Leveraging SAP IBP Demand Driven Material Requirements Planning (DDMRP) for Improved Performance

Demand Driven Material Requirements Planning (DDMRP) is a new world planning method aiming to tackle current world demand volatility and supply continuity. This method has been introduced by the Demand Driven institute. This concept was introduced in SAP S/4 HANA 1709 and in IBP 1802. Even in today’s extremely complex supply chain model most advanced planning systems follow Material Requirements Planning (MRP) logic. Most modern ERP systems are MRP based or derivatives of MRP. 79% of ERP buyers implement MRP. Around 48% of companies have described supply chain complexity as a top pressure. Table 1 below shows the market changes from when MRP was first adopted in the 60s to the current scenario.

Table 1.

MRP runs with all the activities in supply chain dependent on each other which promotes a longer planning horizon. This results in the industry conundrum “bullwhip effect” in supply chain performance both upstream and downstream. As a result it leads to problems of too much inventory for finance people, less inventory for customers, and right product at the wrong place. MRP relies on the demand forecast to calculate requirement and the forecast is more error prone as the planning horizon increases. DDMRP is based on the principle that future demand cannot be accurately predicted and that acting on forecast demand creates an unstable, error-prone, and inefficient master schedule that needs to be adjusted all the time. DDMRP strategically decouples the lead times by decoupling supply chain nodes and places inventory buffers that act as shock absorbers for variable demand signals and non-continuous supply as illustrated in Figure 1:

Figure 1.

MRP often converts the demand forecast into Planned Orders. Forecasts start out wrong, and as more detail is captured, the further in time they are, the more wrong they are. When Planned Orders are wrong, we commit our time, space, material, and capacity at the wrong place; and then, we spend more money to make things right impacting working capital, service levels, and commitments. MRP produces nervousness, as minor changes in higher level records or the Master Production Schedule (MPS) causes significant timing or quantity changes in lower level schedules or orders. These changes create the “bullwhip effect” in vertical direction magnifying the effect across the whole structure. Also, since the MRP system plans all activities, including manufacturing, transportation, the BOM is dependent and coupled which also adds into the increasing the bullwhip effect as illustrated in Figure 2:

Figure 2.

 

DDMRP methodology is based on a 5 step process (Figure 3) out of which 2 are currently covered by SAP IBP (Integrated Business Planning) and rest in S/4 Hana. Although, as per the SAP roadmap, the rest of the steps will be included in the IBP response & supply module.

Figure 3.

SAP IBP DDMRP operators strategically identify buffer positions in the supply chain based on factors like customer tolerance time, quick turn market, critical operation protection, external variability, inventory leverage, and flexibility. After identifying these inventory positions the system calculates buffer levels according to the properties of similarly grouped material defined in buffer profiles. These buffer profiles also account for lead time and demand/supply variability. Also to consider is that these profiles are easily customizable and can be changed according to business & situation. These buffer levels tell planners how much inventory to maintain and when to order more to offer best customer service with optimal amount of working capital expended as illustrated in Figure 4.

Figure 4.

SAP IBP DDMRP also allows planners to input their own decoupling point decisions and recommended output and compare them with system generated outputs. Planners can use the DDMRP buffer analysis application (app) to create scenarios like the effects of promotion, effects of removing decoupling points, effects of adjusting demand, lead time etc. This app seamlessly integrates with scenarios from Excel front end and compares the average on hand quantity and value between baseline and user created scenarios. In short, it informs planners for their scenario how much quantity and money they can save or will spend more. It helps them in “what if” scenario planning/simulation and provides insights to the decision making process for upper management as illustrated by Figure 5:

Figure 5.

For organizations looking to optimally place the inventory, consider prioritized demand for order generation, and save investments, they can utilize this tool. Companies who have already implemented IBP inventory module can compare the target inventory position with top of green using analytics and charts to compare the result between MEIO and DDMRP for same input like demand, target service level etc. for the same supply chain model. They can also compare the working capital cost for plans generated by MEIO and DDMRP and take decisions accordingly.

DDMRP implemented principles have recorded results such as reduction in raw material inventory by 45%, increased service levels 99%+, sales volume up by 40 %, and savings in working capital investments to utilize in improvement of performance and to fund new initiatives in supply chain management.