate the data for master scheduling??

To calculate at the Product Level using Master Production Scheduling. Even though I am not sure if this is called Master Production Scheduling because according to your blog it should be called MRP. But is this then aggregating this for S&OP??

Using APS- Master Planning Modules. Are the Supply Planning Modules you mentioned in your book About Supply Planning like SNP Master Planning Modules or something totally different?

Besides, there are S&OP Softwares available. Are they mainly for creating Dashboard, what if Analysis and demand planning or also for capacity planning?

Answer #1

I believe you have mixed up different supply planning threads. See this article for the differences called out in How to Appreciate The Four Supply Planning Threads and Their Timing.

I would leave aggregation out of the analysis for now. Aggregation can happen in any of the planning threads, its not unique to S&OP, although S&OP is really just more aggregated.

Question #2

As far as I understand S&OP and MPS can be produced by the same technique. But S&OP involves finance and sales while MPS does not. Besides S&OP can also be done without a supply planning software while for MPS a supply planning software (like MRP or APS) is necessary. Is this correct?

But what I am now a bit confused about is why rough-cut capacity planning is the same method as S&OP and MRP. Is rough-cut-capacity planning what you referred to as capacity leveling? And where is the difference between capacity requirement planning and resource requirement planning?

Answer #2

Yes, that one item you brought up is a major point of S&OP. S&OP has finance as one of the three involved parties.

As for MPS, that gets a little grey, because the term has changed in use over time. See the article How the Master Production Schedule Changed Through Time.

The term rough-cut capacity planning is not used much anymore. It just means a less accurate or detailed capacity plan. Capacity planning is very difficult, so it is abstracted to make it more manageable. So it is capacity planning, but less detailed. This usually looks out far further in time but is less detailed.

Capacity planning, resource planning, resource requirements planning are all the same thing.

S&OP capacity planning is supposed to take in account capacity, and sometimes it does. But the company doing it needs to really make it a focus. I had a client with an incredibly detailed capacity planning spreadsheet that was highly tuned to the actual capacities of the factory.  But now that I think of it — I am not sure if it was ever used in their S&OP process. I was asked if the spreadsheet could be reflected in SAP, and I said absolutely not. Applications have much more simplified assumptions around capacity planning.

See the definition described in the article Production Planning with Constraints Versus Capacity Leveling Definition. 

The problem is that these terms come into existence, and people often use them in an imprecise manner, so over time, their meaning gets confused and commingled with other terms. Notice this term — “perpetual inventory.” Because of the universal use of computers, this term basically lost its meaning, but it used to be a very important term in inventory management. See the article Whatever Happened to the Perpetual Inventory System?

Furthermore, consultants often provide descriptions of these terms that are not accurate but are good for selling their services. The business world is not like science, it is filled with a lot of hyperbole and exaggeration.

I think it might help others if I place your questions out on a few articles and show my answers. Would you be interested in having your name attached or would you prefer if it is anonymous? I can tell you, there are people with a lot of work experience who are actually confused about these terms or think they mean something when the actual definition is different.

Brightwork Research & Analysis has developed an application that addresses S&OP. That is not all that it does, but that is one of the things it does. See the article Brightwork MRP & S&OP Explorer.

Conclusion

Hopefully, these answers have been helpful.

Brightwork MRP & S&OP Explorer

Improving Your Supply Planning, MRP & S&OP Software

Brightwork Research & Analysis offers the following supply planning tuning software, which is free to use in the beginning. See by clicking the image below:

 

Why The Largest Supply Chain Vendors are Small in Supply Chain Planning

Executive Summary

  • The largest software vendors tend to have small supply chain planning products.
  • We cover why this is.

Introduction

It was curious to find the list of supply chain vendors as published by Modern Materials Handling magazine.

Largest Supply Chain Vendors by Revenues

Supplier2015 Revenue 2016 RevenueReceives a Large Percentage of Income from Supply Chain PlanningRated Well by Brightwork
SAP2,666.802,932.40
No
No
Oracle1,447.801,552.90
No
No
JDA Software467.8475.9
Yes
Yes (only one application)
Infor Global Solutions105.5243.3
No
Yes
Manhattan Associates209.3218.8
No
Never Evaluated
Epicor162.1191.6
No
No
Descartes Systems Group145.3159.2
No
Never Evaluated
HighJump129.7134.9
No
Never Evaluated
Basware112.6122.3
No
Never Evaluated
Coupa72.4114.3
No
Never Evaluated
IBM126.6112
No
Never Evaluated
PTC105.8104.6
No
Never Evaluated
Dassault Systemes74.992.9
No
Never Evaluated
BluJay76.685.8
No
Never Evaluated
Jaggaer82.284
No
Never Evaluated
Kinaxis66.382.8
Yes
Never Evaluated
Perfect Commerce44.572
No
Never Evaluated
e2open57.769.8
Yes
Never Evaluated
Zycus49.465
No
Never Evaluated
GEP5563.3
No
Never Evaluated
Top 20 Supply Chain Management Software Suppliers 2017 - By Modern Materials Handling

*So many of the vendors on the list are coded as not evaluated because Brightwork Research & Analysis does not evaluate procurement/spend vendors, warehouse management vendors or transportation management vendors. 

Observations of the List

Things that stood out to us are the following:

The Limited Number of Vendors that Receive Income from Planning

It was curious that 0nly the vendors, JDA Software, E2Open and Kinaxis receive either a primary or a substantial amount of their revenues from supply planning.

The other vendors are either ERP vendors, spend/sourcing vendors, or focus their products on warehousing and transportation. These areas have some planning aspects but tend to be far more execution oriented in nature.

This shows that the core supply chain planning space (demand, supply, and production) planning is far smaller than we would have anticipated. SAP receives a decent amount of money from their supply chain planning applications, but their offerings are not rated well by us.

Fragmented Market

This shows how fragmented the market is for supply chain planning. There are so many vendors that we have rated highly (like Planet Together and DemandWorks) that are far away from breaking into this $50 revenues club.

Major Supply Chain Planning Vendors Not on the List

  • A major vendor in the area not on the list is Logility, which is at around $26 million to $27 million in yearly revenues.
  • ToolsGroup is another prominent vendor in the supply chain planning space that because they are private, they do not report revenues.

Many other vendors that are entirely SaaS-based like Lokad, Slimstock etc, have yet to reach scale.

The Fastest Growing Supply Chain Vendors

The fastest growing vendors are in procurement/spend management, lead by Coupa, Zycus and Perfect Procurement. In fact, all the fastest growing vendors on the list are either in procurement/spend management or are Infor — which due to an infusion from the Koch Brothers, had gone on an acquisition spree. ERP vendors purchasing advanced planning applications usually does not end well.

The fastest growing vendor of those that perform supply chain planning is Kinaxis.

The Worst Website

The worst website has to be Perfect Commerce. Perfect Commerce has roughly the same site volume as Brightwork Research & Analysis but did $72 million in business in 2016!

Furthermore, Perfect Commerce’s content is so bad, it deserves less than the volume it receives. This demonstrates that you don’t need a competent website to be one of the fastest growing companies in their space.

Conclusion

One of our higher level observations is that there are still many areas of supply chain planning that are not addressed by a software of any size. That is since i2 Technologies and Manugistics declined in 2001, there has been no vendor to ignite people’s imaginations anything like these vendors and to focus attention on supply chain planning.

Brightwork MRP & S&OP Explorer

Improving Your Supply Planning, MRP & S&OP Software

Brightwork Research & Analysis offers the following supply planning tuning software, which is free to use in the beginning. See by clicking the image below:

 

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 Understand DDMRP as Yet Another Repackaging of JIT and Lean

Executive Summary

  • The Demand-Driven Institute has created the DDMRP concept which began with a perversion of Orlicky’s 3rd edition MRP Book.
  • DDMRP is very simply a repackaged of JIT and Lean.

Introduction: The Real Story into DDMRP

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

DDMRP is an adjustment to MRP that is proposed to improve MRP systems outcomes greatly. 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 beginning to be known. Orlicky died in 1986. In 1994 the 2nd edition of Orlickly’s MRP was written/adjusted by George Plossl. I am not a big fan of the 2nd edition of books being written by authors other than the original author. This is apparently 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 merely 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.”

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 a 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, then 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. 

JIT as Esoteric

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 merely consists of imposing unrealistic proposals on 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. 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 this How to Understand Forecastable Unforecastable Formula.

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) on 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.

Basing MRP on Sales Orders

Secondly, how does basing MRP on sales order reduce the cost of expediting? 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 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 an exaggeration than Larry Ellison or Steve Jobs).

No Inventory Method is Designed for 98%

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.

Actual Percentage of Make to Order Products?

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 are received. It does not mean that stock is maintained until an order is received and then manufacturing begins from that point. That is called assemble to order, and is a different thing altogether.

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”

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.

MRP Versus More Advanced Supply Planning Methods

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 entirely 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?

Why is Inventory Carried…..Again?

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.

How To Understand Trendiness in Supply Chain Management

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.

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 side. 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 to the traditional methods of stock level setting. It is different, and therefore more difficult to validate, but is it better? Overall DDMRP has nothing that strikes me as having contributed 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 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 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 straightforward 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 Multi-echelon (MEIO) is more mathematically sophisticated than MRP. In fact, there is nothing in MRP beyond arithmetic (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 multi-echelon 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 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 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.”

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 forecasted efficiently is an important strategy in both improving stocking positions, but also in allocating the scare time available in overburdened 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

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 interested 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 suspicious 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 shortcomings of your approach.

Admitting 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 everyone 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 optimization.

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 two together that the applications need 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 optimization.

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 on resumes, but little time to determine if 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 skepticism 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 has to read it for oneself. In 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 an excellent 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 also 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 let’s 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 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 too complicated 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 exaggerated 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 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 the 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.

This is 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 a seven percentage point service level than they do, and there is virtually 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.

The problem with DDMRP is it put forward an illusory magic solution for supply planning. DDMRP requires a great deal of adjustments on the part of companies that implement DDMRP, extensive new training, etc..

One of the primary claims of DDMRP is that standard MRP does not work. However, the bigger or more central issue is that MRP systems are poorly maintained. Whenever we extract parameters from an MRP or other supply planning system we find a wide variety of irregularities. Since the 1990s, multiple vendors have proposed that MRP was no longer relevant and that companies needed to move to cost optimization, allocation, heuristics or inventory optimization.

The net result?

The vast majority of products planned in the US and Europe are planned by the MRP procedure. DDMRP is in our view just another in a list of supposedly better methods of supply planning that reduces the incentive to focus on the key areas that are necessary for improving MRP.

The Problem: Maintaining Inventory Parameters

A major part of replenishment is inventory parameters. These parameters include values like safety stock or days of supply, rounding value, reorder point, lot size/economic order quantity and minimum order quantity. Whatever the planning procedure that is used, these parameters control what the supply planning system does.

Testing of the extracted parameters of ERP and external supply planning systems clearly shows that these values are poorly maintained. The result is far worse planning results than could be obtained otherwise.

Being Part of the Solution: Our Evolution of Thinking on Maintaining Reorder Points in ECC or APO

Maintaining inventory parameters like rounding values and lot size in systems comes with a number of negatives that tend to not be discussed. One issue is that when using ERP systems, inventory parameters are typically managed on a “one by one” basis. This leads to individual planners entering values without any consideration for how inventory parameters are set across the supply network. After years we have given up managing safety stock or other inventory parameters in we now calculate inventory parameters in our application, the Brightwork Explorer, and then simply upload the data into the ERP system. See our link below. We have developed a SaaS application that sets the inventory parameters that allow for simulations to be created very quickly. These parameters can then be easily exported and it allows for far more control over the parameters. In our testing, the approach, which is within the Brightwork Explorer is one of the most effective methods for managing planning in any system. This approach is laid out in the book How to Repair Your MRP System.

In our testing, the approach, which is within the Brightwork Explorer is one of the most effective methods for managing planning in SAP applications.

References

One of the questions we have considered is whether DD-MRP is logical, which is a high maintenance change to MRP, or if instead MRP and supply planning software can be tuned with an external application.

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

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

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

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

Orlickly’s Material Requirements Planning, 3rd Edition, Carol Ptak and Chad Smith.

DDMRP: Demand Driven MRP, Carol Ptak and Chad Smith.

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

*https://www.brightworkresearch.com/supplyplanning/2016/11/28/forgotten-supply-driven-supply-chain/

https://www.orlickysmrp.com/

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

Why Magical Ideas Are More Appealing than Standard Supply Planning

Executive Summary

  • Magical thinking permeates supply planning over implementing the fundamentals.
  • We explain why this is the case.

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 should be discussed is why the dynamic safety stock calculation is 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.
  • Trendy concepts that have far less important than the real substance of inventory management are overemphasized.
  • 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.

The commonality of Magical Beliefs Outside of Supply Chain

If we step back from supply chain for a moment, we can see a number of consistencies regarding non-scientific thinking.

  • 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.
  • Around 1/2 of the population does not think global warming is an issue.

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 they 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

https://news.gallup.com/poll/207119/half-concerned-global-warming-believers.aspx

Brightwork MRP & S&OP Explorer for Tuning

Tuning ERP and External Planning Systems with Brightwork Explorer

MRP and supply planning systems require tuning in order to get the most out of them. Brightwork MRP & S&OP Explorer provides this tuning, which is free to use in the beginning. See by clicking the image below:

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

Executive Summary

  • There is a putaway and goods receipts which involves the confirmed goods received post goods issue and post goods receipt.
  • There is also a putaway process.

 

Introduction to the Putaway Process

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 is 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 good post receipt will typically 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 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.

Brightwork MRP & S&OP Explorer for Constraining

Improving Your Constraint Planning

Brightwork Research & Analysis offers the following supply planning tuning software with a new approach to managing capacity constraints, which is free to use in the beginning. See by clicking the image below:

 

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 Use ABC Inventory Classification

Executive Summary

  • ABC classification or ABC inventory is a way of segmenting inventory so that the product location combinations can be managed.
  • We cover how ABC classification works and how it compares to other comparative methods of segmentation.

Introduction to ABC Classification

ABC classification is probably the most common way of performing the 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

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 by 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 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.

Brightwork MRP & S&OP Explorer for Tuning

Tuning ERP and External Planning Systems with Brightwork Explorer

MRP and supply planning systems require tuning in order to get the most out of them. Brightwork MRP & S&OP Explorer provides this tuning, which is free to use in the beginning. See by clicking the image below:

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

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 Calculate Supply Chain Lead Times

Executive Summary

  • We cover how to calculate overall supply lead time, customer lead time, supply lead time in inventory.
  • This describes how to calculate lead times and overall lead time calculation.

Introduction: What Makes Up the Lead Time?

Lead times are one of the major timing elements within the overall subject of supply chain planning. This article will cover lead time in several dimensions and focus on lead time calculation.

We will start off with the lead time definition and discuss the lead time’s function in the supply chain. You will learn all of the sub-lead times that constitute the overall lead time.

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 planning and are what when combined to make up the time from when the order is placed until the time the order arrives.

  • These are all terms that describe lead times specific to supply chain management.
  • Lead times are of course also a general term that can apply to non-supply chain topics. For example, a product plan results in calculating a series of lead times for completing various stages of a project, as well as the overall product duration.

Lead times are normally not shown graphically in supply planning systems, however, if they were — they would look something like a project plan. That is lead times are a sequence of dependent durations with relationships. Manufacturing can’t commence upon material until the material arrives, and the material can’t arrive, until the time has passed from the order, etc..

Auto Lead Time Calculation of Interdependent Lead Times in Supply Planning Systems

In a supply planning system, all of these dependencies are calculated every time and sales order is created.

  • The system knows that if a sales order is desired for say August 20th.
  • The procurement order for input item ABC must be made on May 12
  • The overall production order must commence on July 5th, etc..

Supply Side: Supplier, Manufacturing, Purchasing, and Shipping Lead Times

The total lead time is the time required to complete a supply chain process required to provide the product to a customer. The overall lead time is made up of the following sub-lead times from the supply side:

  1. Supplier Lead Time or Supply Lead Time
  2. Manufacturing Lead Time
  3. Purchasing Lead Time
  4. Shipping Lead Time

Demand Side: Customer Lead Time and Order Lead Time

Additionally, there are lead times from the demand side.

This includes:

  • Customer Lead Time
  • Order Lead Time

These are more hypothetical lead times with it comes to supply planning and are measurements of lead time that occur before the order is placed.

How is The Supply Lead Time Incorporated into Inventory Management and Safety Stock

  • Supply lead time inventory is made up of the portion of the inventory that is held without any variability.
  • Safety stock is made up of inventory that accounts for variability or uncertainty on both the demand and supply side. And with a dynamic safety stock formula, the service level is another category of the safety stock.
  • Safety stock for the lead time in inventory would then be where the variability (which is always higher as only the variability above the baseline is what is calculated in safety stock) of the lead time is maintained.

Supply Lead Time Analysis

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

How to Calculate Lead Time, Lead Time Calculation and How to 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 to be calculated is a total lead time. This means having a lead time calculator that combines multiple component lead times that are shown above.

How Effective is Putting Effort into Reducing the Lead Times?

There is often discussion of expediting the various lead times. Process improvement or Six Sigma or Lean consultants often propose simply reducing lead times.

The proposal is often stated as..

“If we can reduce our lead times, by ABC% we could reduce our inventory by ZYX%.”

The consultant will often present the information as if there are many companies that have had success in reducing lead times. Lean consultants tend to have a philosophical problem with any constraints that exist in the supply chain. Their training is designed around altering the constraints rather than adjusting to these realities. These consultants will propose working with suppliers or using various forms of expediting.

The problem with this is that it tends to provide a false impression of the actual constraints. And secondly, it tends to be proposed by people with a background in areas other than the domain of supplier management and shipping. That is the lead times that exist are typically there for a reason.

Lead times reduction projects ten to take a lot of time, and most of them don’t work out. In the interim, the supply planning systems need to reflect the lead times as they are.

Applying the Wal-Mart Strategy with Suppliers?

Wal Mart is often pointed to as a company that is able to get suppliers to make major adjustments for them. However, there is an obvious and serious problem in projecting what Wal-Mart has done and can do with suppliers to other companies.

  • Unless the company being discussed is a substantial percentage of the supplier’s business, it is unlikely the supplier is interested in adjusting its operations to suit one supplier. The lead time is configured around the cost that is negotiated. As soon as a shorter lead time is requested, this is a change to the terms of that arrangement — and the buyer needs to expect to pay more for the same items. Lean consultants tend to make it sound as if suppliers will simply change the terms of the transaction without any request for extra compensation. Suppliers that won’t conform to the expectations of the Lean consultant are often categories as “difficult.”
  • When the proposal is made by a Lean consultant, it typically is just one of the areas that he is trying to pitch to justify his cost billing the account.
  • Suppliers are ordinarily already trying to get products to their customers as quickly as is financially feasible. Suppliers know that customers are including lead times or “responsiveness” into their evaluation of who they will select as a supplier.
  • The Lean consultant may propose switching to different suppliers with shorter lead times, however, this is normally only done at a higher cost.

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). A second area that is proposed is that the current manufacturing lead times can be reduced.

Reducing Manufacturing Lead Times?

Again, in many cases it is possible, but only at considerable expense. This often means installing more machinery or adding more machine operators. Overall manufacturing capacity is frequently reduced (and therefore lead times lengthened) through the process of product proliferation. Therefore manufacturing capacity could be increased and lead times reduced by cutting down on changeovers — but this is typically not acceptable to marketing.

Realizing The Reality of Lead Times

It is rare for companies to actually substantially reduce their lead times. That is, lead times tend to be far more fixed than is often promoted by various process improvement consultants. Therefore, rather than being distracted by concepts around reducing lead times, the most important function is to simply reflect the lead times in the supply planning system. Any inaccuracy of the lead times impacts the accuracy of the supply plan the same way that a forecast error would.

The Typical Accuracy of Lead Times Residing in Supply Planning Systems

Lead times normally have a level of inaccuracy, and companies typically put very little effort into updating their lead times. That is once a lead time is entered into the system, it is likely to stay there for many years. Companies will often talk about their lead time inaccuracies but normally will not make it a priority to modify or update the lead times. If a company reduces lead time inaccuracy by say 10%, this has the same impact on the accuracy of the supply plan as a 10% reduction in forecast accuracy.

Finally, with the use of so many suppliers in so many industries that are driven by cost considerations, it means that the lead times have actually lengthened in the developed countries. Many input products for at least some industries come from China. Companies could have sourced those products from the US, but they preferred the higher margins of Chinese manufacturing.

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 to 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 merely 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 managed efficiently 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 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.

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

In this article, we defined lead time, and we covered lead time analysis which requires lead time calculation.

However, to calculate lead time and develop an accurate lead time calculator and perform 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..

There are a number of topics around lead time accuracy and the opportunity to reduce lead times. However, the role in supply planning with lead times is to try to reflect the actual lead times within the supply planning system.

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.

Brightwork MRP & S&OP Explorer for Tuning

Tuning ERP and External Planning Systems with Brightwork Explorer

MRP and supply planning systems require tuning in order to get the most out of them. Brightwork MRP & S&OP Explorer provides this tuning, which is free to use in the beginning. See by clicking the image below:

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

How to Plan Long Lead Time vs Short Lead Time Items

Executive Summary

  • Lead time has a definition and has different categories.
  • Important topics are lead-time accuracy, effective lead time, static versus effective lead time and long lead time versus short lead-time items.

Introduction: Lead Time as a Foundational Concept

Lead times are always in the background but often overlooked in supply chain management. Even central concepts such as Lean or JIT are based upon (in part) a misunderstanding of lead times versus the replenishment trigger.

You will learn the common lead time categories and our analysis of common (and commonly confusing) lead time topics.

What Are Lead Times?

Lead times are the time between locations to within, or from a supply network.

The term lead time often includes processing at the beginning or end of the main consuming component. For instance, a standard lead time definition will consist of the total supplier or customer lead times include the transportation lead time.

Common Lead Time Categories

The following are common lead times that we will define.

  • Manufacturing Lead Time Definition
  • Procurement Lead Time Definition
  • Stock Transfer Lead Time Definition
  • Transportation Lead Time Definition
  • Goods Issue Lead Time Definition
  • Goods Receipt Lead Time Definition
  • Quality Inspection Lead Time Definition
  • Setup Lead Time Definition
  • Total Lead Time Definition

Manufacturing Lead Time Definition

The time from when the production order is created to when the finished good is available.

Procurement Lead Time Definition

The time from when the procurement order is placed to when it is received.

Stock Transfer Lead Time Definition

The time from when an item is issued from one internal facility to when it is received into another internal facility. Identical to the procurement lead-time, except it covers internal shipments rather than receiving shipments from external sources.

Transportation Lead Time Definition

The time from when an item is shipped to when it is received.

Goods Issue Lead Time Definition

The time from when an item is released to when it is available (normally for production or for shipment)

Goods Receipt Lead Time Definition

The time from when the item is received to when it becomes available as inventory.

Quality Inspection Lead Time Definition

The time from when an item is released to when it passes quality inspection.

Setup Lead Time Definition

A subcomponent of the overall manufacturing lead-time.

Total Lead Time Definition

Not a standardized term as there is no “total lead time” within a system. Rather it is a conceptual term.

Normally it is the entire time from when an order is placed until the item is delivered.

Notice that some these lead times are not referred to as “lead times.” For instance, one would ordinarily use the term “setup time” rather than “setup lead time.” However, the setup time is a lead-time as it is a time required to complete a task.

The Importance of Lead Time Accuracy

One of the major related issues with the lot size determination is data quality and accuracy of lead times. For a supply planning system to calculate accurate dates, the system must have lead times that reflect the reality of operations. The problem is that lead times often differ quite substantially from reality.

  • It should be noted that there is often a lead time variance from suppliers.
  • There can also often lead time variances in manufacturing as well as outbound transportation.

Interestingly this is not an issue that is discussed within companies. But it should be because it is a much wider problem than generally understood. And while there is a universal interest in forecast accuracy, lead time accuracy is often overlooked.

What is Lead Time and the Lead Time Meaning

Lead time meaning 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
  • Manufacturing Lead Time
  • Purchasing Lead Time
  • Shipping Lead Time

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

  • Customer Lead Time
  • Order Lead Time

The Customer lead time and order lead time are considered to be synonyms.

Therefore when the question “what is lead time” the answer depends on what lead time is being discussed.

Many companies make very high profits by importing products made in low wage countries. These products mostly come by ship and have long lead times. While many Lean consultants have preached about lowering lead times, this outsourced manufacturing to these low wage countries has caused lead times to lengthen quite significantly. However, the profits are so high on these items from a financial perspective, it makes sense to accept the long lead times. 

Long Lead Time Items and Short Lead Time Items

A product location database can be segmented by the length of the lead time. What is considered a long versus short lead time can change depending on the company.

For many US companies, the division between long lead time items and short lead time items is whether the product is sourced from overseas (often China) or domestically sourced. Of the products that are locally sourced cost more, but come along with short lead times.

Long lead time items must be planned considerably differently than short lead-time items, and there is less margin for error. Long lead time items must carry more safety stock than short lead-time items to make up for this.

How to Reduce Lead Time and The Feasibility of Lead Time Reduction

Often it is proposed that one can reduce lead times and therefore reduce the impact of lead times on supply chain planning. But really, what is the feasibility of lead time reduction? It turns out that there are normally few options to reduce lead times. The lead time that has the highest feasibility of lead time reduction is normally shipping lead time.

However, shipping lead time is also normally expensive to reduce. And the supposed case studies that often are used to show the feasibility of lead time reduction tend to have little-published detail about them, and therefore are difficult to verify independently.

How to Calculate Lead Times

To properly understand lead times, it is beneficial to view the subcomponents of lead times to determine what makes up the overall lead time. We covered this topic in the article How to Best Calculate Lead Times.

The Definition of Effective Lead Time

Up until this point, we have covered lead times as entered in systems, or static lead times. However, there is another type of lead time that is important to understand that changes depending upon the specific circumstance of demand and applied to the supply network. This is the concept of effective lead time.

Effective lead time is only modeled if the category of supply planning software call multi-echelon planning is used.

  • Different demand levels, lead to different circumstances and different needs to move to a higher echelon in the supply network.
  • The most important thing to consider is that while lead times between locations do not change (in the short term) effective lead times do change.

For software to be considered multi-echelon, it must have the ability to reflect the changes in effective lead time in its planning. This, combined with inventory optimization, which is a different set of mathematics. It is what allows the software to position inventory to the right location properly. To select the right quantity based upon the demand, the current stocking position, and the service level.

It can also be described graphically which can allow the reader to more intuitively understand what effective lead time is.

effecive-lead-time

Other Users of the Term Effective Lead Time

Another use of the term is when a company needs to determine if it has the raw materials/components/packaging material to make an order quantity. If a company can produce the sales order quantity from safety stock of all input materials, then the effective lead time is the production lead time.

If the order quantity exceeds this, the effective lead time must include the procurement lead time.

This is covered in more detail in this article.

How Can One Use the Concept of Effective Lead Time?

Interestingly, the term “effective lead time“ is unique to a special class of supply planning software, but is still useful to understand as a concept even if that category of software is not used.

Effective lead-time is the total lead-time required to deliver the product to its final destination. It is variable and dependent upon the stocking positions of higher echelons in the supply network. This is a conditional concept of lead time. A conditional concept of time for a lead time is quite foreign to the normal usage of the term lead time, which is static and hard-coded into a system.

When higher-level locations must be called upon to satisfy a demand, this lengthens the lead time.

In the excellent paper by Cohen, Agrawal, and Agrawal on dynamic asset deployment, this is described as follows.

“Similarly, investing in additional safety stock at a central depot reduces the effective lead-time for replenishment at the “child” locations connected to it. This lead-time reduction will, in turn, affect the stocking requirements at the child locations. Alternatively, such decisions are often constrained by the budgets allocated to the service organization. Consequently, if a particular asset is assigned to a specific location, it affects what can be assigned to other locations. Thus, the service levels that can be offered to customers at various locations are affected by these decisions, and are, therefore, interrelated; a high level of service to one customer may imply a lower level of service to another.” – Achieving Breakthrough Service Delivery Through Dynamic Asset Deployment Strategies, Cohen, Agrawal and Agrawal 2004 

Conclusion

The lead time meaning is the time required to complete a supply chain process.

Lead times are one of the most important foundational components of supply chain planning. Many of the misunderstandings when it comes to business process or supply chain planning systems have their source in a faulty understanding of lead times. A good example of this is the notion that companies can simply switch to a make to order manufacturing environment.

  • Some things that many people do not think of as lead times are in fact lead times.
  • Lead times in most systems are static. But in some systems, they can be variable and dependent upon changing circumstances.

Lead times are any passing of time that can contribute to the time required to make something in the supply chain occur.

One of the most important lead time distinctions in companies is short lead-time items versus long lead time items. Most companies treat the planning of short lead-time items quite differently from long lead time items.

What is often not included in cost calculations for moving to lower-cost items with long lead time items is the increased inventory costs which as well as planning and update costs which are incurred by accepting longer lead times.

Lead times which change depending upon the circumstance of demand versus the inventory or planned inventory in the supply network are called effective lead times. The only supply planning method that calculates effective lead times is classified as inventory optimization and multiechelon software.

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

How to Best Understand Inventory Planning

Executive Summary

  • Inventory planning differs from supply chain execution.
  • We cover the major aspects of inventory planning.

Introduction

This article will provide an overview as to many topics related to inventory planning, stock planning and inventory and stock inventory.

How to Best Understand Supply Chain Inventory

In supply planning, inventory is that product that his held in the company’s supply network to satisfy demand.

In this article, you will learn the various reasons for holding supply chain inventory. 

Inventory and the Manufacturing Environment

Finished goods inventory is necessary for make to stock environments. Component inventory is necessary in assemble to order environments. In make to order environments, if followed faithfully, no inventory should be necessary. Fundamentally inventory is necessary due to the lag between when a product is demanded, and when it can be supplied.

Sales and Statistical Forecasting Combined: Mixing Approaches for Improved Forecast Accuracy

Like the question of what is inventory, the reasons for holding inventory or stock inventory boil down to the fact the lead-times for production and procurement are longer than the customer demand lead-time.

Not all companies need to forecast all of their finished goods products. One example of this is defense contractors that frequently know years in advance, what they will build as they have firm contracts containing quantities and dates from the government.

However, even these companies are still required to create forecasts for the service parts that support the products that they sell.

How is Inventory Positioned? 

Inventory is positioned in different locations by the supply planning system. The assumptions that the software uses to perform positioning very much depends upon the supply planning method selected. Most methods of supply planning plan each location independently of other locations. Only inventory optimization software position inventory while considering the inventory position of the related locations. This is covered in the article The Multiechelon Definition.

What Makes Up Inventory?

The total inventory at a location is the total stocking level, which is made up of cycle stock (the stock held between ordering) and safety stock (the stock designed to ensure there is enough stock to satisfy demand while mitigating demand and supply variability)

  • The total stocking level is not necessarily the correct amount of stock that should be held.
  • This is referred to as the target stocking level (only MEIO vendors refer to it like this, but it is quite a logical term)

What are the Functions of Inventory to Keep Inventory, or the Reasons for Holding Inventory and to Stock Inventory?

Fundamentally the functions of inventory are to allow the company or entity to have something available at the time of sale. The reason for holding inventory or to stock inventory is because, in the vast majority of cases, the lead time required by the customer, or the order period is shorter than the

The reason to keep inventory or to stock inventory is because, in the vast majority of cases, the lead time required by the customer, or the order period is shorter than the replenishment lead time. This is the reason to keep inventory or stock inventory because not to do so will result in not being able to fulfill demand.

Understanding how the various lead time connects is required to get to the essence of the functions of inventory.

The True Reasons for Holding Inventory

This is important to consider the true reasons for holding inventory. This is because many Lean inventory advocates propose that stock can be drastically cut and in fact refer to inventory as a liability.

That is technically inaccurate. When inventory is excessive that portion of the stock is a liability, but it is only really a liability if the inventory is either not used or if it is significantly marked down when sold.

The costs of carrying inventory for short periods of time is quite low. And of course, the cost of having a stock out is much higher than having too much inventory. Therefore the reasons for holding inventory really required illumination.

What is Inventory Planning and Stock Planning and the Stock on Hand?

Inventory planning or stock planning is the analytical process of determining the stocking levels throughout the supply network. This means planning for every product location combination in the supply network. Inventory planning or stock planning can be based on two primary approaches; one is forecast based planning and the second is consumption based planning.

The stock on hand is the stock at each product location combination (if the overall supply network that is being discussed) that the company has in inventory. The stock on hand can also apply to a specific product location combination, such as a particular product material in a specific distribution center.

What is the Difference Between Forecast Based Planning and Consumption Based Planning?

These two major approaches, which contain a large amount of detail below each are the following:

  1. Forecast Based Planning: This is where a forecast is used by the system to drive the ordering logic.
  2. Consumption Based Planning: This is where the consumption of the stock drives the ordering logic.

There is no need for a company to choose exclusively forecast based planning or exclusively consumption based planning as all supply planning applications contain settings for both, and their forecast based planning or consumption based planning can be used for specific product location combinations.

What is an Inventory List, a list of Inventory Items, Product Inventory or an Inventory Database?

The inventory list or the list of inventory items is the product inventory or inventory database that the company maintains. The inventory list or list of inventory items is not specific to a location, so will always be far lower than when locations are brought into the analysis. This is why it is always important to specify whether one means the inventory database or the inventory database per location.

Any inventory list should be reviewed for whether some of the products on the list of inventory items should be removed. This is because the inventory list has a way of proliferating over time due to things like new product introductions.

Replenishment Lead Time, Procurement Lead Time, Manufacturing Lead Time and Shipping Lead Time or Lead Time for Delivery

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 or Lead Time for Delivery

For Procured Products

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

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 or lead time for delivery. The shipping lead time or lead time for delivery can normally only be expedited at a considerable expense (unless the product in question is of high value and low weight)

There are cases where the opposite occurs, where the total fulfillment lead time is shorter than the order lead time. Examples of this include defense contracting and custom suits. While it receives a very high amount of coverage, this is in actuality a very small portion of the overall market that is as made to order. Make to order products tend to be premium priced, and many products that are thought to be made to order (such as configurable computers) are not made to order at all, but in fact, assemble to order.

Introduction to Inventory Segments

In this article, we will cover many of the different ways that inventory can be divided or segmented.

The Concept of Types of Inventory, Inventory Types, Categories of Inventory, Inventory Categories and Inventory Classification

There are many concepts of the types of inventory, inventory types, categories of inventory or inventory categories that are used in supply chain management. Some of these have to do with how the types of inventory or inventory types are treated by the supply planning system. For instance, high-value product inventory may be set on different supply planning settings that low-value product inventory.

Categories of inventory or inventory categories can be based upon what that inventory does. That is, is the inventory a raw material, a finished good, a component, work in process, etc. Understanding these categories of inventory is important both for working with others (so you can have a shared understanding of the meaning of different categories of inventory) but also to decide which of the inventory categories one may want to use themselves.

Target Stocking Level, Safety Stock Level, and the Initial Stock Level

One way of looking at inventory is the total amount of inventory in the system or the inventory at a stocking location in total. This can be viewed as the actual inventory versus the target inventory.

The target inventory or target inventory level is often made up of the following conceptual components.

  • TSL: The Target Stocking Level
  • SS: The Safety Stock Level
  • ISL: The Initial Stock Level

Each of these different stocks is shown in the following graphic:

tsl-or-safety-stock

  • Using this inventory optimization construct, a portion of the total stocking level is the safety stock, and another portion is called the ISL or initial stocking level.
  • The initial stocking level would be the target stocking level if no supply or demand variability were to exist.

Segmentation Of Inventory by Inventory Usage

  • Inventory has multiple inventory uses.
  • It can be categorized into multiple inventory types.
  • By categorizing inventory and evaluating the allocation of the overall inventory into the different uses and types, one can gain a measure of the relative impact on overall inventory of these segments.
  • It is also valuable to consider what the actual function is the inventory that is carried.

Types of Inventory, Inventory Classification, and Inventory InfoGraphic

The following infographic shows the types of inventory and inventory classification by two different dimensions.

inventory-categories

Functions of Inventory: Anticipation Inventory, Goods in Transit or Stock in Transit, or Transportation Inventory, Pipeline Inventory, Lot Size Inventory and Hedge Inventory or Speculative Inventory

Another way to categorize inventory is by its function.

  •  Fluctuation Inventory: Fluctuation inventory is inventory that is carried to account for variability in either demand or supply. The technical definition of this is safety stock.
  • Anticipation Inventory: Anticipation inventory is inventory that is held in anticipation of specific or unusual demand. It goes without saying that all inventory is “anticipatory” in nature unless the stock has been sold already, but what makes anticipation inventory different from normal inventory is that there is a reason that can be pointed to for carrying more inventory than normal. A very common example of anticipation inventory is inventory carried specifically for weather events.
  • Goods in Transit, Stock in Transit or Transportation Inventory: Goods in transit, stock in transit or transportation inventory is stock that is somewhere in the process.
  • Pipeline Inventory: Pipeline inventory is a subset of transportation inventory. However, pipeline inventory is only the portion of the stock in transit inventory that it is outbound to the customer.
  • Lot Size Inventory: A lot size is an order size that in many cases are larger than the demand. The lot size is applied to keep companies from purchasing in “non-economic” quantities, which means quantities that would incur overly high transaction costs. The resultant lot size inventory, therefore, is the inventory that is carried not because of need, but because the lot size required the quantity to be increased. Lot size inventory is differentiated from inventory that is purely demand driven.
  • Hedge Inventory or Speculative Inventory: Hedge inventory or speculative inventory is inventory that is carried above what would ordinarily be carried to meet the demand for a speculative purpose. If an entity were to conclude that some input material has a high chance of becoming more expensive in the future, then it would make sense for that entity to purchase and carry hedge inventory or speculative inventory which would reduce its cost of material acquisition. Hedge inventory or speculative inventory would tend to be the most common in raw materials, as the raw material can be converted into so many output items and never really becomes obsolete.

Classes of Inventory: Raw Materials Inventory and Raw Materials Examples, Components Inventory, Work in Process Inventory, Finished Goods Inventory

Another way to classify inventory is of its class.

  • Raw Materials Inventory: Raw Materials Inventory is the material that is in a very basic stated with little manufacturing or other processing performed by the supplier. Raw materials examples are things like gold, copper, grain, industrial powders, raw milk, etc. Raw materials examples will tend to be shipped in bulk.
  • Component Inventory: Component inventory is inventory that is a recognizable part or assembly that goes into the finished goods. When component inventory is held until a sales order is received, this is called assemble to order manufacturing.
  • Work In Process Inventory: Work in process inventory is material that has is somewhere along in the manufacturing process but is not yet a finished good or finished product.
  • Finished Goods Inventory: Finished goods inventory may be in storage at the factory right after manufacture, or finished goods inventory can be anywhere in the outbound supply chain. For entities that distribute an item rather than manufacture an item, these entities receive finished goods inventory from suppliers.

What is The Role of the Inventory Clerk and the Inventory Manager?

The inventory clerk is the individual how touches the inventory and does things like the physical inventory. Although the term inventory clerk is a bit dated. The inventory manager performs inventory planning and also expediting of things like purchase orders and production orders. While the inventory clerk is entirely execution-focused, the inventory manager must often keep inventory stock on hand below a certain cap, while attaining service level targets.

What is an Inventory Planning System?

An inventory planning system can refer to either an approach or to software applications that implements a particular inventory planning system.

Conclusion

The functions of inventory are to have the right amount of stock on hand when demands are received to meet expected service levels expectations. The foundational functions of inventory are to compensate for where the order lead time is shorter than the replenishment lead time.

While inventory planning and stock planning is certainly not a high profile activity, it is of great importance.

Inventory planning and stock planning has been greatly changed through the introduction of both inventory planning or supply planning software and the use of general tools like spreadsheets. These tools allow the inventory manager and others to manage far more inventory more effectively than they did in the past.

Inventory is controlled by the supply planning system and is designed to be moved and stocked to satisfy future demand. The reasons for holding inventory are often not fully explained and the costs of maintaining inventory versus not having inventory when it is needed, are in most situations not quantified.

The Problem: Maintaining Inventory Parameters

A major part of inventory management is inventory parameters. These parameters include values like safety stock or days of supply, rounding value, reorder point, lot size/economic order quantity and minimum order quantity. Whatever the planning procedure that is used, these parameters control what the supply planning system does.

Testing of the extracted parameters of ERP and external supply planning systems clearly shows that these values are poorly maintained. The result is far worse planning results than could be obtained otherwise.

Being Part of the Solution: Our Evolution of Thinking on Maintaining Reorder Points in ECC or APO

Maintaining reorder points in APO or ECC comes with a number of negatives that tend to not be discussed. One issue is that when using APO or ECC, the reorder points are typically managed on a “one by one” basis. This leads to individual planners entering values without any consideration for how inventory parameters are set across the supply network. We have developed a SaaS application that sets the inventory parameters for ECC or APO or both systems externally, and that allows for simulations to be created very quickly. These parameters can then be easily exported and it allows for far more control over the parameters in APO and ECC. Both APO and ECC are designed to receive parameters, they are not designed to develop the parameters.

In our testing, the approach, which is within the Brightwork Explorer is one of the most effective methods for managing planning in SAP applications.

Brightwork MRP & S&OP Explorer for Order Optimization

Order Sizing and Optimization

Order optimization is necessary in order to get the predicted value from ERP and other supply planning applications. The Brightwork MRP & S&OP Explorer does exactly this, and it is free to use in the beginning until it sees “serious usage.” It is permanently free to academics and students. See by clicking the image below:

 

References

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