Are you using 20th Century inventory management tools in the 21st Century?
It is quite amazing to think that the majority of businesses are still using dated processes and practices to manage inventory and production in the current business environment.
Materials requirement planning was conceived in the 1950s with the broad commercialization of computers and came to prominence in 1975, when Joe Orlicky published his book Materials Requirement Planning: The new way of life in production and inventory management which is still considered the standard today. At the time of publishing, only 700 companies in the world had or were implementing MRP. Today this has expanded into a full ERP suite of which MRP is a module, and over 80% of companies who invest in ERP include MRP.
Today, in 2019, companies are still using these processes to manage inventory in a vastly different market. An example, in the 1970s a company may have had 1 or 2 variants of a brand, whereas today, in order to remain competitive, brands can have up to 50 variants or SKUs in a range of sizes to suit market demand. This exponentially increases the number of raw and packing materials we must purchase and hold in stock to satisfy the market and yet we are still using the same approach that was first introduced.
We must acknowledge that the principles are sound, they just aren’t responsive enough to address the disparity between the time required to deliver to market and Customer order cycles. Supplier orders being placed against forecast anticipating customer need, production is planned against firm planned orders and finally we supply the market against customer orders. The changes in time horizons means that each step works off different information, causing nervousness in the system which is compounded by variation.
The result is excess materials that aren’t needed and too little of the right materials, ultimately resulting in missing customer orders, loss in profits and customer dissatisfaction.
In order to remain competitive in the current economic climate, especially in emerging markets where our exchange rate, margins and cash flow are affected by even the slightest changes in global markets, we need to keep our stock levels as lean as possible, maintain flexibility of supply and maintain or improve customer service levels.
This is the reality we are faced with on a daily basis and we need to adapt or accept that we’ll continue to disappoint customers and eventually lose them, or alternatively face major cash flow problems, both of which will ultimately lead to business failure and the loss of income not only for our staff, but also for their dependents. In a society where we have in excess of 25% unemployment, and historical challenges to overcome, this doesn’t bode well for anyone trying to find alternative employment.
So, what can we do about it? We can sit around and lament our situations, complain about lack of commitment by leadership or we can change how we conduct ourselves and lead our teams.
The Demand Driven Institute (https://www.demanddriveninstitute.com) under the leadership of Carol Ptak and Chad Smith have developed the demand driven operating model that will assist us in becoming more responsive to market demands. This requires a change in the way you think about your supply chain and how you can decouple the key points to protect the flow of information towards your suppliers and incoming materials.
The decoupling point buffer creates independence in the supply chain and reduces the level of dependency that is the foundation of traditional MRP. The level of independence is determined by the size of the buffer so you can now look at your supply chain as a series of independent legs, each supported by its own buffer. The shorter each leg, the more accurate the information flows will be and as a result the more relevant your stock holding.
There are questions that need to be answered when considering this approach,
- Where do we place the decoupling points?
- How big must they be?
- How do we change our order process to maintain the buffers?
Reference: Demand Driven Materials Requirement Planning Version 2
Ptak and Smith