The Demand Driven Operating Model

Frankfurt | October 2018

 From Forecast driven to Demand Driven Supply Chain

The entire BOM is made dependent. MRP propagates the demand signal
MRP/Forecast
(forecast/MPS) through the BOM creating planned orders. Any change
driven supply chain
in forecast is amplified down the supply chain.

Demand propagation is decoupled and signal variability is absorbed by

Demand driven
the inventory buffers. Execution is driven by sales orders or triggered
supply chain
by downstream buffer status..

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 The Demand Driven Operating Model

Innovation,
Go-to-Market Model projections / Strategic Recommendations
& Financial
Strategies
Strategic
directives

Model projections
Forecasts Simulation
and/or
historical
Variance Analysis
consumption Flow Based Metrics
Master settings
Master settings Buffer profiles
Capabilities & capacity profiles

promised dates
& quantities
DDMRP Sales orders/
Supply Order actual
Capacity Generation consumption
C
Scheduling shop orders
(WO) PO
STO

WO
Order Execution

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 Control Point / Drum Scheduling

Scheduling Planning
What L0 Item N.F. Order
How much
SKU 3 53% 3500
capacity SCHEDULE
-D-
By when
SKU 1 62% 2500
Mo xxx xx x
Tu yyy yy y
We zzz zz z
What SKU 4 64% 2000
Th aaa aa a
Mo Tu We Th Fr Sa Su Mo
Fr bbb bb b
How much SKU 2 76%
By then Total 8000

L2 A B

D L1 E F G L0

L2 C D = critical resource

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 Capacity: 5 days, 2 shifts @ 7.5hrs = 75 hrs/week (15 hrs/day)
15h

week 1 week 2 week 3

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 ▪ Decoupled lead time = 5 working days.
▪ When we start we assume that the current week is already fully scheduled.

15h

15 15 15 15 15

week 1 week 2 week 3

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 W1, Day Orders Due Confirm Delta Scenario 1
Mon 10 hrs W2 Mon W2 Mon 0
Demand: 75hrs
Tue 18 hrs W2 Tue W2 Tue 0 Capacity: 75hrs
Wed 20 hrs W2 Wed W2 Thu +1
Thu 8 hrs W2 Thu W2 Thu 0
Fri 19 hrs W2 Fri W2 Fri 0

15h
2
5 4

15 15 15 15 15 15 15
13 8
10

week 1 week 2 week 3

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 W1, Day Orders Due Confirm Delta Scenario 2,
Mon 13 hrs W2 Mon W2 Mon 0 +30% demand
Tue 23 hrs W2 Tue W2 Wed +1
Demand: 101hrs
Wed 26 hrs W2 Wed W2 Fri +2 Capacity: 75hrs
Thu 10 hrs W2 Thu W2 Fri +1
Fri 25 hrs W2 Fri W3 Tue +2

15h
2 3

15 15 15 15 15 15 15 10 15
13

6 7

2
week 1 week 2 week 3
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 W1, Day Orders Due Confirm Delta Scenario 3,
Mon 7 hrs W2 Mon W2 Mon 0 -30% demand
Tue 13 hrs W2 Tue W2 Tue 0
Demand: 53hrs
Wed 14 hrs W2 Wed W2 Wed 0 Capacity: 75hrs
Thu 6 hrs W2 Thu W2 Wed -1
Fri 13 hrs W2 Fri W3 Thu -1

15h

5
8
10

15 15 15 15 15 6

7 8
5 4

week 1 week 2 week 3

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 W2, Day Orders Due Confirm Delta Scenario 3,
Mon 7 hrs W3 Mon W2 Thu -2 -30% demand
Tue 13 hrs W3 Tue W2 Fri -2
Demand: 53hrs
Wed 14 hrs W3 Wed W3 Mon -2 Capacity: 75hrs
Thu 6 hrs W3 Thu W3 Tue -2
Fri 13 hrs W3 Fri W3 Wed -2

15h
2 3
5
8 7
10
12
15 15 15 15 15 6 13 12

7 8
5 4 3
1
week 1 week 2 week 3
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 1 hr of capacity = 100 units produced

Sales Price €3 per unit

Material Cost €1 per unit
Direct Labour €5000 per week
Overhead allocation €5000 per week

Scenario 1 Scenario 3 (-30% Demand)

7500 units produced and sold 5300 units produced and sold

Sales €22,500 Sales €15,900

- Material Cost -€7,500 - Material Cost -€5,300
- Direct Labour -€5,000 - Direct Labour -€5,000
- Overhead allocation -€5,000 - Overhead allocation -€5,000
= Gross Profit €5000 (22%) = Gross Profit €600 (4%)

Do we have a problem?

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Will anything that we do at the operational
level – like increasing order size and
produce on forecast – change ANYTHING
(for the better) to this situation?
On Paper: Yes

In Reality: No, it actually makes the

situation worse

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Scenario 3 (-30% Demand)

5300 units produced and sold

Sales €15,900 Cash Flow

- Material Cost -€5,300 (green – red)
- Direct Labour -€5,000 = +€600
- Overhead allocation -€5,000
= Gross Profit €600 (4%)

Scenario 3 (-30% Demand)

7500 units produced, 5300 sold

Sales €15,900 €0 Cash Flow

- Material Cost -€5,300 -€2,200 (green – red)
- Direct Labour -€3,533 -€1,467 = -€1600
- Overhead allocation -€3,533 -€1,467
= Gross Profit €3534 (22%)

Inventories (2200 units) €5,134

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Scenario 3 (-30% Demand)

7500 units produced, 5300 sold

Sales €15,900 €0 Cash Flow

- Material Cost -€5,300 -€2,200 (green – red)
- Direct Labour -€3,533 -€1,467 = -€1600
- Overhead allocation -€3,533 -€1,467
= Gross Profit €3534 (22%)

Inventories (2200 units) €5,134

▪ I need space to store them → warehouse rental cost

▪ I need to manage them → OH cost for tracking, reporting, etc.
▪ It’s cash that I have spent but not generating returns yet → longer cash-to-
cash cycle, interest cost, opportunity cost.
▪ It’s raw materials that I have consumed, and right now I may need those
same materials to produce what the market asks → delays and lost sales.
▪ They may go out of fashion → sell at discount price, loss of revenue and
margin.
▪ They may become obsolete → write off cost, cost of reprocessing or disposals.

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How does anyone in his right
mind still believe that
producing on forecast is a
good idea?

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 Remember

The common belief is that you are paying

your resources to be busy.

In reality you are paying them to be

available!
(If this weren’t true, why would anyone own a car?)

It is better to keep them idle than to keep

them busy producing stuff for which there is
no immediate demand.

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 But still...

Having people sitting around is not OK.

You need a strategy, a contingency plan.
▪ Maintenance
▪ Cleaning/5S
▪ Kaizen
▪ Training/Education
▪ Support other department (flexible
workforce)
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 But still...

In the medium term you need to re-align

your shift pattern and resource availability
with the demand. busy-ness

But this is a S&OP task, not operational

decision.
That’s why you need the next element of the
operating model → Tactical Flow Based
Metrics for Variance Analysis.

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 The Demand Driven Operating Model

Innovation,
Go-to-Market Model projections / Strategic Recommendations
& Financial
Strategies
Strategic
directives

Model projections
Forecasts
and/or actual
consumption
Variance Analysis
Flow Based Metrics
Master settings
Master settings Buffer profiles
Capabilities & capacity profiles

promised dates
& quantities
DDMRP Sales orders/
Supply Order actual Simulation
Capacity Generation consumption
C
Scheduling shop orders
(WO) PO
STO

WO
Order Execution

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 Flow Based Tactical Metrics

The Main Question:

How do we detect misalignments

in a DDOM?

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 Flow Based Tactical Metrics

Metric Objectives The Message Behind the Objective

Execute to the model, plan, schedule and

Operational

System Reliability
market expectation;

System Stability Pass on as little variation as possible;

System Speed/Velocity Pass the right work on as fast as possible;

System Improvement & Waste

Point out and prioritize lost ROI opportunities.
Reduction (Opportunity $)
Tactical

Spend minimization to capture the market

Local Operating Expense Control
opportunity

Maximize system return according to relevant

Strategic Contribution
model factors (volume and rate)

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 System Reliability

“The best process is worthless if people don’t follow it”

Order Release Compliance

What did the DDMRP tool tell the planner to order

vs.

What did he actually order

”I have seen things you people wouldn’t believe...”

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 Example: On Hand Target Range Compliance

Using analytics and reason codes (past month, past three months, past six
months) to identify improvement opportunities

- Ordering more than Net

Over Top Flow recommendation
Of Green - Ordering early
(OTOG) - Rounding up
- ADU overestimate
- Frequent spikes - Prioritised share / Full
- Supply early: lead time truck loads.
overestimate Net Flow
- Ordering more than Net
Flow recommendation
- Frequent spikes
- Ordering less than Net
Flow recommendation
On Hand - Ordering late
- ADU underestimate
- Higher than expected
variability
- Supply issues – lead
Stock out
time underestimate
with demand
(SOWD)

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 IN CONCLUSION

ONE: Don’t just throw data in an IT system and assume that it’s gonna work.

TWO: Engage with all part of the organisation early

THREE: Set up the rules of engagement and ways of working, then

educate, train, re-educate, re-train and finally, make sure you
have a way to enforce them – Leadership is required here.

FOUR: Formal education (DDP, DDL) is a key foundation – then a lot of

actual learning will happen when the team designs and refines the
model.

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