MRP does more harm than good

After years of oscillating between shortfalls and surpluses and the necessary chaos and frustration that entailed, calm has recently returned for one of my clients and his supplier. How come? They simply turned off their MRP system.

By Alex Tjalsma, partner/consultant Involvation

The consequences of this decision have been astounding. By reducing the delivery time from several months to just a few weeks, responsiveness has been improved tremendously. This has led to a substantial increase in availability, while the need for forecasting is limited to easy-to-predict monthly volumes. S&OP has become a piece of cake. As a result, my customer can manage with much less inventory and his supplier is running at a higher capacity utilization rate. Needless to say, suspicion and frustration have been replaced by trust and constructive collaboration – an excellent basis for further improvement.

Fairy tale

The above scenario may sound like a fairy tale, but I can assure you it isn’t. In truth, material requirements planning (MRP) does more harm than good, because MRP completely disregards the first two laws of supply chain physics (Hopp & Spearman). The first law states that variability always degrades the performance of a production system. The second law states that variability in a production system will always be buffered by some combination of inventory, capacity and time.

In practice, many manufacturing companies choose to compensate for their variability with (lead) time. After all, overcapacity is a deadly sin if you’re assessed based on utilization. However, because end customers often won’t tolerate these long, frequently unreliable lead times, the middle man is left with no choice but to hold more stock in order to reduce the delivery time to acceptable proportions. And that’s precisely where things often go wrong.

Instead of using that stock as a buffer to absorb the demand variability and to help Production to deliver quickly despite a high utilization rate, people usually do the complete opposite – they give the inventory manager the responsibility and the tools (re-order point model or MRP system) to optimize his stock. In that scenario, he won’t place an order until his inventory drops below the re-order point, to be replenished (preferably in an economical order quantity) only when safety stock is to be used. As a result, and despite his good intentions, rather than absorbing the demand variability he actually amplifies it and passes it on to Production (in a phenomenon commonly known as the ‘bullwhip effect’). Clearly, Production is then forced to respond with an even longer lead time in order to cope with this variability. The bottom line is that inventory is usually a variability catalyst rather than a variability buffer. You can guess the rest.

Lean supermarkets

However, there is also a completely different way of doing things. The simplest and therefore the best example of the effective use of inventory is the supermarket concept from lean methodology. The downside of such a supermarket is that it is a visual tool. This makes it unsuitable for managing complete warehouses, let alone remotely. In SCM at Warp Speed, Schragenheim introduces a nice yet apparently complicated method for effective inventory utilization. He calls the concept ‘Make to Available (MtA)’ as an alternative to ‘Make to Stock (MtO). It’s brilliant in theory, but unfortunately too complex to conquer the world, let alone to be a serious challenger to MRP.

Breath of fresh air

However, demand-driven MRP (DDMRP) has recently blown into the supply chain world like a breath of fresh air and it now seems to be really catching on. DDMRP is rooted in Schragenheim’s train of thought and is, in fact, a variation on his MtA concept. Rather than challenging MRP head on, however, DDMRP is striving to secure a position alongside MRP – although not without some concessions to the purity of MtA, unfortunately.

And instead of clearly explaining what it does and why, it appears to be taking a more opportunistic marketing-based approach, as the name suggests. Nevertheless, DDMRP now seems to be gaining considerable ground – and deservedly so. After all, it rectifies fundamental errors resulting from MRP by setting priorities based on actual inventory levels rather than projected due dates. Besides that, it offers the possibility of decoupling valueless stock dependencies.

So is DDMRP the panacea? Of course not. But is it better than MRP? Definitely – much better, as long as you produce to stock. Should you implement it without a second thought? You could. But my advice would be to first gain a good understanding of your current situation and current dynamic in order to identify the best way to tackle bad variability in your specific market situation. For my customer, this approach has resulted in a solution in which MRP hasn’t been improved, but has in fact been completely turned off and replaced with little more than a digitalized version of the lean supermarket…and it works.

By the way, the challenge once again lay not so much in finding a solution but in casting off the old logic and embracing the new. Solutions such as DDMRP can play an important role in this process. By packaging and marketing solutions as products it may well be possible to position them so that only a fool would dismiss them. The prerequisite remains that the product concerned offers a real solution to the problem in question.