Smooth out your planning wrinkles with demand-driven material requirements planning (DDMRP)

Demand-driven material requirements planning (DDMRP) is the greatest innovation in supply chain management in decades – at least, so say numerous thought leaders in manufacturing planning circles. This claim is also supported by the impressive return on investment experienced by many manufacturing companies when they implement DDMRP. Why, then, hasn’t DDMRP become the predominant approach to manufacturing resource planning (MRP) and advanced planning and scheduling (APS) in the 10+ years since it was first formulated? We believe that many manufacturers will choose DDMRP when they better understand its benefits and have the right technology partner to help them implement it. In the meantime, the combination of an existing MRP and a modern APS system provides companies with all the software capabilities and agility needed to realize many of the same benefits that DDMRP offers.  

How did demand-driven material requirements planning gain its reputation as a disruptive technology? What is DDMRP, and how does it compare to other planning approaches? What are the benefits of DDMRP? Let’s take a look.

What is DDMRP?

DDMRP departs from the two most common planning strategies, the traditional make-to-stock (MTS) and make-to-order (MTO) approaches. On the one hand, DDMRP departs from MTS in that it does not create an inventory of finished products in anticipation of future orders. On the other hand, DDMRP departs from MTO in that it does not wait until an order comes in before initiating production.

The defining feature of DDMRP is the strategic inventory buffer. These buffers help to break up long and/or complex production sequences that otherwise create relatively long overall cycle times. If each step in a complex production sequence must be completed before subsequent steps can commence, then the traditional make-to-order approach – waiting for the order to come in before starting production – often lengthens lead time and delivery time unacceptably. To shorten lead time, the planner that employs DDMRP determines where in the supply chain to disconnect sequential lead times. At these “decoupling points,” the DDMRP plan creates an inventory of some of the parts or components that make up the finished product.

Practitioners of demand-driven material requirements planning typically describe it as a five-step process:

1. Strategic inventory positioning determines where to place the decoupling points along the supply chain.
2. Buffer profiles and levels evaluate the size of the inventory buffer that helps optimize the production plan.
3. Dynamic adjustments define the bases for changing buffer levels. These may include future events as they become known, changes to operating parameters, market changes, or other events.
4. Demand-driven planning employs data from the previous DDMRP steps along with other planning tools to establish the production plan.
5. Visible and collaborative execution is used to manage supply orders.

How is DDMRP different from other planning strategies?

DDMRP was developed to mitigate production challenges that arise with traditional MTS and MTO planning approaches. Planners employing a make-to-stock approach rely on forcasted product demand, such that products made during one production period are used to fulfill orders made in the next production period. Ideally, this approach allows the manufacturer to fill an order and deliver products as soon as the order comes in. But the ideal is difficult to achieve because MTS is dependent on the accuracy of the demand forecast.

For many product types and industries, predicting how much product will be ordered, even in the near future, is no easy task. What’s more, forecasting becomes that much harder for manufacturers whose products, processes, or supply chain have become more complex – a common experience these days. Top these factors off with market disruptions, volatility, and uncertainty, and the challenge can become confounding! The stakes are high: too much stock raises inventory costs and spoilage, while too little stock incurs expediting premiums, overtime, and missed delivery times.

Despite these challenges, the make-to-stock approach remains popular and effective for some manufacturers and industries. Familiar with the challenge of forecast accuracy, software providers like Siemens have developed agile APS systems that generate achievable, efficient MTS plans and schedules. These APS systems are designed to work in concert with existing MRP systems to address market volatility with functionality that quickly adjusts to changes in demand forecasts, supply availability, and production capacity. DDMRP comes at the MTS challenge from the other side: instead of adjusting the plan as the forecast changes, DDMRP accommodates forecast changes and avoids overstocks and/or shortages by providing strategic inventory buffers.

Make-to-order planning, of course, is not dependent on demand forecasts, waiting instead for demand to occur before production begins. Ideally, MTO planning is able to generate acceptable delivery times for customers. Working with an exsiting MTO-based MRP, an agile APS system helps optimize MTO planning by ensuring efficient and timely replenishment of supply inventories to maintain production readiness and flow. However, just as market factors and the complexity of products and supply chains intensify the challenge of forecasting for make-to-stock planning, so too do these conditions make MTO delivery times longer and/or more vulnerable to disruptions in the manufacturer’s production capacity or supply chain.

While it accounts for material inventories, make-to-order planning does not rely on stock levels of finished and intermediate products as key process parameters. DDMRP diverges from MTO planning by considering intermediate product inventory directly.

What are the benefits of DDMRP – and how does a company obtain them?

The key benefits of demand-driven material requirements planning arise out of the planning approach’s ability to tailor plans to the new challenges created by greater product variety, smaller lot and batch sizes, and more complex production operations. Compared to make-to-order planning, DDMRP reduces lead time and delivery time. Compared to make-to-stock planning, DDMRP reduces overstocks and shortages and the accompanying manufacturing overtime and expedited shipping. DDMRP has the potential to improve on either traditional approach in terms of on-time delivery rate and reduced supply chain, production, and delivery costs.

With such attractive benefits, again the question arises, why haven’t more manufacturers adopted DDMRP – especially those facing more complex production and/or abbreviated delivery times? As with most investments in manufacturing operations, companies want to be assured that they will achieve tangible, sustainable improvements in their planning efforts. We at Siemens have found that an existing MRP system combined with agile APS enables manufacturers to get the most out of their MTO or MTS approach, and we work with our customers to determine when they may reach a tipping point that makes the DDMRP approach worth the investment.

When that point is reached, the primary challenge in implementing DDMRP is the implementation itself. DDMRP differs significantly enough from conventional planning methods that it requires “buy-in” from planners and other stakeholders. This buy-in can be achieved when a digital systems provider like Siemens lends its experience and expertise to the implementation process.

Learn more about Siemens’ Advanced Planning and Scheduling software solutions.