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Demand Driven MRP in Dynamics 365 F&O: A smarter way to optimize inventory planning

June 6, 2025

Content

What is Demand Driven MRP (DDMRP)?
Why is it time to rethink inventory planning with DDMRP?
Five principles of the Demand Driven MRP(DDMRP) methodology
1. Strategic inventory positioning
2. Buffer profiles and levels
3. Dynamic adjustments
4. Demand Driven planning
5. Visible & actionable priorities
Exploring Demand Driven MRP (DDMRP) in Dynamics 365 Finance and Operations
Sample use case for Demand Driven MRP (DDMRP)
Planning optimization add-in
Conclusion

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With increasingly complex global supply chains, extended lead times, supply delays, poor forecasting, and unpredictable demand with short lead times, businesses often face inventory imbalances and operational inefficiencies. Traditional Material Requirements Planning (MRP) systems struggle to keep up, leading to frequent stockouts, overstocking, and a reliance on thousands of manual planning actions.

Demand-driven material planning (DDMRP) methodology offers a powerful solution by decoupling supply from demand through strategically placed inventory buffers. This approach minimizes the bullwhip effect, improves material availability, and enables planners to focus on high-impact decisions, resulting in a more responsive and resilient inventory planning process.

This blog is the first in a two-part series exploring the fundamentals of the Demand Driven MRP methodology and its practical benefits for businesses. Using a real-world scenario involving a finished good with long-lead-time BOM items, we will demonstrate how DDMRP in Dynamics 365 Finance and Operations helps maintain optimal on-hand inventory to meet customer demand with shorter lead times.

What is Demand Driven MRP (DDMRP)?

Demand-driven material planning (DDMRP) is a planning methodology that is based on the decoupling of supply and demand. This decoupling is achieved by setting up decoupling point items.

Demand Driven Institute is the standardization body for the Demand-Driven methodology. It defines demand-driven material planning as “sensing changing customer demand, then adapting planning and production while pulling from suppliers – all in real time!”

Implementing DDMRP, as the demand-driven institutes say, typically yields inventory reductions of 30-45 percent (lowering total supply chain cost) while improving customer service. Many companies want to control their supply chains based on DDMRP principles.

More insights: Learn how Demand Planning features in Dynamics 365 SCM can optimize your supply chain.

Why is it time to rethink inventory planning with DDMRP?

Supply chains have changed tremendously over the past five decades (see Table 1 below). Traditional MRP systems worked perfectly earlier, but Supply chain characteristics like global sourcing, complexity, longer lead times, product complexity, and variable demand have made it more difficult to determine how much to stock and when.

That is where Demand Driven MRP D365 (DDMRP) helps us make the right and more effective decisions, so it is worth exploring. It enables businesses to lead the way by employing buffer zones that protect against supply chain shocks and the ripple effect of unexpected changes in demand. It’s a more adaptable, targeted approach to planning and makes sense in today’s rapidly changing world.

We will discuss the details in the coming sections. Meanwhile, here is an overview of how supply chains have changed over the years:

Supply Chain Characteristics	1960s	Today
Supply chain complexity	Low	High
Product life cycles	Long	Short
Customer tolerance times	Long	Short
Product complexity	Low	High
Product customization	Low	High
Product variety	Low	High
Long lead time parts	Few	Many
Forecast accuracy	High	Low
Pressure for less inventory	Low	High

Table 1: Supply chain and market conditions as defined by the Demand Driven Institute

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Five principles of the Demand Driven MRP(DDMRP) methodology

The Demand Driven Material Requirements Planning (DDMRP) methodology is built on five key principles. These are:

1. Strategic inventory positioning – Decouple supply chain dependencies with buffer zones.

1. Buffer profiles and levels – Dynamically calculated zones (green, yellow, red) for stock control.

1. Dynamic adjustments – Buffers adapt to demand patterns, lead times, and variability.

1. Demand-driven planning – Actual demand pulls supply orders, not forecasts.

1. Visible & actionable priorities – Clear signals to expedite or delay production/purchasing.

These principles work together to ensure supply chain decisions are based on actual demand, rather than forecasts, helping businesses respond more effectively to variability and reduce excess inventory. Let’s look at these principles in detail:

1. Strategic inventory positioning

The first step in Demand Driven MRP (DDMRP) is identifying material supply dependencies. This involves strategically decoupling the supply of items with longer lead times from actual demand. Businesses can protect critical supply flows from variability and reduce planning complexity by doing so.

2. Buffer profiles and levels

Second, buffer stock levels for decoupled items should be included to remove supply chain dependencies that offer lead time compression. This ensures you always have the right amount of product on hand, even when demand changes. The buffer stock also prevents small demand changes from causing big problems further up the chain, a common issue known as the "bullwhip effect” (shown in Figures 1 and 2 below).

Figure 1: The red and blue line shows the bullwhip effect in demand and supply

Figure 2: Shows the decoupling point in the middle of the demand and supply flows What is the bullwhip effect? The bullwhip effect refers to how small fluctuations in demand at the retail level can cause progressively larger fluctuations in demand at the wholesale, distributor, manufacturer, and raw material supplier levels.

3. Dynamic adjustments

DDMRP recommends dynamically adjusting buffer levels to account for changes in demand, seasonality, and other sources of variability.

4. Demand Driven planning

DDMRP suggests demand-driven planning using actual demand and not forecasting. The reason is that higher market fluctuation and more variability result in inaccurate forecasts. And whereas customers demand products with a short lead time, businesses depend on actual demand.

5. Visible & actionable priorities

The fifth principle of DDMRP suggests implementing actionable priorities that refer to generating planned orders based on urgency and priority, rather than solely on requirement dates, allowing on-time fulfillment of customer demands.

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Exploring Demand Driven MRP (DDMRP) in Dynamics 365 Finance and Operations

DDMRP is not a standalone module within Dynamics 365 Finance and Operations. Instead, it complements and utilizes the existing planning framework rather than replacing it. DDMRP has been added to the existing master planning module using the Planning Optimization Add-in and a new Coverage code named “decoupling point,” which completely differs from period, min/max, and requirement. Below, we will present a business use case to demonstrate the necessary setups and workings of DDMRP in D365FO.

Sample use case for Demand Driven MRP (DDMRP)

A good place to start exploring Demand-Driven technologies, MRP in D365FO takes the use case of a manufacturing company that produces perfume. Our sample finish good, Perfume - OUD 75ml (SAPG-FG-01), has six line items (Bill of materials), including the Raw material and Packing material required to produce the finish good (see Figure 1 below). One of the raw materials, Fragrance concentrate (SAPG-RM-05), is a semi-finished item or sub-BOM, which has its raw materials (see Figure 2).

Figure 3: Shows Formula (Bill of material) for production of Finish good OUD–75ml (i.e. SAPF-FG-01)

Figure 4a: Shows formula lines of “Perfume concentrate” and purchase lead time of 21 days for Essential Oil-Oud

Figure 4b: Shows the purchase lead time of “Perfume concentrate” The bill of material snapshot below shows the lead time for Perfume OUD-75ml (SAPG-FG-01) finish good production. You can observe that Fragrance concentrate (SAPG-RM-05) has a longer lead time of 21 days. The longest path in the product structure is the cumulative lead time, which is 28 days, since everything depends on each other. If raw material with a longer lead time of 21 days is decoupled, then the decoupled lead time becomes 06 days. This means the longer lead time of raw materials, including other factors like supply shortages and delays, has impacted the overall production delivery timeline of FG Perfume OUD-75ml (SAPG-FG-01), and customers are demanding products with a short lead time. The manufacturing company's planning department wants the system to shorten material requirement planning, ensuring that demand is met with the minimum possible delay. The next section will present how DDMRP helps achieve business objectives.

Figure 5: Shows the bill of materials with cumulative and decoupled lead time for Perfume OUD-75ml.

Planning optimization add-in

DDMRP requires the planning optimization add-in, so you should install it on a tier 2 or higher (not a OneBox environment) with Dynamics 365 Supply Chain Management version 10.0.7 or later. We have provided the Microsoft blog link that guides you through installing and enabling Planning optimization in D365FO. After installing the planning optimization on your LCS project, it should look like Figure 6. Next, you should turn on the Planning Optimization functionality in the master planning module by following the steps listed below:

1. Open your Dynamics 365 Finance and Operations application

1. Go to Master planning > Setup > Planning Optimization parameters

1. Open the General tab and click the “Use planning optimization” option

1. Check the Connection status.

1. It shall show “Connected” as a value (see Figure 7), which means that a connection has been established between the Planning Optimization service (cloud) and D365FO.

Figure 6: Shows “Planning optimization” add-on enabled in the LCS project

Figure 7: Master planning optimization parameters shows D365FO is “Connected” with “Planning optimization service”

Conclusion

As supply chains grow more complex and less predictable, traditional MRP systems fail to deliver the agility businesses need. Demand-driven MRP (DDMRP) offers a practical and proven alternative, helping planners make faster, smarter decisions through strategic buffering, real-time demand signals, and visible priorities that align with actual market conditions. If you're looking to modernize your inventory planning strategy with Demand-Driven technologies, MRP, and Dynamics 365, reach out to Confiz at marketing@confiz.com. Our team can help you deploy demand-driven planning solutions that align operations with today’s supply chain realities.

About the author

Tariq Rafique

Tariq Rafique is an accomplished Associate Director and Functional Solution Architect with over 13 years of hands-on experience in Microsoft Dynamics AX and Dynamics 365 Finance & Operations. He excels at aligning ERP solutions with business objectives, helping organizations drive transformation across Retail, Supply Chain, and Manufacturing sectors. Tariq has led multiple end-to-end ERP implementations…

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