Thus the flow of information and materials must be relevant to the required output or market expectation of the system. To be relevant, both the information and materials must synchronize the assets of a business to what the market really wants; no more, no less. Having the right information is a prerequisite to having the right materials. With this is mind, Plossl’s first law can be amended to:
All benefits will be directly related to the speed of flow of relevant information and materials.
But in the highly complex and volatile New Normal, is it even possible to promote and protect the flow of relevant information? What stands in the way?
A massive amount of research and literature has been devoted to the phenomenon known as the bullwhip effect. However, very little, if any, of that body of knowledge has been related specifically to the objective of protecting and promoting the flow of relevant information and material. APICS Dictionary defines the bullwhip effect 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. Inventory can quickly move from being backordered to being excess. This is caused by the serial nature of communicating orders up the chain with the inherent transportation delays of moving product down the chain. The bullwhip can be eliminated by synchronizing the supply chain. (p. 19)
This definition clearly deals with important points discussed earlier in this book. “Inventory can quickly move from being backordered to being excess” is descriptive of the oscillation effect that occurs with the bimodal distribution. Additionally, this definition deals with both information and materials. “Communicating orders up the chain” is the information component, while “moving product down the chain” is the materials component.
In this respect, the bullwhip is really the systematic breakdown of relevant information and materials in a supply chain. Figure 2-2 is a graphical depiction of the bullwhip effect. The wavy arrow moving from right to left is the distortion to relevant information in the supply chain. The arrow wave grows in amplitude in order to depict that the farther up the chain you go, the more disconnected the information becomes from the origin of the signal, as signal distortion is transferred and amplified at each connection point. An MRP characteristic known as nervousness combined with batching practices creates this transfer and amplification, respectively. Both are explained in Chapter 3.
In the figure, the wavy arrow moving from left to right is the distortion in relevant materials in the supply chain. The wave grows in amplitude from low-level suppliers to the end item producer (OEM) to show the accumulation of delays that occur due to chronic shortages and late shipments. This transference and amplification occurs due to batching practices and the inherent synchronization problems associated with the probability of simultaneous availability; both are explained in Chapter 3.
It could and should be argued that the prevalence of the bullwhip effect is a fourth indicator of conventional planning logic deficiency. Chapter 3 describes how this logic, driven by one key attribute, directly leads to the bullwhip effect.
FIGURE 2-2 The bullwhip effect
The flow of relevant information and materials is the fundamental principle to achieve sustainable success across the supply chain. Is the concept of promoting flow difficult for people to grasp? Titans of early industry like Henry Ford, F. Donaldson Brown, and Frederick Taylor all understood this importance and built their models around it, models that provided the backbone of modern corporate structure. Later thought leaders such as Plossl, Ohno, Deming, and Goldratt built entire methodologies around the concept. The concept is a basic tenet of management accounting.
The concept is also intuitive. In general, most people within an organization seem to intuitively grasp why flow is so important. Yet there is a significant amount of evidence to suggest that most companies are incapable of really managing their assets with this fundamental principle. Next, the planning systems in use throughout the world to plan and manage the use of these assets are examined to discover why this is the case.
Material Requirements Planning in the New Normal
As discussed in Chapter 2, the primary enemy of the protection and promotion of the flow of relevant information and materials is the bullwhip effect. The bullwhip effect exists largely due to the characteristics and configurations of conventional planning systems utilizing MRP. This chapter will describe these characteristics and configurations and highlight one key attribute as a core problem.
The APICS Dictionary defines Material Requirements Planning (MRP) as a:
A set of techniques that uses bill of material data, inventory data, and the master production schedule to calculate requirements for materials. (p. 103)
MRP is essentially a calculation hub. The master production schedule feeds demand signals to MRP, which in turn creates a synchronized list of supply orders based on current inventory records (on hand and on order) and product structure (bill of material). The supply orders have date and quantity requirements that define the elements of that synchronization plan. These date and quantity requirements are then fed to a manufacturing execution system. They are turned into transfer orders to distribution sites, manufacturing orders to be scheduled on the shop floor, and purchase orders to be relayed to suppliers. Figure 3-1 shows this conventional planning approach.
The requirements to run MRP are simple and straightforward:
When these requirements are implemented in the computer system, then the MRP batch program can be run. However, to be considered a Class A user or to expect some kind of reasonable result from the computer system, the following assumptions are made: