A Deeper Understanding of the Bullwhip Effect
With this expansion and segmentation of the equation, we can see the bullwhip effect in a slightly different light. The bullwhip effect is the manifestation of the core problem area in Figure 1-13. Figure 1-14 provides an amended view of the bullwhip effect.
FIGURE 1-14 Restatement of the bullwhip effect
As you can see in Figure 1-14, distortions to relevant information go up the chain, growing in size and causing wider and wider oscillations in terms of both quantity and timing requirements. Distortions to relevant materials come down the chain as delays and shortages accumulate. These distortions directly contribute to the bimodal inventory distribution and its related effects are seen at the organizational level, the need for users to employ alternative methods to make sense of it, and, finally, why return on investment performance is lagging.
With the restatement of Plossl’s law and the deeper understanding of the bullwhip effect, we must consider a restatement of the true objective of planning:
To ensure the protection and promotion of the flow of relevant information and materials
Is it possible to meet this objective with conventional planning systems? Before we can answer that question, we must thoroughly understand how those systems actually work. Chapter 2 will provide that framework. After we have a better understanding about how conventional planning works, we can begin to understand if those conventional planning systems can meet the challenge, or if, in fact, there is actually a critical flaw that directly leads to and exacerbates less relevant information and materials (aka the bullwhip effect) This will be a key point of emphasis in Chapter 3.
How Conventional Planning Works
Chapter 1 focused on the history of conventional planning and the true objective of planning. This chapter will turn its attention to conventional planning’s attributes, requirements, and assumptions and focus on fundamentally how it works to produce a specific output. Chapter 3 will then explore problems associated with the factors and outcomes.
The Conventional Planning Schema
Conventional planning systems have two primary components—one is tactical, and the other is operational. These two elements are critically linked and must be discussed in combination in order to really understand how conventional planning systems are supposed to work.
The Master Production Schedule
The tactical element is called a master production schedule (MPS). The fourteenth edition of the APICS Dictionary defines MPS this way:
The master production schedule is a line on the master schedule grid that reflects the anticipated build schedule for those items assigned to the master scheduler. The master scheduler maintains this schedule, and in turn, it becomes a set of planning numbers that drives material requirements planning. It represents what the company plans to produce expressed in specific configurations, quantities, and dates. The master production schedule is not a sales item forecast that represents a statement of demand. The master production schedule must take into account the forecast, the production plan, and other important considerations of backlog, availability of material, availability of capacity, and management policies and goals. (p. 101)
As explained in the third edition of Orlicky’s Material Requirements Planning:1
The master production schedule expresses the overall plan of production. It is stated in terms of end items, which may be either (shippable) products or highest-level assemblies from which these products are eventually built in various configurations, according to a final assembly schedule. The span of time the master production schedule covers, termed the planning horizon, is related to the cumulative procurement and manufacturing lead time for components of the products in question. The planning horizon normally equals or exceeds this cumulative lead time.
The master production schedule serves as the main input to an MRP system, in the sense that the essential purpose of this system is to translate the schedule into individual component requirements, and other inputs merely supply reference data that are required to achieve this end. In concept, the master production schedule defines the entire manufacturing program of a plant and therefore contains not only the products the plant will produce, but also orders for components that originate from sources external to the plant, as well as forecasts for items subject to independent demand. In practice, however, such orders and forecasts are normally not incorporated into the master production schedule document, but are fed directly to the MRP system as separate inputs. (p. 100)
Simply stated, the MPS is a statement of what can and will be built by the organization. One of its primary inputs comes from the organization’s sales and operations planning (S&OP) process in the form of demand forecasts. The MPS also incorporates all known sales orders from customers as demand. The output of the MPS is the time-phased demand numbers given to MRP. The MPS can update MRP as frequently as the company chooses. This will be an important point to remember in Chapter 3.
Material Requirements Planning
The operational element for conventional planning is material requirements planning. The fourteenth edition of the APICS Dictionary defines MRP as:
A set of techniques that uses bill of material data, inventory data, and the master production schedule to calculate requirements for materials. It makes recommendations to release replenishment orders for material. Further, because it is time-phased, it makes recommendations to reschedule open orders when due dates and need dates are not in phase. Time-phased MRP begins with the items listed on the MPS and determines (1) the quantity of all components and materials required to fabricate those items and (2) the date that the components and material are required. Time-phased MRP is accomplished by exploding the bill of material, adjusting for inventory quantities on hand or on order, and offsetting the net requirements by the appropriate lead times. (p. 103)
MRP is essentially a calculation hub. The master production schedule feeds time-phased demand signals to MRP, which in turn calculates the necessary synchronized list of supply orders based on current inventory records (on hand and on order) and the product structure (bill of materials). The supply orders have date and quantity requirements that define the key elements of that synchronization plan. They are turned into transfer orders to distribution sites, purchase orders to be relayed to suppliers, and manufacturing orders to be scheduled on the shop floor. These manufacturing orders are then fed to a manufacturing execution system. It should be noted that the MPS was invented as a stabilizing filter against simply dumping forecasted demand directly into MRP—something that was proved to be extremely problematic 40 years ago.
MRP evolved because of the advent of the computer, and the age of marketing in the 1950s introduced more product variety and complexity than was managed previously. As was described in Chapter