Whatever happened to DRP?
Sliding down the slippery slope of crisis management, it's easy to lose grasp of distribution requirements planning.
Lately, there has been a problem cropping up with many of the clients we engage with: people have ' willingly or unwillingly ' decided to do away with different planning time-frames or time-horizons.
They've all gone operational, and abandoned tactical and strategic planning. O.K., I understand that the financial crisis makes us do funny things, but seriously, this is not a good practice to adopt, and let me tell you why.
Supply chain processes follow a particular flow (Figure 1), with work starting in the demand planning area, generating a collaborative forecast, and then flowing to the supply planning area, by first going through distribution planning and then onwards to production and materials planning, and so on. The activities in the medium and short terms are clearly delineated by different processes (e.g. production planning vs. scheduling, distribution planning vs. deployment). This is a representative flow in a make-to-stock (MTS) environment, where the business planning is driven off a medium distribution plan, which takes into account a robust inventory policy at the ship-to points and works its way upstream from that point.
The problem is when companies migrate unwittingly from an MTS to a make-to-forecast (MTF) environment without knowing it. Believe me it can happen unwittingly, over a period of time. As crises loom, the focus becomes more on the demand forecast and pretty soon the inventory planning function is abandoned. When this happens, a critical link in the chain is lost, as there is nothing to drive the planned arrivals at the distribution centers. Soon, the company realizes this, but instead of retracing its steps and recovering, it completely abandons the distribution planning function and migrate to a situation where the demand forecast directly feeds production planning and materials planning areas. On the distribution side, the only thing that remains is the deployment function, which works off of the on-hand inventory, the production schedule and customer orders to generate shipment recommendations to execute in real time.
In this manner, companies begin to slide down the slippery slope of crisis management, never quite able to recover from the blow of abandoning the seemingly insignificant and banal process step of distribution planning.
Where MTF models make sense
Make-to-forecast models make complete sense when a business is operating with highly stable demand patterns, sufficient (and extra) capacity, has no restrictions in terms of freight, warehouse space, low value items, and short lead times. In addition, MTF works well with highly trained people who have clear roles and responsibilities, and operating in an environment with systems that have complete transparency and visibility into events into the future and the past, with highly analytical capabilities and high transaction velocity and capacity.
Sounds like utopia? Well, it is. Not many of us live in this luxurious world these days. MTF is therefore becoming a rarer breed to train and maintain. Many companies lose sight of this fact, and think that they can operate successfully in a MTF model.
MTS continues to be the norm
Since most of us operate in an environment with capacity restrictions, volatile demand, freight and warehouse restrictions, multiple distribution locations, customer connections, and where visibility is not taken for granted, systems may or may not work, and people may not always be aware of their roles, or qualified, skilled or competent in what they are responsible for. We need buffers in this imperfect world, to protect us from these imperfections in planning, anticipation and reality.
Let us remind ourselves, operating in a MTS environment allows us flexibility to serve customers better by delivering within shorter lead times, having the stock of the right product available at the right times, and making products with the right/optimal production quantities so as to minimize allocated cost per product. This MTS environment also allows us to fulfill unanticipated demand, compensate for supply variability, lead time variability, production cycle time variability, materials supply variability, as well as errors on timing (Friday vs. Monday delivery).
Knowing whether your supply chain is out of balance
An excellent way to tell when your supply chain is out of balance is to use bias charts. Bias charts can be used with demand forecasts, shipment plans, distribution plans, production plans and any other plans for which you have corresponding actuals. Bias is measured using the formula Bias = (Actuals ' Plan)/Plan. Using this formula, you can understand not only the degree of the error or variability, but also the direction of the error or variability.
Consider the bias shown in Figure 2A, where we see consistent under-planning. If these were demand plans (i.e. forecasts), we would see that the business would be having severe customer service issues. If these were shipment plans or production plans, there would be gross under-shipments to the destination location, or low 'conformance-to-plan' for production, both of which would result in short-shipping, and customer service issues. Further, expediting and transshipments will have to be the norm.
Now, consider the contrary case in Figure 2B, where you have chronic over-planning. This will most likely result in more inventory than necessary, also resulting in excess storage and handling charges, freight charges and overutilization of production facilities (possibly incurring excessive tolling charges if contract manufacturing is being used). In addition, stock may be of the wrong product mix, which gives a 'double-whammy' of inferior service and too much inventory (in the wrong place).
The best situation is to have a MTS operating model where bias is under control. In any given week/month, there is a 50/50 chance that you have over-planned or under-planned, and should see a bias chart as shown in Figure 2C. The probability of getting three points on the same side of the line (over/under planning) is about 10,000 to one, so it's not normal.
Distribution planning is the key to unlock your success of operating in a MTS environment. Use it, it's easy and can be a cheap fix to many of your supply chain imbalances.
Deep R. Parekh is a partner with Equus Group LLC, a supply chain advisory services and management consulting firm based in New York and Sao Paulo, Brazil. He welcomes your feedback and comments at firstname.lastname@example.org, and can be contacted at (917) 940-7538.