Supply Chain Article:
"Material Planning Strategies To Address Material Shortages"
By Pari Annamalai, CEO, PlannerHub.com
How many
times have you faced a situation when you cannot ship an order because
you are short of some parts?
Many customers have pointed out that these material problems manifest
themselves in the following ways:
In many industries, material shortages are
becoming the limiting factor in meeting orders. This is often
caused because companies follow a static inventory planning process.
There are three popular static material planning approaches companies
all over the world use today. They are:
-
Min/Max Level
-
Reorder Point
-
Safety Stock
These techniques are static because they
calculate material requirements based on the following:
In this article we will explore one simple area
called demand based material planning. In future articles we will
discuss ways to further improve material availability through other
strategies like demand planning, ABC analysis and simultaneous
constrained based planning.
Static Approach to Material Planning
In this approach Material planning happens based
on past consumption, but not based on future requirement. The problem
with traditional static approaches to material planning is the
frequency of recalculation. Let’s take the reorder point
approach to material planning using the following example: 
In this example the Resistor 100 ohm will be purchased once the
inventory level drops below 10,000 and the order quantity will be based
on minimum. Now this works fine as long as the lead times
from the vendors do not change and the demand does not go up but let’s
say the demand goes up by 10% and at the same time the lead time
increases to 6 days.
Then let’s assume that on the 1st of December the beginning on-hand is
20,000. The following would be the scenario: 
This would mean a stockout would occur on the 10th of
December. It will keep stocking out bigger and bigger
quantities each time.
How did the stockout happen?
First let’s analyze why this happened.
When the vendor’s lead time increased from 3 days to 6 days the minimum
reorder point was not sufficient to handle the old demand.
Compounding the problem the demand has gone to 2200 from 2000, which
means stockout will happen after four days and on the 5th and 6th day
there is a shortage of materials. Usually in most companies
when stockout happens frequently someone will analyze the reason and
he/she will adjust the reorder points and the order
quantities.
How do most companies cope with this problem?
Most companies cope with this problem by
building a sub-optimal supply chain, meaning they build buffers in the
form of the following:
Excess Inventory - Raw
Material, WIP and Finished Goods Expedite Shipments – In-bound and Out Split orders with multiple suppliers Lost Sales
In some cases demand could go down. This can
result in excess inventory and could lead to obsolescence. In many
companies, reorder level is increased to take care of stock-out
situations. But when the demand goes down, it is rarely reduced and
unnecessary inventory is built up.
What can we do?
It seems logical to use demand to determine
material requirements. It would seem you just adjust reorder
points more frequently based on changing supply and
demand. This would be possible if the
manufacturing complexity was as simple as our example with linear
demand and unique materials. In most companies the complexity
is higher, i.e. many more raw materials are used in end
items. What happens if this resistor was used in three end
products and demand was not linear (2000 or 2200 per day)?
Then it becomes harder to measure the impact and readjust the restock
level.
This is where the power of the computer can be harnessed to do the
analysis and ‘number crunching’. In future articles we will
consider the impact of alternate parts and suppliers but here we will
focus on how simple materials planning can address the common problems
of static material planning and quickly move to a more forward looking
material planning process.
Forward Material Planning
Forward Material Planning approach is based on
demand, also called demand based planning. We can classify
Demand as ‘Independent Demand’ which is the finished products or
saleable items. This demand comes from either Customer Orders
or forecast. Another type of demand is ‘Dependent Demand’
which is the sub-assemblies or components or raw materials that are
part of the BOM for the end items. The demand for these items
is indirect or comes from the finished products demand when we explode
the Bill of materials (BOM). In other words, we can broadly
say external demand and internal demand. Demand based planning helps in
reducing the “Unwanted Inventory” and improves the number of inventory
turns.
Demand based Material Requirements Planning process is based on getting
the independent demand and netting the “on-hand” finished goods
inventory. This netted demand is what is known as the
dependent demand for raw materials. The dependent demand is
used to explode the BOMs to calculate the gross material components
required. To calculate the netted material requirements, raw
material inventory is subtracted from the gross material
requirements. The process is illustrated in the following
diagram: 
This is the basic approach that PlannerHub
follows. PlannerHub also considers these requirements by time
period (whether it is daily, weekly, etc), consolidates common raw
materials and automatically takes into account lead times to ensure
purchase orders for raw materials are purchased in time to get the
materials.
This planning can be done frequently so that any problems in supply or
demand are immediately known. For instance, if a supplier is getting
delayed, the effect is immediately known. It will allow a planner to
take preventive measures before the problem goes out of
proportion.
This type of approach will automatically adjust for changes in demand
or supply. It also uses up inventory so as to ensure
efficient use of resources. Forward material planning for
many companies is a concept that was hard to adopt with manual or
legacy approaches but with Plannerhub even the smallest of companies
can adopt these types of techniques without huge investments in time,
money or personnel.
Please visit www.PlannerHub.com or email us at enquiries@plannerhub.com
to learn more about the PlannerHub Solution.
About PlannerHub
PlannerHub is an On-Demand (Software As A
Service) offering by Planvisage. Planvisage is a Supply Chain
Management firm dedicated to providing products and services tailored
to address real time supply chain problems. PlannerHub is
based on proven technology used in Planvisage’s On-Premise licensed
product.
About the Author
Mr. Annamalai is Founder and CEO of Planvisage
Pte. Ltd. He has led Planvisage from startup to profitability
and positive cash flows in less than two years. Mr.
Annamalai provides overall direction, strategy and leadership for
Planvisage. Mr. Annamalai is also co-founder of a Design
Technology Company, Genometri, and co-founder of an Industrial Gas
Distribution Company, Melos Gas N Gear. Mr. Annamalai has
helped these companies grow from inception to
profitability.
Prior to founding Planvisage, Mr. Annamalai was the Worldwide Program
Director for a multi-million dollar implementation of Supply Chain
Solutions for a Fortune 2000 company. Mr. Annamalai has over 20 years
of operations, product development and consulting experience.
Mr. Annamalai holds an MBA from Bentley College in Waltham,
Massachusetts and a BS in Electrical and Computer Engineering from
Clarkson University in Potsdam, New York. More Relevant Reading Material
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