SAP S/4HANA Demand Driven Material Requirements Planning

[hrishi_pendse]

This blog post mainly focuses on the conceptual introduction to SAP S/4HANA DDMRP and why should we be using DDMRP.

Source:

1. Demand Driven Material Requirements Planning (DDMRP), Version 2, Carol Ptak and Chad Smith, Industrial Press Inc


2. Demand Driven Institute https://www.demanddriveninstitute.com/ddmrp


3. https://help.sap.com/viewer/feae3cea3cc549aaa9d9de7d363a83e6/2005/en-US/dc87d46d18fe41718c92db3d642b...

 

What is DDMRP?

• Demand Driven MRP, also called Demand Driven Replenishment Planning is a concept Originating from Demand Driven Institute. SAP, with close cooperation from the DD Institute – which provided all the concepts to put into practice – has introduced a new MRP type ‘D1’ with release of S/4HANA 1709 version.


• Unlike traditional MRP; which largely relies on demand forecast, DDMRP mainly takes into consideration the actual customer requirements or demand while planning.


• Demand Driven MRP is based on concept of “Decoupling” – where a specific material is detached from all the BOM dependencies from the supply chain and planned separately.


• SAP S/4HANA DDMRP provides a tool called “Material Classification” which helps planners identify materials which needs to be “decoupled” from BOM dependencies planned with Demand Driven MRP.


• Once such materials are identified, the concept aims at proposing the quantity of “Buffer Inventory” or “Decoupling Inventory” to be maintained for all identified materials

There are some myths about DDMRP in the marker:

Source:https://www.researchgate.net/profile/Simon_Eagle/publication/280554093_Banishing_the_Myths_about_Dem...

1. DDMRP improves forecasting: DDMRP does not improve forecasting, it is not a forecasting tool at all. On the other hand, it is a tool which focuses on actual demand


2. It’s a Make to Order everything tool: As, it begins with word ‘demand’, many consider DDMRP as a tool is based on Make-To-Order planning. Although, the tool uses demand as reference and, the spikes in the demand; the tool is NOT simply a make to order planning tool


3. DDMRP Increases inventory: Since the tool deals with the ‘buffers’, there is a false understanding amongst some that we need to maintain inventory buffers for all the materials by increasing the inventory. This tool does not require you to maintain over inventory for all materials. On contrary, the tool helps you to maintain an optimized inventory. Also, this tool is not to be used for all materials, but only for selected materials – especially raw materials or lower level materials.


4. It’s a Simple Pull strategy: This is neither exactly a Pull (MTS) or a Push (MTO) strategy. It uses an innovative multi-echelon Position-Protect and Pull” methodology.


5. You can implement DDMRP in first sprint: Technically, you can. But Demand Driven Institute recommends waiting for few months, typically three to six months and allow some historical data to build in your S/4HANA system before using DDMRP.

Why become demand driven?

Source:

1. Demand Driven Material Requirements Planning (DDMRP), Version 2, Carol Ptak and Chad Smith, Industrial Press Inc


2. Demand Driven Institute https://www.demanddriveninstitute.com/ddmrp


3. https://help.sap.com/viewer/feae3cea3cc549aaa9d9de7d363a83e6/2005/en-US/dc87d46d18fe41718c92db3d642b...

What is it that the conventional MRP based planning systems (SAP ECC MRP or SCM APO) fail to deliver, that we have to start thinking about some other planning method?

It is important to note that MRP has been a successful planning method which greatly impacted the industry.

Joe Orlicky brought MRP into the mainstream in his 1975 book “Material Requirements Planning – The New way of life in Production and Inventory Management”

• MRP originated in around 1950’s, put into practice in 1960’s and by 1990, it had become very successful, with most of the manufacturers using MRP as a planning tool


• MRP featured Time Phased material planning against demand forecast, with level by level BOM explosion for all the dependencies.


• It promised to meet material requirements whenever they were needed with improved planning capability to prioritize materials to be planned and reduce inventory

What is the real problem then?

Although MRP produced ground-breaking results, the algorithm hasn’t been changed over the period of time to adapt to new challenges.

What are those New Challenges, or as they call it – The New Normal?

Source:  Demand Driven Material Requirements Planning (DDMRP), Version 2, Carol Ptak and Chad Smith, Industrial Press Inc

1. Compared to 1960’s, the supply chains have become volatile yet more complex, with shorter customer tolerance times.


2. However, old MRP planning rules have not much changed. Back then, MRP algorithm was formulated considering certain rules or constraints – and those factors or constraints have changed a lot today.


3. Although, the environment in which MRP was built to function has changed a lot, MRP concept is not much changed to adopt to the new challenges in supply chain planning environment


4. MRP functioning is largely impacted due to this and as a result, managing material inventories has been becoming a challenge


5. With the current MRP based planning, companies end up in a problem called “Inventory Bimodal Distribution”– where material inventories oscillate between High to Low and companies either have excess material inventories or they frequent material shortages


6. As MRP plans at all BOM levels it creates a “Nervousness” – where minor changes in higher level (e.g. level 0 or 1) records or the master production schedule cause significant timing or quantity changes in lower level (e.g. 5 or 6) schedules or orders


7. This material and time ‘variability’ transfers up and down the supply chain and starts amplifying introducing another problem in supply chain – called the “Bull-whip effect”.


8. In bull whip effect, a small change in inventory of lower level BOM materials create a large change at higher level BOM materials, and vice-versa. Typically, this is caused due to poor Forecast accuracies of higher level BOM materials (Finished Goods or Semi-finished goods) or delays or shortages in supply of raw materials.

Demand Driven Material Requirements Planning basis –

The only way to stop Bullwhip effect & Nervousness is to stop variation from being transmitted between the linked parts of supply chain, both upwards and downwards.

This is achieved in DDMRP by a method called “Decoupling” – where the aim is to create independence between supply and use of material. DDMRP algorithm helps you identify the materials that need to be de-coupled from the supply chain. The places in the supply chain at which the system is decoupled are called “Decoupling points”

For the decoupling points to maintain their decoupling effect, there must be a level of protection that absorbs demand and supply variability at the same time. This level of protection is a concept called “Decoupling inventory” or “Decoupling buffer” or “Buffer Inventory” and with this, DDMRP focuses at dampening the bullwhip effect and stopping the nervousness.

This is the basis behind DDMRP functioning.

One last thing!

Is Buffer Inventory any different than good old Safety Stock from Material Requirements Planning? The answer is a resounding ‘YES’.

How? Well, although the two terms sound similar, the differentiating concept here is – the Decoupling. In MRP, there is no decoupling. The Safety Stock is not planned separately and thus it becomes part of dependent requirements, contributing to the variability in supply chain. This isn’t the case with Buffer Inventory, as Buffer Inventory is planned differently than the MRP items - stopping the variability.

 

I have tried to debrief some of the key concepts Demand Driven MRP.

Thank you for reading! Appreciate your comments and feedback.