Managing Demand Spikes in A Demand-Driven Supply Chain

Single Use Replenishment (SUR?): A comprehensive planning solution for recognizing and servicing demand spikes in your supply chain? today!

In my earlier blog post, Why are we busy pushing? Pull your plants for a LEANER Supply Chain…Today , I concluded that no one wants to build to forecast, but most of us do exactly that. I also argued that you don?t have to be in a perfect LEAN state to build to customer demand. You can do this in your own environment, starting today. You don?t have to accept the inefficiencies of building to forecast?there really is a better way.

In another blog post, Can You Plan Using Push and Execute Using Pull?, I explained why it is necessary for us to employ a different planning method in a demand-driven, pull or LEAN environment. Solutions like LEAN PLANNER? scan the planning horizon and calculate the buffer size (KANBAN/ROP) for the entire time horizon. You now have a dynamic LEAN plan that adjusts itself to the changing demand profile. You can see dependent demand across all the levels of product structure on supply chain nodes that are managed entirely by pull.

Variability is the biggest enemy of a LEAN supply chain. Variability is what leads to stock outages or, for that matter, to excess. Your buffers are always sized to service a certain level of variability. This is the reason that LEAN advocates advise smoothening out everything that contributes to variability. Manufacture in smaller lot sizes. Work with your suppliers to improve the quality of supplies. They even advise asking your customers to order in smaller lot sizes over a longer time period rather than in lump sums!

Unfortunately, most of us do not have the luxury of working in a near-zero variability environment. There is far too much variability that we can?t control. We have to learn to live and work with the variability we have today, smoothening it as our product, supplier, and customer base mature.

A typical approach to addressing this challenge is to use the push method for planning. It makes sense to try to plan ahead and source as early as possible if we have high variability, or unpredictability, in our supply. The same is true of manufacturing.

Unfortunately, this approach has never worked. It doesn?t take long to get into a reactive mode. Our supplies get out of sync with our demand very quickly and we find ourselves building what our customers don?t need. Inventory starts piling up. Soon we start missing our shipments, too.

Traditional LEAN advocates the recalculation of KANBAN/reorder point (ROP) sizes as your demand profile changes. Depending on the number of nodes and products and the degree of variability, this method can quickly become overwhelming in a manual environment. Our LEAN PLANNER? solution alleviates it by automating this process. However, such an approach may still not be adequate to service rare demand spikes that are way beyond normal and outside of standard deviation. Trying to service such demand by bumping up buffer sizes also increase inventories significantly.

An alternative approach is to implement business rules that can a detect spikes in the demand forecast ahead of time and b create a one-time push replenishment to service whatever cannot be serviced using the current inventory buffers. This is what we accomplish through our Single Use Replenishment (SUR?) planning solution.

During a planning run, the SUR? solution scans the entire planning horizon, applying business rules to recognize demand spikes that cannot be serviced using present KANBAN/ROP sizes, and creating one-time push replenishments for them. You now have a planning solution that services regular demand using pull (LEAN PLANNER?) and unusual demand spikes using push (SUR?). In essence, you are using the best of push and pull techniques to plan for the type of demand that they are best suited for. This ensures a 100% service level at significantly optimized inventory.

If the planning run outputs too many one-time push replenishments, you are most likely running, or on the verge of running, a push system. You must either bump up your ROP/KANBAN sizes or smoothen your variability to bring down the number of push replenishments.

On the other hand, if you have none or only a few one-time replenishments, then most likely your buffer sizes are too large and you have an opportunity to optimize inventories.

Figure [1] displays the output of such a planning solution in real life.

 

 

Figure [1] ? Typically, the pull supply plan is a replica of the demand forecast. The exceptions are demand spikes, for which a one-time Single Use Replenishment (SUR?), a time-phased ?push? replenishment, is created.

In a future blog post, I will explain how the SUR? solution also smoothens these one-time push replenishments and attenuates them at the first opportunity, thus preventing them from propagating upstream.

In summary, a Single Use Replenishment (SUR?) solution extends the capabilities of a LEAN planning solution (LEAN PLANNER?), as below:

 

[a] Offers 100% service level without a need to increase buffer (KANBAN/ROP) size. For most customers it is not practical to resize KANBAN/ROP every time their demand profile changes. Besides with their level of variability, it will require them to carry very large inventories to achieve 100% service level. SUR? offers an excellent practical alternative.

[b] Provides dependent demand visibility: The dependent demand from these demand spikes is now visible to all the levels of the product structure on all the nodes of the supply chain.

It can even generate delivery rescheduling recommendations when necessary, an option not available in a traditional pull environment. You can fine-tune these messages based on your business rules. I?ll discuss this function more in one of my future blog posts.

[c] Offers an opportunity to smooth and attenuate demand spikes and eliminate bullwhip effects: In a traditional push environment, a spike in demand is simply passed over to the next level of supply. A small spike creates a much larger variability upstream if simply passed from one node to another. SUR? presents a unique opportunity of smoothening and attenuating the spike at the source based on user-defined business rules.

This means that a demand spike at the finished product level may create a one-time replenishment. But since this replenishment is smoothened, the lower level assemblies and components can continue to service this demand spike using their normal KANBAN/ROP size. I?ll discuss this further in a future blog post.

[d] Continues to support pull execution: Like the LEAN plan, SUR?s are also dynamic. They constantly recalibrate as the demand profile changes. While these replenishments do introduce ?push? behavior in a supply chain, you only execute to SUR?s that are within the lead-time of a product. Those outside the lead-time are only for planning purposes.

Additionally, the inventories sourced using this one-time replenishment become a part of the KANBAN/ROP managed inventory. Excess created by forecast inaccuracies is momentary and inventories are pulled back into normal levels very quickly by the pull nature of the execution.

[e] Flex between push and pull: SUR?s offer a unique opportunity to take advantage of the best of push and pull techniques. A push method is often preferred when you introduce a new product (NPI) or onboard a new vendor or a customer. Mature products and markets are better suited to pull methods. LEAN PLANNER? and SUR? solutions in combination make it easier for you to identify such opportunities and create a good balance between the two. You always stay informed and in control of this balance by fine-tuning the business rules. I will discuss this opportunity in more detail in one of my future blogs posts.

You cannot afford to build to a forecast in today?s market. It is time to migrate to a demand-driven supply chain. The SUR? and the LEAN PLANNER? solution offers an opportunity to do just that in your current environment? today. You can create a healthy balance of push and pull that suits you and flex your way to a LEAN environment as your business matures. This is a better way to move to a demand-driven environment than to wait indefinitely to smoothen variability before embarking on a LEAN journey.

 

What do you think?

 

Ranjan Choudhary is a founding director at Lean Axis (www.LeanAxis.com).? From LEAN business strategy to its implementation on SAP?, Lean Axis combines LEAN industry experience with SAP? implementation expertise to create solutions that bring real, tangible business value with rapid return on investment. He can be reached at rchoudhary@LeanAxis.com.

 

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