DDMRP: The Good, the Bad, and the Ugly

There has been a lot of activity on the LinkedIn feeds of this thing called DDMRP. Now that SAP has embraced it, I expect this activity to get much stronger. But what is it really? What does it do? Is it the magic elixir to solve all supply, inventory and service issues once and for all as its proponents boast? Or is it just another fad as its opponents claim? In this article I provide a more balanced perspective.

Note: DDMRP stands for Demand-Driven Material Requirements Planning, which was introduced and is promoted by the Demand Driven Institute (DDI).

The Good

Starting with the good. DDMRP does some things traditional MRP and many other traditional approaches did not focus on or ignored completely. Notably, a lot of approaches have historically been inspired by innovative system capabilities, not so much by innovative processes. Take for example MRP II, ERP, APS, FCS and similar system types. Implementations of such systems generally take the form of input what the supply chain looks like today, and they will output what you should do to manage the day-to-day operations. You tell the system where stock is held and relevant supply parameters, and it will tell you how much to stock there. DDMRP instead takes companies back to the drawing board. Taking inspiration from queuing theory, LEAN, JIT and other schools it enables companies to determine where product should be stocked and in what form. Its focus on flow and reduction of queues around and between each stocking location, allows for effective lead times to be reduced more than would otherwise be possible. A main objective is to reduce the maximum effective lead time between any two sequential stocking locations across all the steps a product traverses from supplier to customer. As soon as a sales order comes in for an item, every stocking location in its path independently and simultaneously determines if it needs to replenish or not. This behavior is why they dubbed the approach "demand-driven", the DD in DDMRP. Since the lead time to replenish is a significant factor of safety stock, minimizing the longest lead time achieves a minimal inventory coupled with fastest possible replenishment, as needed only. The beauty of this concept should be evident to those experienced in inventory management.

The other strength of DDMRP is that it provides an easy methodology. In principle it requires no specialized systems, just follow the rules. All the parts are provided: concepts, calculations, and processes. This makes DDMRP accessible to both companies without the budget for advanced systems and their expensive implementations, as well as those without good processes in place, or bad adherence to processes. Regardless of other benefits of DDMRP, taking a company's supply chain from chaos to a controlled state will in itself be of huge value to those companies, both financially and otherwise.

The Bad

DDMRP does a lot to reduce lead times, which is beneficial in any supply chain. However, there are some lead times that cannot easily be reduced, and these limit the extent to which DDMRP can provide value. One example is overseas supply. If it takes effectively 90 days to get product ordered and delivered from China to the USA what are the options to reduce this? Options may be:

• Intermediate stocking points along the globe are costly and are not helpful in this regard. The ships themselves are moving stocking points, serving the same purpose, but better and cheaper.
• Local sourcing is sometimes an option, but not in most cases. In those cases it is inevitable to have safety stock on the US side, and plenty of stock in-transit, all well before sales orders for the same are received.
• Another option is to offload the sourcing to a third party, but that is only making it someone else's problem, not solving it.

This means DDMRP will be useful to companies that source everything locally, or could change their sourcing to do so. For all others, there is a big gap that must be addressed.

Whilst a strength of DDMRP is that it can determine WHERE product should be stocked, one of its biggest weaknesses is determining HOW MUCH to stock in such locations. Safety buffers are determined backward looking, using archaic logic with wet-finger parameter values. This is equivalent to using a naive safety stock, worse than using a traditional safety stock and certainly much worse than determining stocking levels through a multi-echelon inventory optimization. This is masked rather than addressed by the use of multiple so-called zones of inventory levels.

Whenever product demand patterns show trends or seasonality, inventory buffers should inherently flex along with the demand, otherwise service levels will fluctuate unmanaged. DDMRP acknowledges this fact through a seasonality factor that may be applied to the safety buffer levels. Since DDMRP takes no forecast as input, it should be evident this equates to using a naive forecast, worse than using a traditional statistical or judgmental forecast and certainly much worse than using a probabilistic forecast.

Similarly its use of so-called average daily usage (ADU) is nothing more than a naive forecast.

And this brings us to the ugly...

The Ugly

The ugly side of DDMRP actually has nothing to do with its concepts. Those are solid, with its strengths and weaknesses, similar to any other approach. The ugly of DDMRP is in how it is promoted and marketed, with lots of exaggeration, contradictions, and outrageous claims. This has very much been the case in the past, but still is to a degree today. In my opinion this is the primary reason DDMRP is getting so much push-back from the industry experts and practitioners. Some outrageousness in marketing is fine in that it sparks discussion, and brings attention of a new concept to a larger audience. A moderate dose of outrageousness will allow a majority of experts to overcome their initial knee-jerk reactions and accept, maybe even embrace the new concept in time. In talking to many experts I find that the sheer magnitude of outrageousness of the claims made by the DDMRP crowd, especially the early claims, have made lifelong enemies of many such experts.

I will not hash out all the faulty claims, since that would fill another few articles. But I would highlight one that has practical implications. This claim, still maintained today, is that with DDMRP you do not need a demand forecast. This claim has been nuanced more recently in that you still need forecasts for long-term planning and capacity planning, but not for replenishment. From the above it should be clear this is only true for a small subset of companies that can make ALL their lead times so short to become effectively a make-to-order business. For the majority of companies this is a falsehood. Then even for those companies for which this claim may be true, not using a forecast leads to significant inventory inefficiencies for all items except the ones with the most steady fast-moving demand patterns.

Another downside of this sharp demarcation is that it dooms every DDMRP implementation to become an additional functional silo in the supply chain, where most companies are working very hard to remove the silos they have already.

It is clear though why DDMRP followers would persist this claim. First, its outrageousnous gives it traction and visibility, sparking discussions. This may even have been the direct impetus to SAP embracing the concept. One cannot fault them for doing so. Second, it is my opinion that they simply haven't figured out how to make it work with a forecast. Unfortunately, it perpetuates an us-versus-them situation, preventing more experts and practitioners to embrace it. It does not need to be this way however; in a future article I will lay out the missed opportunity of how DDMRP and demand forecasts can not only work side-by-side, but in fact enhance each other.

The term DDMRP itself is both a misnomer and misleading. Without going into all detail, again I wish to highlight only one issue of this. DDMRP is not a flavor of MRP. It is again clear why the term was chosen: existing MRP implementations are the primary target to rip and replace. And again DDI cannot be faulted for picking this name for this reason. However, all the boasts of value it brings are in comparison to the value of MRP. That is setting the bar so very, very low. It is like boasting to a college math major that you are better at math than a third grader. Similar and even greater value than DDMRP has been achieved for decades compared to MRP. As early as the 1990's the APS systems introduced (the real ones: FYGIR, Manugistics, Numetrix, not the big ERP tag-alongs of the time) were all providing financial value of similar size as DDMRP is claiming today. On this count too, I believe DDMRP does bring additional value, but they are short-changing themselves by not comparing to the best of the rest. Whilst DDMRP brings similar order of magnitude of value, it does so with simple rules rather than the brute force of complex expensive systems. It also does a better job at controlling the bullwhip effect than those systems did. Its benefits are not as impressive as forecast-driven multi-echelon inventory optimization (MEIO) offerings of today though, caused directly by the shortcomings described above. If you already have such systems the incremental value of DDMRP may be non-existent or even negative, if you were to replace them.

However, there is good news here too. The value both approaches bring (DDMRP, MEIO) are for a large part complementary. This would indicate that combining both approaches would bring even greater combined value.

Conclusion

DDMRP is built on strong core concepts and it has a lot of potential. However, the way it is marketed and promoted today pretends to be more than it is. They paint a black-and-white picture where shades of gray are possible. This is unfortunate. It makes opponents of people that could be proponents. It allows them to hammer away at weaknesses that do not need to be weaknesses, and it draws attention away from the strengths that it certainly possesses.

Rather than us-versus-them I believe a hybrid model is possible. DDI and other DDMRP evangelists will need to open up to this possibility before it can happen. Until then, I would strongly caution companies considering DDMRP to validate it could work for them and question every boast made about it. If you have very long lead times, question if it is at all possible to reduce the longest ones and by how much. Is it sufficient to cover order lead times? Are you already in a state where supply chain processes are under control? Then DDMRP value may be very limited. Use what makes sense, but do not go all in until you have ascertained it is not a dead-end street.

As mentioned above, I will publish more articles in the near future that explain in increasing detail how DDMRP can play nice with demand forecasting and inventory optimization systems. Maybe it can persuade DDI of the same...

UPDATE:

Following the discussion caused by this article I have published a rectification:

DDMRP: A Fistful of Considerations

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