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Demand Driven MRP
Replenishment Positions vs. Safety Stock 
Why are they so different? 
Carol Ptak and Chad Smith 
Demand Driven MRP (DDMRP) is the formal planning and
execution solution for the 21st
Century introduced in the
new Orlicky’s Material Requirements Planning that
provides the ability to sense, adapt and serve today’s
highly volatile and complex demand chains. The DDMRP
method replaces the previous convention of Safety Stock
with strategically replenished positions that decouple the
supply chain and compress lead time response. This
position paper will detail the dramatic differences
between these two approaches. This paper introduces
new verbalizations and graphical depictions and should be
treated as a supplement to the book.
“Sir, please do not smoke around the fuel pumps.”
“It’s OK, I brought my fire extinguisher.”
September 2011 
www.demanddriveninstitute.com
All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
Replenishment Positions vs Safety Stock
Why are they so different?
Carol Ptak and Chad Smith
In the newest edition of Orlicky’s Material Requirements Planning the new rules for formal
planning and related execution called Demand Driven MRP (DDMRP) are introduced. A key
change from traditional MRP is the elimination of Safety Stock. You may be asking “What is
the difference between safety stock and these replenished positions you advocate?” Below
is a chart that summarizes part classification types in DDMRP. This position paper will focus
on the difference between replenished positions and the conventional safety stock notion.
All parts
Stocked
Non-
Stocked
Replenished
Replenished
Over-ride
Min-max
Non-
buffered
Lead Time
Managed
= strategically positioned and managed part= strategically positioned and managed part = non-strategic part
What is Safety Stock?
The APICS dictionary provides an excellent definition for safety stock:
1) In general, a quantity of stock planned to be in inventory to protect against fluctuations in
demand or supply. 2) In the context of master production scheduling, the additional inventory
and capacity planned as protection against forecast errors and short-term changes in the
backlog. Over-planning can be used to create safety stock.1
This definition clearly describes that safety stock is a supplementary position to guard only
against variation. Consider the dramatic increase in variation across every supply chain as
complexity increases worldwide. Combine this fact with working capital reduction mandates
and planners are now finding themselves in a huge conflict. If forecast error is high then
the safety stock supplementary position can become quite an extraordinary financial
commitment to statistically cover that error.
Are strategic and primary inventory position 
designed to decouple areas in order to compress 
lead times and dampen variability
A supplementary inventory position designed to 
make up for misalignments between planned 
orders, actual demand and supply orders
Are strategic and primary inventory position 
designed to decouple areas in order to compress 
lead times and dampen variability
A supplementary inventory position designed to 
make up for misalignments between planned 
orders, actual demand and supply orders
Safety Stock Replenishment
1
APICS dictionary 12th
edition, Blackstone 2010
All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
Replenishment positions, however, are strategic and primary in nature. Replenishment
positions are put into place with the idea of stopping or preventing the amplification and the
impact of variation instead of reacting after it happens like safety stock does. It is similar to
the difference between the notions of a firewall versus a fire extinguisher. One isolates,
prevents and protects while the other reacts only after a fire has occurred.
Replenishment
Buffer = Safety Stock =
There are four significant differences between replenished and safety stock positions.
1. The Planning and Execution Equation
Replenishment positions are primary in nature. As such, all planning activity flows through
this position decoupling discrete demand requirements from generated supply orders.
Supply orders are generated based on what zone the “available stock” is in.
DDMRP Available Stock Equation (Finished Items) =
On-hand + On-order (open supply)
– Sales Order Demand (due in the past, due to today and qualified spikes)
DDMRP Available Stock Equation (Intermediates and Purchased) =
On-hand + On-order (open supply)
– Work Order Demand Allocations (due in the past, due to today and qualified spikes)
As seen in the equations above, replenishment buffers use only actual customer demand or
consumption (typically represented in the form of Sales Orders). For intermediates, the
assumption is that the work order demand allocations are driven by Sales Orders.
Replenishment buffers do have a safety zone built into them. Unlike safety stock, however,
the penetration of the available stock equation into that safety zone DOES NOT LAUNCH A
NEW ORDER, it simply points out the need to consider expediting an ALREADY EXISTING
open supply order.
Safety stock supplements supply orders that are generated by a demand allocation
explosion; these are typically planned orders that are primarily driven from a forecast. The
inventory exposure of a safety stocked position at any one time will be the total of on-hand,
on-order and safety stock. The on-hand and on-order sections directly correlate to planned
orders. Only the safety stock section is independent of planned orders.
All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
Safety
Stock
On-
Order
On-Hand
Green
Red
Yellow
Directly related to
planned orders
Independent of
planned orders
Independent of
planned orders
(no forecast)►avg on hand◄
Safety Stocked ItemReplenished Item
Replenishment positions allow actual demand consumption to be independent of specific
supply orders. According to Dr. Eli Berniker, one of the world’s foremost experts on
Sociotechnical Systems (STS) the DDMRP method has “cracked the problem by, in effect,
turning independent demand into what mimics dependent demand via strategic buffers. In
place of unreliable statistical forecasts, you have specific requirements calculated within ops
for the replenishment of internal buffers.”
2. Variability Control
Safety stock exists because there will be variation from what was
planned versus what is actually needed. Safety stock logic launches
AND expedites a new supply order when unexpected variation causes
inventory to drop below a pre-determined level. This can act like a
grenade thrown over the supplier’s fence. This can set off a “bullwhip
effect” in most supply chains. The bullwhip effect is defined as:
An extreme change in the supply position upstream in a supply chain generated by a small
change in demand downstream in the supply chain. 2
Safety stock can protect only one side of the relationship. This protection can be either
inadequate or capital intensive depending on the volatility of demand. Replenishment
buffers are designed to protect both sides of the position. On the customer side it allows
supplier variability to be dampened thus promoting availability. On the supplier side it
allows for a natural aggregation of real demand and consumption. This naturally dampens
variability from the demand side AND allows for batch performance that relates to actual
demand.
2
APICS dictionary 12th
Edition Blackstone 2010
All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
Cumulative Supply Variability
Supplier of Stock Consumer of stock
Cumulative Demand Variability
Reliable AvailabilityAggregated and Steadier Supply
Requirements
Green
Yellow
Red
Compressed Lead Time
The win for suppliers The win for consumers
Replenished positions are not susceptible to the forecast error or the order spikes that
typically overwhelm or grossly inflate statistical safety stock positions. This is because, with
regard to replenished positions, only sales orders are considered. Forecasted orders are
simply not part of the supply generation equation. You cannot be susceptible to the error of
something that is irrelevant.
Additionally, replenished positions have two forms of spike protection. Replenishment
buffers do have a safety zone built into them. One of the critical elements in sizing that
zone is the buffer profile that the replenished item falls into (for more information about
buffer profiles see Chapter 24 in Orlicky’s MRP 3rd
edition). Part of the buffer profile
determination is the level of variability associated with the parts/SKU that is associated with
the profile. A component of that variability is how susceptible the part/SKU is to spikes and
magnitude of those spikes.
Lead Time
Variability
Green Zone Impact Red Zone Base Impact
Long Lead Time 20-40% Usage over LT 20-40% Usage over LT
Medium Lead Time 41-60% Usage over LT 41-60% Usage over LT
Short Lead Time 61-100% Usage over LT 61-100% Usage over LT
Red Zone Safety Impact
High Variability 60-100% Red Zone Base
Medium Variability 41-60% Red Zone Base
Low Variability 20-40% Red Zone Base
Red Zone
Base
Red Zone
Safety
Yellow
Green
Red Zone
Base
Red Zone
Safety
Yellow
Green
Usage over 1 LT
MOQ if > calculated green
zone using lead time factor
This is an example of a strategically replenished position and the factors that comprise the
various zones. The zones can be calculated using usage over lead time. The red zone is
All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
divided into two tiers – a base and a safety factor. If a part/SKU is in its proper buffer
profile then its average on-hand position will be in the lower half of the yellow zone.
The second type of spike protection is much more pro-active and, in many scenarios, allows
the amount of safety carried in a buffer to be dramatically lowered. This type of spike
protection is called “order spike qualification.” Order spikes are Sales Orders that trip an
“order spike threshold” within an “order spike horizon.”
Order Spike Horizon (grey area)
R Order Spike Threshold
SO
#
1234SO
#
1235SO
#
1236SO
#
1237SO
#
1238SO
#
1239SO
#
1240
SO
#
1241SO
#
1242
Part #
XYZ
SalesOrderQuantity
SO
#
1243
SO
#
1243
SO
#
1244
SO
#
1244
Above you see an example of order spike qualification. The threshold is the dotted line and
is set at 50% of the total red zone. The order spike horizon is the shaded area of time
representing 10 days. Any Sales Order within a 10 day horizon that is greater than 50% of
the total red zone is flagged and put into the available stock equation (Sales Order 1242).
Sales Order 1244 is outside of the set horizon so is disregarded in the available stock
equation. The order spike horizon should be set at a minimum to the realistic lead time of
the part. This can be either the Purchasing Lead Time or ASR Lead Time3
for manufactured
parts.
Order spike qualification is covered in depth in Chapter 25 of Orlicky’s MRP 3rd
edition. This
type of qualification is impossible for conventional safety stock positions. MRP systems do
not filter demand for sales orders only within a window of time AND then apply that to a
dynamic threshold setting set against a stocked position.
3. Lead Time Compression and Positioning Limitations
One of the most obvious differences between replenished positions and safety stock is their
relationship to lead times and where they are placed. First and foremost, replenished
positions decouple lead times whereas safety stock does not. Below you see a Bill of
Material for parent item A. The shaded boxes represent items
that have safety stock and the numbers beside each box
represents either the part’s manufacturing lead time of
purchasing lead time. Note that part B is not safety stocked.
Under most conventional approaches intermediate components
are not safety stocked since by definition safety stock is intended
to guard against the variability of supply or demand. Part B is an
internally produced part.
A
B C
D
10 days
5 days
15 days
25 days
3
ASR Lead Time is defined as the longest unprotected sequence in the BOM. This is a more realistic
lead time. See Chapter 23 of Orlicky’s MRP 3rd
Edition.
All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
What is the lead time for Part A under these conditions? On one leg of the BOM (A – C) it is
35 days. On the other leg of the BOM (A – B – D) it is 30 days. That means that safety
stock for position A will need to account for forecast variability over a 35 day time frame.
Additionally, it drives planning to use planned orders at least 35 days in advance in order to
create the necessary supply orders. Even in the case where intermediates ARE safety
stocked it does not change the lead time equations; 35 days must still be used.
Using a replenished position (symbolized with the three
colored bar symbol) the lead time for parent A is decoupled
from the supplier lead time since both purchased parts are
replenished. Part A’s longest unprotected sequence in the
BOM is 15 days. This is referred to as ASR Lead Time in
DDMRP. The buffer position can now be sized according to
Average Daily Usage combined with the ASR Lead Time and
under the parameters of the assigned buffer profiles.
Additionally, under DDMRP logic an analysis can easily be
done to see if declaring intermediate component B a replenished position is worth the
inventory investment. At a minimum it could reduce the ASR Lead Time of Parent item A to
10 days (matching its manufacturing lead time). If intermediate component B is a shared
component that feeds multiple parents AND it lies in the ASR Lead Time chain for many of
those other parents then it is most certainly worth it. This may seem to be heretical after
so many years of trying to flatten BOMs, but, under the DDMRP method companies have
actually been inserting layers in their bills in order to take advantage of this common
component leverage factor. (Detailed example in Chapter 23 of Orlicky’s MRP 3rd Edition)
A
B C
D
10 days
5 days
15 days
25 days
If we look at the above point in a more linear fashion it might look something like the next
diagram where, under DDMRP, lead times have compressed and variability is dampened as
compared to longer lead time chains with higher degrees of accumulated variability
(represented by the wavy lines in both directions).
DCDCSupplierSupplier MfgMfg Finished
Stock
Finished
Stock
Raw
Stock
Raw
Stock
Intermediate
Stock
Intermediate
Stock MfgMfg
Dampened Variability
Compressed Lead Times
DDMRP
All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
DCDCSupplierSupplier MfgMfg Finished
Stock
Finished
Stock
Raw
Stock
Raw
Stock
Intermediate
Stock
Intermediate
Stock MfgMfg
Safety Stock
Open Supply
On-Hand
Safety Stock
Open Supply
On-Hand
Safety Stock
Open Supply
On-Hand
Safety Stock
Open Supply
On-Hand
Safety Stock
Open Supply
On-Hand
Safety Stock
Open Supply
On-Hand
Un-Compressed Lead Times
Partially Dampened Variability
Safety Stock
4. Dynamic Adjustments
In most cases safety stock is relatively static. There are some very sophisticated dynamic
safety stock systems. All of these systems attempt to take forecast variability and combine
that with expected changes in demand including promotions and seasonality to adjust the
safety stock levels to give better protection within certain windows of time. While this is
obviously superior to static positions, the dynamic portion of this approach is limited to the
safety stock zone only – the rest of the on-order and on-hand inventory still corresponds
directly to planned orders.
Safety
Stock
Open
Supply
On-Hand
Green
Red
Yellow
Only this portion
flexes
The entire
buffer flexes
with changes
to demand
Directly related to
planned orders
►avg on hand◄
When on-hand goes below safety
stock a supply order is
LAUNCHED and EXPEDITED
When on-hand goes below red an
EXISTING supply order is EXPEDITED
▲▲
With replenished positions the entire buffer flexes with regard to changes in actual
consumption or planned adjustments like seasonality, product introduction and/or deletion.
Dynamic Buffer Adjustment
AvailableStockPosition
AverageDailyUsage
100
200
300
400
500
600
700
800
900
1000
10
20
30
40
50
60
70
80
90
100
Dynamic Buffer Adjustment
AvailableStockPosition
AverageDailyUsage
100
200
300
400
500
600
700
800
900
1000
100
200
300
400
500
600
700
800
900
1000
10
20
30
40
50
60
70
80
90
100
10
20
30
40
50
60
70
80
90
100
100
200
300
400
500
600
700
800
900
1000
100
200
300
400
500
600
700
800
900
1000
10
20
30
40
50
60
70
80
90
100
10
20
30
40
50
60
70
80
90
100
AverageDailyUsage
ZoneLevels
Seasonal Planned Adjustment
All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
Summary Comparison of Safety Stock and Replenished Positions
Replenishment BuffersSafety Stock
Protects both side of the stock positionProtects only one side of the stock position
Encroachment into red zone triggers an expedite 
of an existing open supply order
Any encroachment triggers a new supply order 
that is flagged for expedite
Are often placed at intermediate positionsAre not placed at intermediate positions
Directly compress lead timesDo not impact lead times
Dynamically adjustedIn most cases they are static buffers
All demand (actual + qualified spikes) is fulfilled 
from the buffers – they are planning and execution 
points.
Planned orders pass OVER safety stock positions.  
Safety Stock is a reaction point only.
Are strategic and primary inventory position 
designed to decouple areas in order to compress 
lead times and dampen variability
A supplementary inventory position designed to 
make up for misalignments between planned 
orders, actual demand and supply orders
Replenishment BuffersSafety Stock
Protects both side of the stock positionProtects only one side of the stock position
Encroachment into red zone triggers an expedite 
of an existing open supply order
Any encroachment triggers a new supply order 
that is flagged for expedite
Are often placed at intermediate positionsAre not placed at intermediate positions
Directly compress lead timesDo not impact lead times
Dynamically adjustedIn most cases they are static buffers
All demand (actual + qualified spikes) is fulfilled 
from the buffers – they are planning and execution 
points.
Planned orders pass OVER safety stock positions.  
Safety Stock is a reaction point only.
Are strategic and primary inventory position 
designed to decouple areas in order to compress 
lead times and dampen variability
A supplementary inventory position designed to 
make up for misalignments between planned 
orders, actual demand and supply orders
The third edition of Orlicky’s Material
Requirements Planning tells the story of MRP;
its past, its present and the blueprint for its
future. The future, something called Demand
Driven MRP (DDMRP), is a true multi-echelon
supply chain solution that represents a fusion
of the still relevant aspects of MRP and DRP
combined with the pull-based methods of Lean
and the Theory of Constraints and
incorporates revolutionary innovations. The
future is now.
“It is in short the best book in this subject area
that I have ever seen.”
“Carol and Chad: as one of the original MRPers, I
applaud you and thank you for your work, and for
advancing, with this book, our science more than any
other has done in many years.” Bob Reary
John G. Schleier Jr.
“This is a very useful and
brilliant book. Ptak and Smith
have resolved the core problems
of MRP systems.”
Eli Berniker PhD
“This comprehensive text will, in
my opinion, become THE new
standard for anyone who wants
to get ahead in manufacturing.”
William M Hewitt
Praise for the new Orlicky’s Material Requirements
Planning (Ptak and Smith, McGraw-Hill, 2011)
Official book page at:
www.orlickysmrp.com
All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
About the authors
To learn more about Demand Driven Material Requirements Planning go to
www.demanddrivenmrp.com and explore whitepapers, downloads, podcasts and special
book offers.
Carol Ptak is currently a partner with the Demand Driven Institute, and was
most recently at Pacific Lutheran University as Visiting Professor and
Distinguished Executive in Residence. Previously, she was vice president and
global industry executive for manufacturing and distribution industries at
PeopleSoft where she developed the concept of demand driven manufacturing
(DDM). Ms. Ptak is also a past president of APICS and has authored several
books on MRP, ERP, Lean and Theory of Constraints (TOC).
Chad Smith is currently a partner with the Demand Driven Institute as well
as cofounder and managing partner of Constraints Management Group, a
services and technology company specializing in pull-based manufacturing,
materials, and project management systems for mid-range and large
manufacturers. He has been at the forefront of developing and articulating
Demand Driven MRP (DDMRP) and is also an internationally recognized expert
on the Theory of Constraints (TOC).
 
 
Transform Push and Promote to Position and Pull 
www.demanddriveninstitute.com

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DDMRP vs Safety Stock

  • 1. Demand Driven MRP Replenishment Positions vs. Safety Stock  Why are they so different?  Carol Ptak and Chad Smith  Demand Driven MRP (DDMRP) is the formal planning and execution solution for the 21st Century introduced in the new Orlicky’s Material Requirements Planning that provides the ability to sense, adapt and serve today’s highly volatile and complex demand chains. The DDMRP method replaces the previous convention of Safety Stock with strategically replenished positions that decouple the supply chain and compress lead time response. This position paper will detail the dramatic differences between these two approaches. This paper introduces new verbalizations and graphical depictions and should be treated as a supplement to the book. “Sir, please do not smoke around the fuel pumps.” “It’s OK, I brought my fire extinguisher.” September 2011  www.demanddriveninstitute.com All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
  • 2. Replenishment Positions vs Safety Stock Why are they so different? Carol Ptak and Chad Smith In the newest edition of Orlicky’s Material Requirements Planning the new rules for formal planning and related execution called Demand Driven MRP (DDMRP) are introduced. A key change from traditional MRP is the elimination of Safety Stock. You may be asking “What is the difference between safety stock and these replenished positions you advocate?” Below is a chart that summarizes part classification types in DDMRP. This position paper will focus on the difference between replenished positions and the conventional safety stock notion. All parts Stocked Non- Stocked Replenished Replenished Over-ride Min-max Non- buffered Lead Time Managed = strategically positioned and managed part= strategically positioned and managed part = non-strategic part What is Safety Stock? The APICS dictionary provides an excellent definition for safety stock: 1) In general, a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply. 2) In the context of master production scheduling, the additional inventory and capacity planned as protection against forecast errors and short-term changes in the backlog. Over-planning can be used to create safety stock.1 This definition clearly describes that safety stock is a supplementary position to guard only against variation. Consider the dramatic increase in variation across every supply chain as complexity increases worldwide. Combine this fact with working capital reduction mandates and planners are now finding themselves in a huge conflict. If forecast error is high then the safety stock supplementary position can become quite an extraordinary financial commitment to statistically cover that error. Are strategic and primary inventory position  designed to decouple areas in order to compress  lead times and dampen variability A supplementary inventory position designed to  make up for misalignments between planned  orders, actual demand and supply orders Are strategic and primary inventory position  designed to decouple areas in order to compress  lead times and dampen variability A supplementary inventory position designed to  make up for misalignments between planned  orders, actual demand and supply orders Safety Stock Replenishment 1 APICS dictionary 12th edition, Blackstone 2010 All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
  • 3. Replenishment positions, however, are strategic and primary in nature. Replenishment positions are put into place with the idea of stopping or preventing the amplification and the impact of variation instead of reacting after it happens like safety stock does. It is similar to the difference between the notions of a firewall versus a fire extinguisher. One isolates, prevents and protects while the other reacts only after a fire has occurred. Replenishment Buffer = Safety Stock = There are four significant differences between replenished and safety stock positions. 1. The Planning and Execution Equation Replenishment positions are primary in nature. As such, all planning activity flows through this position decoupling discrete demand requirements from generated supply orders. Supply orders are generated based on what zone the “available stock” is in. DDMRP Available Stock Equation (Finished Items) = On-hand + On-order (open supply) – Sales Order Demand (due in the past, due to today and qualified spikes) DDMRP Available Stock Equation (Intermediates and Purchased) = On-hand + On-order (open supply) – Work Order Demand Allocations (due in the past, due to today and qualified spikes) As seen in the equations above, replenishment buffers use only actual customer demand or consumption (typically represented in the form of Sales Orders). For intermediates, the assumption is that the work order demand allocations are driven by Sales Orders. Replenishment buffers do have a safety zone built into them. Unlike safety stock, however, the penetration of the available stock equation into that safety zone DOES NOT LAUNCH A NEW ORDER, it simply points out the need to consider expediting an ALREADY EXISTING open supply order. Safety stock supplements supply orders that are generated by a demand allocation explosion; these are typically planned orders that are primarily driven from a forecast. The inventory exposure of a safety stocked position at any one time will be the total of on-hand, on-order and safety stock. The on-hand and on-order sections directly correlate to planned orders. Only the safety stock section is independent of planned orders. All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
  • 4. Safety Stock On- Order On-Hand Green Red Yellow Directly related to planned orders Independent of planned orders Independent of planned orders (no forecast)►avg on hand◄ Safety Stocked ItemReplenished Item Replenishment positions allow actual demand consumption to be independent of specific supply orders. According to Dr. Eli Berniker, one of the world’s foremost experts on Sociotechnical Systems (STS) the DDMRP method has “cracked the problem by, in effect, turning independent demand into what mimics dependent demand via strategic buffers. In place of unreliable statistical forecasts, you have specific requirements calculated within ops for the replenishment of internal buffers.” 2. Variability Control Safety stock exists because there will be variation from what was planned versus what is actually needed. Safety stock logic launches AND expedites a new supply order when unexpected variation causes inventory to drop below a pre-determined level. This can act like a grenade thrown over the supplier’s fence. This can set off a “bullwhip effect” in most supply chains. The bullwhip effect is defined as: An extreme change in the supply position upstream in a supply chain generated by a small change in demand downstream in the supply chain. 2 Safety stock can protect only one side of the relationship. This protection can be either inadequate or capital intensive depending on the volatility of demand. Replenishment buffers are designed to protect both sides of the position. On the customer side it allows supplier variability to be dampened thus promoting availability. On the supplier side it allows for a natural aggregation of real demand and consumption. This naturally dampens variability from the demand side AND allows for batch performance that relates to actual demand. 2 APICS dictionary 12th Edition Blackstone 2010 All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
  • 5. Cumulative Supply Variability Supplier of Stock Consumer of stock Cumulative Demand Variability Reliable AvailabilityAggregated and Steadier Supply Requirements Green Yellow Red Compressed Lead Time The win for suppliers The win for consumers Replenished positions are not susceptible to the forecast error or the order spikes that typically overwhelm or grossly inflate statistical safety stock positions. This is because, with regard to replenished positions, only sales orders are considered. Forecasted orders are simply not part of the supply generation equation. You cannot be susceptible to the error of something that is irrelevant. Additionally, replenished positions have two forms of spike protection. Replenishment buffers do have a safety zone built into them. One of the critical elements in sizing that zone is the buffer profile that the replenished item falls into (for more information about buffer profiles see Chapter 24 in Orlicky’s MRP 3rd edition). Part of the buffer profile determination is the level of variability associated with the parts/SKU that is associated with the profile. A component of that variability is how susceptible the part/SKU is to spikes and magnitude of those spikes. Lead Time Variability Green Zone Impact Red Zone Base Impact Long Lead Time 20-40% Usage over LT 20-40% Usage over LT Medium Lead Time 41-60% Usage over LT 41-60% Usage over LT Short Lead Time 61-100% Usage over LT 61-100% Usage over LT Red Zone Safety Impact High Variability 60-100% Red Zone Base Medium Variability 41-60% Red Zone Base Low Variability 20-40% Red Zone Base Red Zone Base Red Zone Safety Yellow Green Red Zone Base Red Zone Safety Yellow Green Usage over 1 LT MOQ if > calculated green zone using lead time factor This is an example of a strategically replenished position and the factors that comprise the various zones. The zones can be calculated using usage over lead time. The red zone is All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
  • 6. divided into two tiers – a base and a safety factor. If a part/SKU is in its proper buffer profile then its average on-hand position will be in the lower half of the yellow zone. The second type of spike protection is much more pro-active and, in many scenarios, allows the amount of safety carried in a buffer to be dramatically lowered. This type of spike protection is called “order spike qualification.” Order spikes are Sales Orders that trip an “order spike threshold” within an “order spike horizon.” Order Spike Horizon (grey area) R Order Spike Threshold SO # 1234SO # 1235SO # 1236SO # 1237SO # 1238SO # 1239SO # 1240 SO # 1241SO # 1242 Part # XYZ SalesOrderQuantity SO # 1243 SO # 1243 SO # 1244 SO # 1244 Above you see an example of order spike qualification. The threshold is the dotted line and is set at 50% of the total red zone. The order spike horizon is the shaded area of time representing 10 days. Any Sales Order within a 10 day horizon that is greater than 50% of the total red zone is flagged and put into the available stock equation (Sales Order 1242). Sales Order 1244 is outside of the set horizon so is disregarded in the available stock equation. The order spike horizon should be set at a minimum to the realistic lead time of the part. This can be either the Purchasing Lead Time or ASR Lead Time3 for manufactured parts. Order spike qualification is covered in depth in Chapter 25 of Orlicky’s MRP 3rd edition. This type of qualification is impossible for conventional safety stock positions. MRP systems do not filter demand for sales orders only within a window of time AND then apply that to a dynamic threshold setting set against a stocked position. 3. Lead Time Compression and Positioning Limitations One of the most obvious differences between replenished positions and safety stock is their relationship to lead times and where they are placed. First and foremost, replenished positions decouple lead times whereas safety stock does not. Below you see a Bill of Material for parent item A. The shaded boxes represent items that have safety stock and the numbers beside each box represents either the part’s manufacturing lead time of purchasing lead time. Note that part B is not safety stocked. Under most conventional approaches intermediate components are not safety stocked since by definition safety stock is intended to guard against the variability of supply or demand. Part B is an internally produced part. A B C D 10 days 5 days 15 days 25 days 3 ASR Lead Time is defined as the longest unprotected sequence in the BOM. This is a more realistic lead time. See Chapter 23 of Orlicky’s MRP 3rd Edition. All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
  • 7. What is the lead time for Part A under these conditions? On one leg of the BOM (A – C) it is 35 days. On the other leg of the BOM (A – B – D) it is 30 days. That means that safety stock for position A will need to account for forecast variability over a 35 day time frame. Additionally, it drives planning to use planned orders at least 35 days in advance in order to create the necessary supply orders. Even in the case where intermediates ARE safety stocked it does not change the lead time equations; 35 days must still be used. Using a replenished position (symbolized with the three colored bar symbol) the lead time for parent A is decoupled from the supplier lead time since both purchased parts are replenished. Part A’s longest unprotected sequence in the BOM is 15 days. This is referred to as ASR Lead Time in DDMRP. The buffer position can now be sized according to Average Daily Usage combined with the ASR Lead Time and under the parameters of the assigned buffer profiles. Additionally, under DDMRP logic an analysis can easily be done to see if declaring intermediate component B a replenished position is worth the inventory investment. At a minimum it could reduce the ASR Lead Time of Parent item A to 10 days (matching its manufacturing lead time). If intermediate component B is a shared component that feeds multiple parents AND it lies in the ASR Lead Time chain for many of those other parents then it is most certainly worth it. This may seem to be heretical after so many years of trying to flatten BOMs, but, under the DDMRP method companies have actually been inserting layers in their bills in order to take advantage of this common component leverage factor. (Detailed example in Chapter 23 of Orlicky’s MRP 3rd Edition) A B C D 10 days 5 days 15 days 25 days If we look at the above point in a more linear fashion it might look something like the next diagram where, under DDMRP, lead times have compressed and variability is dampened as compared to longer lead time chains with higher degrees of accumulated variability (represented by the wavy lines in both directions). DCDCSupplierSupplier MfgMfg Finished Stock Finished Stock Raw Stock Raw Stock Intermediate Stock Intermediate Stock MfgMfg Dampened Variability Compressed Lead Times DDMRP All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
  • 8. DCDCSupplierSupplier MfgMfg Finished Stock Finished Stock Raw Stock Raw Stock Intermediate Stock Intermediate Stock MfgMfg Safety Stock Open Supply On-Hand Safety Stock Open Supply On-Hand Safety Stock Open Supply On-Hand Safety Stock Open Supply On-Hand Safety Stock Open Supply On-Hand Safety Stock Open Supply On-Hand Un-Compressed Lead Times Partially Dampened Variability Safety Stock 4. Dynamic Adjustments In most cases safety stock is relatively static. There are some very sophisticated dynamic safety stock systems. All of these systems attempt to take forecast variability and combine that with expected changes in demand including promotions and seasonality to adjust the safety stock levels to give better protection within certain windows of time. While this is obviously superior to static positions, the dynamic portion of this approach is limited to the safety stock zone only – the rest of the on-order and on-hand inventory still corresponds directly to planned orders. Safety Stock Open Supply On-Hand Green Red Yellow Only this portion flexes The entire buffer flexes with changes to demand Directly related to planned orders ►avg on hand◄ When on-hand goes below safety stock a supply order is LAUNCHED and EXPEDITED When on-hand goes below red an EXISTING supply order is EXPEDITED ▲▲ With replenished positions the entire buffer flexes with regard to changes in actual consumption or planned adjustments like seasonality, product introduction and/or deletion. Dynamic Buffer Adjustment AvailableStockPosition AverageDailyUsage 100 200 300 400 500 600 700 800 900 1000 10 20 30 40 50 60 70 80 90 100 Dynamic Buffer Adjustment AvailableStockPosition AverageDailyUsage 100 200 300 400 500 600 700 800 900 1000 100 200 300 400 500 600 700 800 900 1000 10 20 30 40 50 60 70 80 90 100 10 20 30 40 50 60 70 80 90 100 100 200 300 400 500 600 700 800 900 1000 100 200 300 400 500 600 700 800 900 1000 10 20 30 40 50 60 70 80 90 100 10 20 30 40 50 60 70 80 90 100 AverageDailyUsage ZoneLevels Seasonal Planned Adjustment All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
  • 9. Summary Comparison of Safety Stock and Replenished Positions Replenishment BuffersSafety Stock Protects both side of the stock positionProtects only one side of the stock position Encroachment into red zone triggers an expedite  of an existing open supply order Any encroachment triggers a new supply order  that is flagged for expedite Are often placed at intermediate positionsAre not placed at intermediate positions Directly compress lead timesDo not impact lead times Dynamically adjustedIn most cases they are static buffers All demand (actual + qualified spikes) is fulfilled  from the buffers – they are planning and execution  points. Planned orders pass OVER safety stock positions.   Safety Stock is a reaction point only. Are strategic and primary inventory position  designed to decouple areas in order to compress  lead times and dampen variability A supplementary inventory position designed to  make up for misalignments between planned  orders, actual demand and supply orders Replenishment BuffersSafety Stock Protects both side of the stock positionProtects only one side of the stock position Encroachment into red zone triggers an expedite  of an existing open supply order Any encroachment triggers a new supply order  that is flagged for expedite Are often placed at intermediate positionsAre not placed at intermediate positions Directly compress lead timesDo not impact lead times Dynamically adjustedIn most cases they are static buffers All demand (actual + qualified spikes) is fulfilled  from the buffers – they are planning and execution  points. Planned orders pass OVER safety stock positions.   Safety Stock is a reaction point only. Are strategic and primary inventory position  designed to decouple areas in order to compress  lead times and dampen variability A supplementary inventory position designed to  make up for misalignments between planned  orders, actual demand and supply orders The third edition of Orlicky’s Material Requirements Planning tells the story of MRP; its past, its present and the blueprint for its future. The future, something called Demand Driven MRP (DDMRP), is a true multi-echelon supply chain solution that represents a fusion of the still relevant aspects of MRP and DRP combined with the pull-based methods of Lean and the Theory of Constraints and incorporates revolutionary innovations. The future is now. “It is in short the best book in this subject area that I have ever seen.” “Carol and Chad: as one of the original MRPers, I applaud you and thank you for your work, and for advancing, with this book, our science more than any other has done in many years.” Bob Reary John G. Schleier Jr. “This is a very useful and brilliant book. Ptak and Smith have resolved the core problems of MRP systems.” Eli Berniker PhD “This comprehensive text will, in my opinion, become THE new standard for anyone who wants to get ahead in manufacturing.” William M Hewitt Praise for the new Orlicky’s Material Requirements Planning (Ptak and Smith, McGraw-Hill, 2011) Official book page at: www.orlickysmrp.com All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved.
  • 10. All material © copyright 2011, Demand Driven Institute, LLC, all rights reserved. About the authors To learn more about Demand Driven Material Requirements Planning go to www.demanddrivenmrp.com and explore whitepapers, downloads, podcasts and special book offers. Carol Ptak is currently a partner with the Demand Driven Institute, and was most recently at Pacific Lutheran University as Visiting Professor and Distinguished Executive in Residence. Previously, she was vice president and global industry executive for manufacturing and distribution industries at PeopleSoft where she developed the concept of demand driven manufacturing (DDM). Ms. Ptak is also a past president of APICS and has authored several books on MRP, ERP, Lean and Theory of Constraints (TOC). Chad Smith is currently a partner with the Demand Driven Institute as well as cofounder and managing partner of Constraints Management Group, a services and technology company specializing in pull-based manufacturing, materials, and project management systems for mid-range and large manufacturers. He has been at the forefront of developing and articulating Demand Driven MRP (DDMRP) and is also an internationally recognized expert on the Theory of Constraints (TOC).     Transform Push and Promote to Position and Pull  www.demanddriveninstitute.com