In this week’s discussion I’ll cover the second of the 4 Innovations, the net flow equation. As part of this explain Buffers and Profiles in more detail and also discuss the Average Daily Usage.
The second innovation, the Net Flow Equation is the key linking our customer demand with Supplier orders.To put this into perspective, we’ll briefly discuss the buffers and profiles so that we can see how the net flow equation (position) fits in and drives our planning phase. The post on the 1st innovation “Just how innovative is DDMRP?” discusses the decoupled lead times, and mentions the use of buffers and profiles.
These buffers and profiles play an integral role in supporting the independence of each decoupled lead time. A buffer is set up for each item code by location, and is sized according to specific parameters. The calculation covers 2 areas, Group settings and individual part properties. When the 3 buffer zones have been calculated, we have a guide to manage our stock levels. The buffers also provide a number of metrics against which to measure the its performance. Average projected stock on hand, order frequency, weeks cover and safety stock levels are examples of these metrics. The visual way the information is reported gives the planner, production and buyer a priority list that is easily followed, and the fact that supplier orders are based on Customer demand eliminates the variability and nervousness that is always present in traditional MRP applications.
The net flow equation is the key component of the planning phase. It is forward looking and operates over the length of lead time horizon. The methodology uses an order spike threshold that spans the lead time horizon to accommodate spikes in demand. The current day’s demand and the order spike make up the qualified demand. The calculation places the Net Flow position in the buffer zones, and its position dictates whether replenishment is necessary and if so, what the required quantity will be.
Remember that the DDMRP methodology always drives stock levels to the optimal level based on demand, and so, when the net flow position drops from green to yellow, the instruction is given to replenish to top of green.
Another important point is the Average Daily Usage, which is initially determined from the forecast. The ADU changes on a daily basis due to fluctuations in demand from the customer. The change triggers an adjustment of the buffer zone sizes, so that we dynamically control their size and the replenishment quantity on an ongoing basis.
Seasonality is managed by a Demand adjustment factor and the planner along with the Sales and marketing teams will agree when to activate it to accommodate for spikes, in seasonality or possibly pre-price increase buy ins. Product launches and phase outs are also accommodated minimizing the need to write off materials in both raw and processed form.
The net flow equation is the key to differentiating between MRP and DDMRP. Forecasting and forecast accuracy doesn’t play the same role in DDMRP, because the forecasts are used in the ADU which is part of the calculation to size the buffer zones. The buffers then become the operating ranges for Net flow and projected stock on hand. All replenishment is based on Customer orders through the Net Flow Position. The ADU is determined in one of three ways, depending on the operating environment and the level of input differs in each. The ADU can either be forward looking (high forecast input), or Blended (partial input), or backward looking (no forecast input). Once the model is operational the ADU adjusts itself based on actual demand.
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Thanks to the Demand driven institute for creating such an awesome methodology that is changing the face of supply chains around the world.
About the author
Dave Hudson is a supply chain and operations specialist and executive coach with over 30 years’ experience, and currently 1 of 5 endorsed Demand Driven instructors on the African continent.