My Review of Chapter 12 of the Theory of Constraints Handbook – Supply Chain Integration

Chapter 12 of the new Theory of Constraints Handbook, titled “Supply Chain Integration” and written by Chad Smith of Constraints Management Group and Carol Ptak of Pacific Lutheran University, is available as a digital download for under $6 from Amazon. You have to install KIndle software on a PC (unless you own a Kindle) but that’s very easy to do and free of charge, of course.

(The TOC Handbook itself is $91 hard cover, just under $80 as a digital download, and ships as a “real” book.)

The Chapter focuses on the benefits of an innovative approach to “fixing” the broken Planning systems of so many manufacturers, originally called called Actively Synchronized Replenishment, or ASR; now further developed into Demand Driven MRP, or DDMRP.

Since that Chaopter was published the technology has continued to develop and Demand Driven MRP is now the focus of a rewrite of a classic – Carol and Chad were asked to write the 3rd Edition of Orlicky’s MRP, and DDMRP is a focal point of the material. Actively Synchronized Replenishment is a term that will fade out, although it’s functionality is still at the heart of the more developed DDMRP technology.

In the interests of full disclosure, let me be clear – I developed this site, BeyondMRP.com, after learning about Actively Synchronized Replenishment from Chad Smith (who I’ve known for many years) soon after it was fleshed out. And I’ve known Carol Ptak by reputation for more than a decade and in person for several years. They’ve made available some of their material for me to use on this site,  and the White Paper and some of the Webinars rely on them.

More – my partner and I are currently involved in an implementation of Replenishment Plus™, which is DDMRP-compliant software from Constraints Management Group, Chad’s company.

So you don’t need a sixth sense to realize that I’m a strong supporter of the DDMRP technology, I’m deeply involved with the technology and some of its originators, and that I have a great deal of respect for the backers of this technology and the authors of this Chapter 12, “Supply Chain Integration.”

Nevertheless, I believe my review here – with personal interpretations and observations – will be useful for anyone interested in the topic.

The first thing I’ll say is that DDMRP is NOT easy to explain, because it has implications for so many different aspects of a supply chain and the manufacturing link(s) in that chain; and within a manufacturer, it touches on so many different functional areas – so the first good thing I’ll say about the Chapter is that in my opinion, this is the clearest and most thorough explanation I’ve seen UNTIL I saw the proofs for the 3re Edition of Orlicky’s MRP.

Now, Demand Driven MRP applied to Finished Goods and Distribution is essentially an advanced and more practical version of the Theory of Constraints Distribution and Supply Chain solution, aimed at providing better service with less inventory.

But DDMRP is a great deal more than “just” the Replenishment solution, and can be considered a fusion of TOC, MRP, DRP, Lean and some innovative thinking.

It’s applications inside manufacturing are unique, and powerful, especially valuable where a company has a complex Bill of Materials, or where chronic shortages are crippling attempts to implement a Lean or TOC Pull system.

It can still come under the same broad heading of providing “improved availability” but as implied earlier it can also be THE key to making  a lean implementation or even a TOC implementation work in some challenging plants; and it can be the key to making a disappointing ERP implementation suddenly be transformed into a competitive edge winner in plants that don’t attempt Lean or TOC. It provides a basis for compressing lead time, for reducing total inventory, for adding stability to chaotic environments and dampening the effects of high variability and volatility.

So the umbrella term “improving availability” doesn’t do it justice … the application to a Lean implementation alone could be an entire chapter of a DDMRP book.

And the application to Purchased parts and materials is different again … the TOC Replenishment solution combined with strategic inventory positioning is enhanced by some execution support approaches that are not rocket science but found almost nowhere else (they should be part of the Purchasing function in every ERP system, in my opinion). Again, this falls under the broad banner of “improved availability”  but is an entirely different kettle of fish.

And, the whole issue of how due-date based priorities are simply not good enough, and how to communicate real priorities internally and to suppliers is a major topic all of its own.

That’s why I say, it’s challenging to describe.

Now, to the Chapter itself.

The shape of the Chapter is classical – introduction, describe the problem,  describe the solution, review some results that support the claims of the effectiveness of the technique in real life.

The Introduction homes-in on 3 areas of problems companies continue to be concerned about – unacceptable inventory performance, unacceptable service level performance, and too-high expedite-related costs.

Nothing surprising there, of course … these were the hot topics 50 years ago, too (and this observation has relevance, as you’ll see).

And it gives hints immediately that it’s challenging one of the “mainstays” of supply chain management … a reliance on forecasting. This is important, because we’re seeing a resurgence of efforts to make the forecasts more accurate … basically, a desperate attempt to cope with the reality that variability and volatility are more extreme than ever before, and no-one seems to have an answer.

It’s where they describe the shape of the problem that things start to get interesting.

I’m putting my own interpretation on it here, but in effect Chad and Carol point out that there’s a common theme that goes unrecognized by the managers charged with improving Supply Chain performance, with making Lean manufacturing work in many (especially complex) environments, with making TOC work in complex environments, and with simply making ERP achieve  the business case that justified the acquisition in the first place … the reality that the MRP “engine” in even the most modern, most expensive ERP manufacturing implementation is crucial to performance yet based almost entirely on 50-year-old logic.

Which might not be so bad except that the manufacturing and supply chain realities of today are sufficiently changed from the realities of 50 years ago that there’s an interesting dilemma … the MRP engine that recalculates requirements is more important than ever because variability and volatility are greater than ever in supply and in demand; yet, the MRP logic is less relevant than ever because so much has changed while the logic hasn’t. The Chapter covers this in some detail, including a history of MRP that puts a lot of things into perspective.

The MRP compromises they describe, that managers and staff put into place to try to deal with the MRP weaknesses in today’s environment, will be recognized by too many frustrated managers; an explosion of workarounds (private Excel spreadsheets and Access databases), calls for flattening the Bills of Material, calls to move to a make-to-order way of working, demand for more accurate forecasts, and more.

But what will be a new perspective for many is the degree to which these are simply the inevitable consequences of trying to make an antique engine work in a modern environment without making changes to the engine first.

So, the Chapter moves to the solution – the approach known in the book as Actively Synchronized Replenishment, but now more broadly defined as Demand Driven MRP.

Now, Chad and Carol’s “take” on the solution has been recognized to the degree that they have been asked by McGraw-Hill (and have agreed) to rewrite THE Classic book on MRP by Joseph Orlicky, “Material Requirements Planning.”  This is literally the book that started it all!

The fact they are rewriting it actually highlights two of their main points … MRP is here to stay, because changes in reality in the past 50 years mean it’s more needed than ever … but it needs to be redesigned in some areas because those same changes in reality demand new functionality.

The Chapter’s description of the 5 elements of the solution – including the Buffer Management concepts that will be new to anyone not already familiar with the Theory of Constraints – is the clearest and most expansive I’ve seen so far until the newest Edition of Orlicky’s MRP, and is a big step-up from their White Paper we’ve been distributing from this web site  (which is very good, but necessarily compacted).

And, they finish with reviews of the results some clients have been achieving, which are pretty spectacular.

The one criticism I leveled at the authors recently is that the focal point of the whole Chapter is on the manufacturing business, with an upstream connection to suppliers and a downstream connection to customers. Now, this IS vitally important because when manufacturing’s in the Supply Chain it’s performance is often the pivot-point for the whole supply chain, and a lot of great supply chain management concepts can be rendered almost useless by a poor-performing manufacturer.

But there’s no real description here of the TOC’s Replenishment technique which is embedded in DDMRP, and no real attempt to take this downstream to a manufacturer’s customer’s customers etc.

Chad’s response to this was simply one of boundaries … the Distribution and Supply Chain solution is a separate Chapter in the TOC Handbook.

Fair enough; so here’s what I’m going to do: I am planning to run then record a Webinars where I interview Chad and Carol, and specifically look to examine the Replenishment solution and the downstream impact in more depth, as well as exploring the ‘core” of the technology inside a manufacturing business.

So … if you’re interested, buy and download the Chapter, or buy the impressive Theory of Constraints handbook.