Associate Director Consulting – D365 Business Applications
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In today’s complex and fast-paced supply chain environment, traditional planning methods often fail to manage variability and ensure timely product availability. Microsoft Dynamics 365 Finance & Operations (F&O) offers robust planning tools, but integrating modern methodologies like Demand-Driven Material Requirements Planning (DDMRP) can further improve responsiveness and stability. Organizations can buffer against demand fluctuations and streamline material flow by incorporating decoupling points.
This blog explores how combining Demand Driven MRP principles with Dynamics 365 F&O enhances supply chain planning and leads to more agile, demand-driven operations.
We will walk you through the key system configurations required to enable DDMRP, including how to set up decoupling points, buffers, and planning parameters that support a demand-driven approach within the Dynamics 365 environment.
Explore part 1: Demand-driven MRP in Dynamics 365 F&O for smarter inventory optimization.
DDMRP in action
Demand-Driven Material Requirements Planning in Dynamics 365 Finance and Operations doesn’t replace existing planning functionality; it’s integrated with the existing master planning setup and introduces a new coverage code of type “Decoupling point.”
Throughout this demonstration of DDMRP, we will be using the use case of a finished good item, i.e., Perfume OUD-75ml (SAPG-FG-01), having a cumulative lead time of 28 days, since a raw material, namely Fragrance concentrate (SAPG-RM-05), has a lead time of 21 days. We will use “Decoupling point coverage group for Fragrance concentrate (SAPG-RM-05) which will decouple the finished good bill of material (BOM) to get two independent structures. This approach resulted in a reduction of lead time to 06 days. The steps below explain how it can be done in Dynamics 365 Finance and Operations.
Before proceeding, we will perform pre-requisite configurations in D365FO to help arrive at the correct planning calculation using Demand Driven MRP in D365.
Pre-requisites to consider
- Set up a Coverage group of type “Decoupling point”
- Set up the Demand forecast for items (i.e., based on the sales plan)
- Set up a “Decoupling point” coverage group with Item(s) to decouple item supplies with longer lead time and calculate Buffer values for item(s) using the following functions:
a. Decoupled lead-time
b. Average daily usage
c. Min, max, and reorder point quantities - Average Daily usage & Buffer values calculation
- Run master planning for decoupled item(s)
Coverage group
In Microsoft Dynamics 365 Finance and Operations, decoupling and lead time factors are managed using a coverage group of type “Decoupling point” and linking it with items to decouple material demand from supplies. If an item has no coverage code defined, then a “Coverage group” defined with master planning parameters will be used.
Figure 1: Master planning parameters showing the value of “General coverage group”
Therefore, we will create a new coverage group of type “Decoupling point.” Next, identify items with longer lead times and associate the newly created coverage group with those items using the steps listed below.
- Open the D365FO application
- Go to Master planning > Setup > Coverage > Coverage groups
- Create a new coverage group named “DDMRP_LT”
- Set values as follows (see Figure 2 below):
a. Coverage code = Decoupling point
b. Time fence = 100 days
c. Lead time factor = 0.50
d. Variability factor = 0.80 – this defines
e. Average daily usage = “Forward”- this means we want the system to calculate average daily usage based on future demand.
f. Forward days = 10 – this value defines the future demand that the system shall consider to calculate the Average daily usage
g. Forecast model = CurrentF
Figure 2: Coverage group of code type “Decoupling point”
Setup Item(s) Demand forecast
In Microsoft Dynamics 365 for Finance and Operations, we can sense the demands of items from actual customer orders or use the sales plan. We will use the Demand Forecast function to define sales demand quantities per item and location for this demonstration. Using the forecasted sales demand, the system will calculate and suggest buffer stock values, including Minimum, maximum, and reorder points, which we will review and accept or reject while setting up a coverage group with items.
Further insights: How does the Demand Planning App in D365 SCM drive forecast accuracy and smarter planning?
Here are the steps to get started with:
- Open the D365FO application
- Go to Product information management > Product > Release products
- Select the SAPG-RM-05 product and then click Plan > Forecast > Demand forecast. A new form named Demand forecast will open, where you can define the future demand for items for different periods (see Figure 3)
- Click New to enter a new sales forecast line for the selected item and do the following (see Figure 4):
i. Model – Enter “CurrentF” as the forecast model value
ii. Date – Enter the date for which you want to consider the sales forecast
iii. Item Number – Item number will be automatically selected for the sales forecast
iv. Warehouse – Enter Warehouse/location for which sales forecast is being set
v. Sales Quantity – Enter quantity for the item
vi. Unit – enter sales UOM for the forecast item - Repeat steps 3 to 4 to add new sales forecast lines for the latest items.
Figure 3: Shows the “Demand forecast” setup option for released products under Plan > Forecast> Demand forecast
Figure 4: Shows “Demand forecast” lines for “SAPG-RM-05 Fragrance concentrate” item
Set up an item coverage group
Next, it is mandatory to link the “coverage group” with products so that Master planning can calculate item requirements using the correct item coverage type, planned order types, and lead time days. We will configure the coverage code “Decoupling point” with finish goods and raw material products, namely SAPG-RM-05 and SAPG-FG-01, respectively.
Here are the steps to get started with:
- Open D365FO application
- Navigate to Product Information Management > Products > Released Products. Select Fragrance Concentration (SAPG-RM-05), which has a longer lead time of 21 days
- Click on the Plan action tab, in the Coverage group, select Item coverage to open the Item coverage page (as shown in Figure 5 below)
Figure 5: Showing the Release product form, “Item coverage” setup option under the Plan action tab
- Next, you will need to set up a DDMRP-TL coverage group with the item so that Master planning shall decouple the demand of SAPG-RM-05 while fulfilling the demand of SAPG-FG-01 while generating planned orders. Click New, a new coverage line record will be created, and do as follows:
a. Site – Select the site for which you want to define item coverage
b. Warehouse – Select the warehouse/location for which you want to define item coverage
c. Coverage group – “DDMRP-TL”
d. Buffer values over time—set “Yes”—the system will automatically track and suggest buffer stock, Minimum, reorder point, and maximum quantities
e. Average daily usage – Set “2” as the value of daily usage in inventory units
f. Next, execute the following functions under Buffer values > Calculate (as shown in Figure 7), review, and click “Accept all calculations.”
a. Decoupled lead-time
b. Average daily usage
c. Min, max, and reorder point quantities - Repeat steps 1 to 3 for SAPG-FG-01 and set the “Decoupling point” coverage group and other values.
Figure 6: Shows “Item Coverage” setup for “SAPG-RM-05 Fragrance concentrate” using Decoupling point and buffer values
Figure 7: Shows system calculated “Buffer values” for “SAPG-RM-05 Fragrance concentrate” item
Average daily usage and buffer values calculation
Let’s understand how the system calculates Average daily usage (ADU) and buffer stock values for decoupled items.
In Dynamics 365 Finance and Operations, the ADU is calculated based on coverage time (days) and total stock issued in the coverage time. For example, if 60 is the value of coverage time and 300 units are issued, the ADU would be 300 ÷ 60 = 5 units/day. Since we have set “Forward”
The buffer stock value for decoupled items is calculated using lead time, variability factors set with coverage group and is categorized into three zones.
• Green Zone – Safety stock, protecting against supply variability
• Yellow Zone – Working stock, used for daily demands
• Red Zone – Critical stock, prioritize replenishment orders that must be triggered
The buffer stock calculation for each of the three zones is shown below. It is based on average daily usage, lead time, and factor values.
• Yellow Zone = (Avg. daily usage * lead time)
• Green Zone = (Avg. daily usage * lead time) * lead time factor
• Red Zone = Base (Avg. daily usage * lead time * lead time factor) + Safety ((ADU * lead time * lead time factor) * variability factor)
Now, let’s understand the buffer zone calculations by taking sample values of ADU = 23/day, lead time = 5 days, lead time factor = 0.5, and variability factor = 0.8.
• Yellow Zone = ADU*lead time (i.e. 23 x 5 = 115 ea)
• Green Zone = ADU * lead time * lead time factor (i.e. 23 x 5 x 0.5 = 57.5 ea)
• Red Zone = Base (Avg. daily usage * lead time * lead time factor) + Safety ((ADU * lead time * lead time factor) * variability factor) (i.e. 57.5 + (57.5 x 0.8= 46) = 103.5)
The buffer size calculation and buffer levels are shown in Figures 8 and 9 below, where “Minimum” is the roof of the RED buffer zone, the “reorder point” is the roof of the YELLOW buffer zone, and “maximum” is the max, which is the roof of the GREEN zone.
Demand-driven MRP calculates the items’ “Net flow” as per the formula, i.e., On-hand + Open Supply Orders – Qualified Demand = Net Flow quantity.
This means when the “net flow” quantity is less than the “Re-order point” (i.e., when it enters the YELLOW zone or below), then DDMP will refill the inventory up to the “Top of re-order point” (or the GREEN zone).
You now understand how ADU & buffer values calculation logic works in Dynamics 365 Finance and Operations. Now click “Calculate min, max, and reorder point quantities”. The system will calculate & populate Buffer values (see Figure 7) using average daily usage (ADU), lead time & lead time variability/factor, we set while defining “DDMRP-TL” coverage group of the item itself. Review min, max, and reorder point buffer values, adjust values per seasonality factors (if needed), and click the “Accept all calculations” button to accept the buffer values calculated by DDMRP when master planning is run.
Figure 8: Shows DDMRP buffer value zone colored in RED, GREEN & YELLOW
Figure 9: Shows Buffer values calculation logic used by DDMRP
Update buffer stock values for Item(s) using batch job
The master planning module has a batch job named “Calculate buffer values,” which helps bulk update buffer values for Item(s) as mentioned in point 3f above. You can execute the batch job from the planning module under Master planning > DDMRP > Calculate buffer values, selecting appropriate options suited to your needs, as shown in the screenshot below.
Figure 10: Calculated Buffer values batch job in the master planning module
Now we are ready to run Master planning again with DDMRP functionality to find planned orders for the decoupling points items.
Run master planning
Typically, a production planner will run master planning to calculate how many production, transfers, and purchase orders will be required to fulfill that month’s sales demand. For this purpose, we will run Master planning (normally on a monthly or as-needed basis) for individual items or item groups by navigating Master planning > Run > Master planning page. Master planning will help generate planned purchase, transfer, and production orders that the planner will review, firm or split based on requirements.
Figure 11: Showing the master planning batch option
1. Planned orders
After the Master planning run, it generated orders that will be available on the Planned order page (path: Master planning > Master planning > Planned orders, as shown in Figure 12 below. You can see that the system has decoupled the SAPG-RM-05 item and generated planned production and purchase orders to fulfill its demand. These planned orders maintain the suggested quantity, regardless of other types of demand. Therefore, before we firm orders generated by master planning, we must understand the output and why a new purchase, transfer, or production order requirement was generated.
Figure 12: Planned orders page showing planned orders generated by the master planning service
2. Firming planned orders
The planning user must firm or approve the planned order(s) before the relevant department users can process them. Below are detailed steps for firming planned orders. You can filter planned orders by status. This is useful, for example, if you want to filter for all planned orders with a status of Approved and then firm them.
- Go to Master planning > Common > Planned orders.
- Select the planned orders for the firm. On the Action Pane, select the Planned order tab.
- In the Process group, select the Firm button and click OK.
- You can view firm planned orders in their respective modules. Select Procurement and sourcing > Purchase orders > Planned purchase orders > Planned purchase orders.
This is how the master planning function works for items where we set up a “decoupling point” coverage code. Demand-Driven MRP calculates the “Net flow” using “buffer stocks” generated using a “Calculate buffer values” batch job or individually at the item level.
Summary
As supply chains continue to face increasing volatility and complexity, DDMRP offers a practical solution for maintaining inventory agility and service levels. By calculating dynamic buffer levels using Actual Daily Usage (ADU), positioning stock strategically, and triggering replenishment based on real-time demand signals, DDMRP in Dynamics 365 Finance & Operations empowers planners to respond faster and more effectively.
This article demonstrated how Data Driven MRP functions within D365FO and the foundational steps for its configuration. As a best practice, we recommend starting with low-risk, low-cost items to pilot the approach and evaluate its impact on your planning process.
If you’re considering implementing Demand-Driven MRP within Dynamics 365, our team at Confiz is here to help. Reach out to us at marketing@confiz.com to explore how a DDMRP-enabled strategy can bring greater responsiveness and visibility to your supply chain.
