The Power of Decoupling

Unlocking the Secret to Demand Driven

Material Requirements Planning (DDMRP)

The First Law of Supply Chain

• All benefits will be directly related to the speed of FLOW of materials and information.

Materials & Information

Information

"All Benefits" Encompass:

• Service is consistent and reliable when a system flows well.

• Revenue is maximised and protected.

• Inventories are minimised.

• Expenses ancillary and/or unnecessary are minimized.• Cash flow follows the rate of product flow to market demand.

Protect and Promote Flow = ROI Maximisation

3

4

“Never mistake activity for achievement.”

John Wooden

The First Law of Supply Chain

• All benefits will be directly related to the speed of FLOW of materials and information.

5

Materials & Information

Information

Caveat:

Materials and Information must be RELEVANT!!!

Conventional Planning Systems

Do They Promote the FLOW of Relevant Information and Materials?

6

Two Universal Points of Inventory

7

Too MuchToo Little

A B

0

Optimal RangeWarning Warning

Note: “Optimal” is from an on-hand perspective

The MRP “Bi-Modal” Distribution

8

Too MuchToo Little Optimal Range

# o

f p

art

s o

r S

KU

Warning Warning

0

The Effects of the Bi-Modal Distribution

Too MuchToo Little Optimal Range

# o

f p

art

s o

r S

KU

Warning Warning

Oscillation

0Three Simultaneous Effects:

1. Persistently High Inventories

2. Chronic and Frequent Shortages

3. High Expedite and Waste Related Expenses

“How can we have so much inventory and not be

able to ship orders?!”

“We paid for fast freight now we don’t need it?!”

Enemy #1 to Flow

The Transference and Amplification of System Variability

The Bull-Whip Effect• Bull-Whip Effect: “An extreme change in the supply

position upstream in a supply chain generated by a small

change in demand downstream in the supply chain.

Inventory can quickly move from being backordered to

being excess.” (APICS Dictionary, 12th Edition)

OEMFoundry ComponentSub-

Assembler

Distortions to relevant information

Distortions to relevant materials

A Bullwhip Example

Decoupling

Stopping Transference and Amplification of Variability

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Establishing Decoupling Pointsdecoupling —Creating independence between supply and use of material. Commonly denotes providing inventory between operations so that fluctuations in the production rate of the supplying operation do not constrain production or use rates of the next operation. (APICS Dictionary, 12th Edition, page 34, Blackstone 2008)

decoupling points —The locations in the product structure or distribution network where inventory is placed to create independence between processes or entities. Selection of decoupling points is a strategic decision that determines customer lead times and inventory investment. (APICS Dictionary, 12th Edition, page 34, Blackstone 2008)

Customer Tolerance Time

Market Potential Lead Time

Demand Variability

Supply Variability

Inventory Leverage & Flexibility

Critical Operation Protection

The amount of time potential customers are willing to wait for the delivery of a

good or a service.

The lead time that will allow an increase of price or the capture of additional

business either through existing or new customer channels.

The potential for swings and spikes in demand that could overwhelm resources

(capacity, stock, cash, etc.).

The potential for and severity of disruptions in sources of supply and/or specific

suppliers. This can also be referred to as supply continuity variability.

The places in the integrated BOM structure (the Matrix BOM) or the distribution

network that leave a company with the most available options as well as the best

lead time compression to meet the business needs.

The minimisation of disruption passed to control points, pace-setters or drums.

The third edition of Orlicky’s Material Requirements Planning by Carol Ptak and Chad Smith, McGraw-Hill Professional, 2011, p. 392)

Decoupling Point Selection Factors

15

MRP = No Decoupling• Nervousness: “The characteristic in an MRP system when minor

changes in higher level (e.g. level 0 or 1) records or the master production schedule cause significant timing or quantity changes in lower level (e.g. 5 or 6) schedules or orders.” (APICS Dictionary 12th Edition, Blackstone, 86)

FPA

ICA SAA

SAB ICB

PPB PPC

PPA

SAG

PPEPPD

FPB

SAL

PPZPPA

SAA

ICBPPA

SAG

PPEPPD

◄ChangeICB

SAA

FPA

SAG

PPEPPD

SAA

FPB

Output Lead time

The Law of System Variability

Delays accumulate while gains do not = SUPPLY CONTINUITY VARIABILITY

• The more that variability is passed between discrete areas, steps, or

processes in a system, the less productive that system will be.

• The more areas, steps, or processes and connections in the system, the

more erosive the effect to system productivity will be.

The Bull-Whip Effect – An Explanation

OEMFoundry ComponentSub-

Assembler

NERVOUSNESS

SUPPLY CONTINUITY VARIABILITY

MRP (Everything Dependent) versus Strategically Decoupled

19

MRP Everything Dependent Strategically Decoupled

Buffering Decoupling Points

20

Buffer Profiles and Levels

Profile Attributes

• Part Type (made, bought, distributed)

• Lead Time Classification (short, medium, long, etc.)

• Variability (low, medium, high, etc.)

• Large Order Multiples (relative to usage rates)

Individual Part Traits

• Average Daily Usage (ADU)

• Lead Time

– ASR LT (make part)

– Purchasing LT (buy part)

– Transportation LT (distributed

part)

• Ordering Policy (min, max, multiple)

• Location (distributed parts)

21DDMRP Intro

Forecast, Historical Usage, Demand Sensing

Average Daily

Usage (ADU)

Buffer Levels at Chosen Decoupling Points

Buffer Profile

Assignment

Part/SKU Lead

Time

Part/SKU Order

Multiple

DDMRP and Part Master Data

Planned Adjustment

Factor

21

300

B11

17

None

Part: 403P

Lead Time: 21 days

Buffer Profile:

B11MOQ

Green Zone 300

Yellow Zone 357

Red Zone Base 179

Red Zone Safety 54 0 % 2 0 % 4 0 % 6 0 % 8 0 % 10 0 %

403P

▼

890▼

590▼

233

GYR

Buffer Zones Overview

The Buffer Zones – An Overview

Red Zone

Base

Red Zone

Safety

Yellow

Green

Determines supply order generation frequency and size• Minimum Order Quantity• Order Cycle• % of usage over lead time (Lead Time Factor)

The heart of the demand coverage in the bufferAlways sized as 100% ADU over lead time

The embedded safety in the buffer• Red Zone Base is established based on Lead Time Factor• Red Zone Safety is determined by Variability family• Total Red Zone = Base + Safety

1

2

3

A New Way for Supply Order Generation

Forec

ast

Plant

Planning

Suppliers

Logistics

To:

Sales

Order

Plant

Planning

Suppliers

Logistics

Using More Relevant Demand Information

Weekly Daily

Committing to the Wrong Demand Signal• Forecasts are often converted to Planned Orders

• Three Universal Truths about Forecasts

– They start out wrong

– The more remote in time they are the more wrong they are

– The more detailed we make them the more wrong the are

• When Planned Orders are wrong:

– We commit capacity, materials, space, time, etc. to the wrong thing

– Adjustments occur as the picture changes

– We often have to spend more to get the right thing within a short window of time or…we risk service

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What Forces us Into Using Forecasting for Supply Order Generation?

• It could be argued that MRP is the perfect JIT System but that assumes one thing…

• That you have enough time!!

• Procurement Time plus Cumulative Manufacturing Time > Sales Order Visibility Horizon

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Cumulative Manufacturing Time

Suppliers

Suppliers

Suppliers

Procurement Time

Sales Order Visibility

Horizon

What Forces us Into Using Forecasting for Supply Order Generation?

• To Compensate we must forecast out in time in order to attempt to have the

right things at the right time

• The farther out in time we project the less accurate the projection becomes

• The less accurate the projection becomes the more bimodal the distribution

tends to be

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Planning Horizon

Suppliers

Suppliers

Suppliers

Sales Order Visibility

Horizon

Cumulative Manufacturing TimeProcurement Time

Decoupling Makes Using What is Relevant Possible

Weekly versus Daily

• Running MRP Daily is rare. Why?

• If Nervousness does not exist then daily planning can occur.

• Daily planning with sales orders means that we get RELEVANT and TIMELY demand information.

DDMRP Planning

• Supply Order Generation is created by the use of the “available stock equation”

• Unique to DDMRP – used to create supply order recommendations

• On-hand + On-order – Qualified Sales Order Demands = Available Stock

– On-Hand: Inventory physically in stock

– On-Order: The quantity of stock that has been ordered but not received

– Qualified Sales Order Demand: Sales Orders due today, in the past and

qualified future spikes.

On-HandOn-Order

Qualifying Spikes

Today 2 3 4 5 6 7 8 9

To

tal Q

ua

nti

ty O

rde

red

Order Spike Horizon = Length of time in the future in which spikes are considered

Order Spike Threshold = Quantity in daily buckets which would qualify for available stock equation inclusion

Generating Supply Order Recommendations

10,000

5,000

Part Open

Supply

On-hand Demand Available

Stock

Recommended

Supply Qty

Action

r457 5453 4012 1200 8265 0 No Action

f576 3358 4054 540 6872 3128 Place New Order

h654 530 3721 213 4038 2162 Place New Order

r672 2743 1732 623 3852 0 Expedite Open Supply

(Execution)

Supply generation is based on what zone the available stock equation places the part

Available stock = on-hand + on-order – QUALIFIED sales order demand (past due,

due today and qualified spikes)

Decoupled Explosion

MRP Explosion DDMRP Decoupled Explosion

• In DDMRP parent demand passes through non-buffered children just the same as with MRP

• That demand will stop at stocked points no matter what

The DDMRP Pyramid

FLOW

Sales Orders

Decoupling Points

Lead Time

Order Minimums

Lower Inventory

High Service

Fundamental Principal

Fundamental Planning

Changes

New Operational Equation

Elements and Emphasis

Bottom Line Benefits

Without Tradeoffs

DDMRP

Fewer Expedites

Buffer Status

ROCE▲

About Chad Smith

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Chad Smith is the co-author of the third edition of Orlicky’s Material Requirements Planning 3/E (Ptak and Smith, McGraw-Hill, 2011) and the co-author of Demand Driven Performance – Using Smart Metrics (Smith and Smith, McGraw-Hill, 2013). He is a co-founder and Partner at the Demand Driven Institute, an organization dedicated to proliferating demand driven methods globally.

Chad serves as the Program Director of the International Supply Chain Education Alliance’s Certified Demand Driven Planner (CDDP) Program. Clients, past and present, include Unilever, LeTourneauTechnologies, Boeing, Intel, Erickson Air-Crane, Siemens, IBM, The Charles Machine Works (Ditch Witch) and Oregon Freeze Dry. Chad is also a certified expert in all disciplines of the Theory of Constraints studying directly under the tutelage of the late Dr. Eli Goldratt.

Chad makes his home in Wenatchee, WA with his wife Sarah and daughters Sophia and Lily.

Contact Chad at: csmith@demanddriveninstitute.com