How to rightsize your inventory?

Supply Chain Café by PICS Belgium & ABCAL 30/01/2025
Speaker: Peter van Cuyck, Master Instructor at the Demand Driven Institute

“Conventional planning schemes (based on a forecast and using S&OP, MPS and MRP) do not cope well with the VUCA world of today”

PICS Supply Chain Café #15 of last January 30, 2025 was centered around 2 challenging statements:

• Conventional planning schemes (based on a forecast and using S&OP, MPS and MRP) do not cope well with the VUCA world of today
• Conventional inventory metrics fail to protect and promote FLOW

In today’s VUCA world (Volatile, Uncertain, Complex, Ambiguous) maintaining the right inventory levels at the right location and right time is critical. If not managed properly, inventory can become a liability, either due to shortages or surpluses. Many companies experience a bimodal distribution of inventory: Having both excess inventory and stockouts at the same time. Root causes include Forecast error, Bullwhip effect, economic order quantities and the fact that in MRP everything is dependent.

The solution to these challenges is Demand Driven MRP. It re-uses everything that is good in MRP, DRP, LEAN, 6 SIGMA and the Theory of Constraints while adding 4 key innovations. DDMRP decouples the supply chain using buffers and effectively manages the variability that the VUCA world presents. DDMRP is based on stock buffers and consists of 5 steps. First Positioning (the WHERE question), then sizing (the HOW MUCH question) and then the 2 daily tasks: Planning of replenishment and managing open supply.

“Conventional inventory metrics fail to protect and promote FLOW”

All companies prefer lower stocks, but no company is willing to pay the price of a reduced customer service. Conventional inventory metrics are often based on turns, euro’s or time. Are more turns always better? Is a lower value always better? Are less days of demand always better? What is the nominal?

A stock buffer in DDMRP consists of a red zone, a yellow zone and a green zone. Each zone serves a specific purpose and is calculated independently on a daily basis. The zones in the buffer determine the optimum stock level: Red zone plus half of the Green zone. This represents the nominal level: No more and no less. Holding this amount of stock will optimize the throughput of the supply chain.

The Inventory Target Ratio (ITR) is a way to calculate inventory values against the nominal point and the optimal range. ITR is calculated by dividing the current on-hand inventory by the nominal on-hand inventory target value.

Since ITR is independent of the unit of measure (e.g. base unit, reporting unit, dollars,..) it can be used for reporting and comparison at an aggregated level, such as the stock of all spare parts, stock of a product family, stock in a region etc.

Why should you consider to implement DDMRP?

DDMRP works well for companies who want to focus on throughput. It finds the balance between stock levels and customer service. Forecasting remains important and it is used to SIZE the buffers. The operational decisions for replenishment and expediting are based solely on actual and confirmed demand.

The emphasis on priorities and color coding makes DDMRP a powerful tool for supply chain personnel.

The speaker Peter van Cuyck is Master Instructor at the Demand Driven Institute. As such he is able to run all programs delivered by the DDI such as Demand Driven Planner, Demand Driven Distribution and Demand Driven Leader. Peter also runs DDBRIX workshops: a serious game which introduces the concepts of Demand Driven while playing with Lego bricks.

Peter brings robust practical experience as well: as a business consultant in Demand Driven he managed the global rollout of Demand Driven MRP at Etex and implemented Demand Driven Sales and Operations Planning.