Why a Forecast is Not a Plan
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MIT research highlights that traditional MRP-based supply chain planning is outdated, advocating for Demand Driven MRP (DDMRP) as a more effective alternative. DDMRP enhances financial performance by improving service levels, reducing inventory levels, and shortening customer order lead times, thereby providing a competitive advantage. The study suggests that DDMRP's structured approach to planning can address contemporary supply chain challenges and reset operational practices for better efficiency.
Why a Forecast is Not a Plan
- 1. Why a Forecast is Not a Plan And What MIT Research Reveals November 2019
- 2. MIT Research shows us that traditional MRP based supply chain planning methods are obsolete KEY INSIGHTS • 1. DDMRP can have a strong impact on the financial performance of the company and can provide a competitive advantage. • 2. Implementing DDMRP results in streamlined operation throughout the internal supply chain. • 3. DDMRP provides similar results as a solver-based plan The findings of recent analysis from the Massachusetts Institute of Technology (MIT) state By: Leo Ducrot and Ehtesham Ahmed Advisors: Dr. Sergio Alex Caballero and Dr. Tugba Efendigil “Summary: In this project, we investigated how Demand Driven MRP (DDMRP) operates in a capacity constrained environment. Using qualitative and quantitative analysis, we proved that DDMRP increases service levels and reduce both inventory levels and customer order lead times. The financial impact of these results combined with the competitive advantage derived from the improved service gives DDMRP the potential to be a game-changer in supply chain planning”
- 3. Advances in MRP based planning logic have not helped business results MRP MRP II ERP APS
- 4. Period of demand certainty has reduced to almost 0 5 4 3 2 1 Distribution Manufacturing Raw Material 15 5 1960s: Full order books, excess demand 1970s: Product development and choice 1980s/90s: Consumer revolution 2000+: Internet revolution / Emerging markets Demand certainty
- 5. Information Gap: Forecast MRP is designed to bring together parts and materials in a Just In Time fashion….now based entirely on forecast 5 4 3 2 1 Distribution Manufacturing Raw Material 15 5 1960s: Full order books, excess demand Now Demand certainty
- 6. Modern business challenges have reduced forecast accuracy, increased the effect of the bullwhip and pushed inventories into a permanent state of imbalance global sourcing and demand shortened product life cycles shortened customer tolerance time higher product complexity & customization pressure for leaner inventory (ever more) inaccurate forecasts more product variety long lead time for materials Inventory SKU’s 0 optimal warningwarningtoo little too much The Bimodal Inventory Distribution The New Normal
- 7. Today’s Supply Chains are Complex! Supply chains are both more fragmented and more connected: • The wrong rules inside each node transfer variability • The greater amount of connections amplifies variability Embedded at the heart of every node is an ERP system and MRPII with all of its problematic forecast planning and cost centric rules Ref: Demand Driven Institute
- 8. Forecast Operational Failures undermine the S&OP process and lead excessive focus on short term issues driven by actuals that do not match the forecast Short- term 2-3 Years History Strategic Direction Detailed Operational Planning Focus – escalations / issue management
- 9. Investments have typically been to invest in faster fire trucks! Speed information flows to spot when to intervene as actual diverges from forecast or apply ever more expensive complexity to try and improve the forecast • Advanced Forecasting systems • Advanced Planning Systems • DRP systems • Inventory Optimization Tools • Integration and alert systems • Business dashboards • Demand sensing
- 10. DDMRPIITM Conditioning segments the time horizon more fully and connects the planning process with business performance Forecast M0 Short- term Long term: M5 - 2 YearsHistory Strategic Direction M1 – M4 Tactical Medium -term
- 11. Each DDMRPIITM Planning process segment has its own focus and outputs that allow the next to operate optimally Business Planning • Set Policies • Define supply chain operating rules and principles • Plan business capacity • Manage life cycle changes & investments for known events Conditioning • Define planning policies based on segmentation policies • Set inventory buffers & manage operational impacts • Plant capacity & resource planning • Define operational parameters: lead times and MOQs Operations Planning • Release orders to demand or plan • Manage orders & optimise operations • Manage exceptions • Deliver & measure to agreed processes, lead times & MOQs LONG TERM TACTICAL SHORT TERM
- 12. Replenishment is driven by demand, and inventory flexes to buffer variability DDMRPIITM Resets the supply chain and addresses the root cause of planning failure by de-coupling the supply chain, giving control, visibility and the ability to manage uncertainty Replenishment plans are driven by forecast, driving stocks up & resulting in continual re-work
- 13. CRITICAL SUCCESS FACTORS FOR DEMAND DRIVEN PLANNING SOLUTIONS Including strategy, tactics and execution in one system Market strategies, demand patterns, product life cycles and service policies to supply chain policies and stocking strategy Release & manage orders in line with planning strategy and conditioning steps. Integrate Shipment, Factory and Supplier execution constraints Measure and improve operating performance Set planning parameters to resolve constraints and compliment operating processes
- 14. The planning approach needs to cover multiple planning strategies – this is not a religious argument. Conditioning in O8 delivers a balanced plan to deliver business goals • Segment the planning process according to an item’s demand profile • Accommodates a diverse range of items, production rhythms, geographies and markets • Policy driven and refined monthly • Integrates and extends planning process to the rest of the business and beyond • MRP not required 14
- 15. O8 Observed Typical DDMRPIITM Benefits In Line with and Exceed Proven MIT model results 0 10 20 30 40 50 60 70 80 90 100 Stock Order stability Obsolescence Service Planning Time Operating Cost Lead time Before After
- 16. More Than DDMRP : O8 Offers DDMRPIITM ROI Guaranteed Just as MRPI was good, MRPII Was better Similarly…DDMRP is good, DDMRPIITM Is better