Doc. Ref. No.

PALAWAN STATE UNIVERSITY Effectivity Date: August 17, 2022

North External Campuses Revision No.: 001

Coron Campus Total Page No.: 29
Instructor: Mark Justine Vicera
Student Name: Program: BSBA MM3 Block: 1

DISTRIBUTION MANAGEMENT WITH

FRANCHISING AND NETWORKING

Module No. 7

Student Signature: Date Returned:

Vision Mission
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 DISTRIBUTION
MANAGEMENT

Part I: Course Background

Main Topic and Subtopics:

Replenishment in a Multi-echelon Channel Environment

Distribution Channel Basics
a. Coupled Deployment “Push” Systems
b. Independent Deployment “Pull” Systems
c. Which to Choose: Order Points or
DRP The Basic of DRP
a. Introduction to the DRP Grid
b. DRP Order Policies and Safety
Stock The DRP Calculation
a. Basic Data Elements
b. Bucketless DRP
c. DRP Regeneration Frequency
DRP in a Multi-Echelon Environment
a. DRP Planning Process
Stocking Multi-echelon Supply Channels
a. Bullwhip Effect
b. Adjusting Channel
Imbalances Supply Chain Capacity
Planning
a. Financial Estimating
c. Transportation Planning
d. Warehouse Space Planning
e. Labor and Equipment Capacity

Introduction:

This course covers the principles and functions of distribution management, the roles of marketing
channels and physical distribution in the marketing system, the cost implications of management
decisions involving distribution. It also aims analysis of distribution cost through students’ participation
in exercises and projects in the area of distribution management.

Learning Outcomes:

Upon the completion of the course, the students will be able:

A. Cognitive
a. Understand and appreciate the importance of logistics in relation to organization’s
business performance.
b. Establishing plan of action using management functions to integrate distribution
management concepts to a given problem.
B. Psychomotor 3
a. Use of distribution management concepts and practices in both local and international
 setting that is supplemented with information technology in maximizing business
operations.
b. Application of the concepts in ethical supply chain or logistics practices in developing
integrity and values of professional practice as a basis for decision making and problem
solving that arises in the corporate setting.
C. Affective
a. Recognizes the value of analyzing the business environment using distribution
management concepts and practices for establishing strategic direction to the organization
Core Values

a. Academic Excellence
b. Cultural Identity
c. Social Responsibility
d. Global Competitiveness

Instructional Materials

a. Articles
b. Module
c. Reading Material
d. Videos

Learning Resources

1. Ross, David Frederick. 2015. “Distribution Planning and Control Managing in the Era of Supply
Chain Management 3rd Edition.” Springer Science+Business Media New YorkVideo:

Learning Modalities

a. Google Classroom
b. Google Meet
c. Google Form
d. Zoom Meeting Room
e. Facebook Room

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Part II: MODULE

Discussion

REPLENISHMENT IN A MULTI-ECHELON CHANNEL ENVIRONMENT

Introduction

This module begins with a review of managing multi-echelon distribution demand and supply inventories.
Central to the discussion is an understanding of channel “push” and “pull” methods of replenishment
management. A description of the application of statistical replenishment in a multi-echelon channel
follows. The remainder of the module concentrates on the theory and processing logic of DRP. After
detailing the data elements and format of DRP, the mechanics of DRP computer logic are reviewed.
Particular attention is paid to analyzing how DRP uses time-phased demand and supply input to generate
output information that is used by the inventory planner to guide resupply order action.

DISTRIBUTION CHANNEL BASICS

Inventory management in a multi-echelon channel environment is determined by the structure and

objectives of a firm’s distribution channel. Companies create a channel of distribution because they have
determined that the best way to serve the marketplace is to have inventory geographically close to the
customer. As represented in Figure 9.1, distribution channels consist of two basic flows: inventory flows
from the plant or main warehouse through the various echelons in the distribution channel until the
customer is reached, while
information about channel
performance, the customer
experience, and financial
settlement flows up the
channel to the supply source.
Creating a distribution
channel affects
inventory in that each
facility in each echelon acts
as an inventory
decoupling point.

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How many echelons exist in a supply channel is dependent on how deeply businesses must penetrate
into the marketplace. The desired level of penetration requires the formulation of strategies associated
with capabilities and costs (storing inventory and performing transportation activities), channel power
(distribution of influence among channel players), and competitive actions (presence of competitors and
buying alternatives). If the customer is willing to wait for delivery, suppliers can limit the number of
channel echelons. On the other hand, the pressure of competition or the nature of the product may
force suppliers to create intricate supply channels where product delivery depends on the presence of
channel partners to provide product access to the customer.

As the number of channel echelons grow, demand information is severed between the original supply
source and the customer and is replaced by inventory buffers staged at strategic points in the delivery
channel. The decision to decouple inventory from direct demand, however, comes with a price. Beyond
inventory carrying cost, channel members must shoulder the responsibility for inventory planning at each
facility in each echelon. The more echelons in the channel, the higher the cost and the more complex the
replenishment process.

There are basically two ways to replenish inventory in a distribution channel: push or pull. As illustrated
in Figure 9.2, in a coupled deployment (“push”) system, all channel resupply activities are conducted by
the central supplying facility. Since replenishment planning is centralized, channel resupply is performed
first by aggregating the demand arising from all dependent facilities in lower echelons, and then using an
allocation metric to push or disburse the replenishment inventory from the plant to these dependent
facilities.

In contrast, in distribution channels characterized by an independent deployment (“pull”) system, inventory

planning is decentralized. Each facility in the channel maintains its own inventory management system
and determines its own replenishment requirements. When the local facility’s planning system indicates
that inventory needs to be replenished, a resupply order is placed on the pre-determined supplying
facility. The

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use of either method is not exclusive: aspects of the two systems can be combined in a distribution
channel to respond to specific network needs.

COUPLED DEPLOYMENT “PUSH” SYSTEMS

Inventory replenishment in a coupled deployment system is pushed from supply points through
intermediate echelon facilities all the way to the lowest channel location. In a “push” system the
supplying location possesses resupply authority. In addition, the supply point also has the ability to adjust
the actual replenishment items and quantities to improve overall channel service or reduce total channel
costs. The key to successfully executing a “push” system is effective central inventory planning.
Inventory managers must have accurate and timely information as to the stock status of all satellite
locations. Whether gathered on a transaction-by-transaction basis or periodically, channel inventory
requirements provide the data necessary for aggregate planning and efficient resupply allocation.
Functionally, whether using min/max rules, reorder point, or other techniques, each satellite warehouse’s
inventory is controlled by a combination of cycle stock used to cover customer demand during
replenishment lead time and safety stock to provide for unplanned demand variations. The role of central
deployment locations is to calculate and resupply inventory requirements for the whole channel in
accordance with the company’s customer delivery responsiveness.

As illustrated in Figure 9.3, “push” system planners begin by assembling the demand history for all items
transacted for a planning period occurring in the distribution channel. This data is then manipulated by
applying forecasting or replenishment techniques to arrive at the total inventory requirement for the entire
channel needed to satisfy customer demand. At this point, the available inventory across the channel is
reviewed to validate individual facility inventory balances and what is needed at each satellite facility. If
sufficient inventory exists, the planners use predetermined algorithms to allocate a share of the aggregate
inventory at the parent facility to each of the facilities on the next echelon level. If inventory is
insufficient to meet the total demands of each channel facility, planners may choose to divide the
inventory among the facilities using predetermined rules, such as fair shares allocation or market-based
judgments.

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The partial inventory quantities are then “pushed” to each facility in the channel. Inventory planners at the
parent facility may then launch a resupply order with suppliers or the supplying production plant to
acquire the remaining demand balance inventory to satisfy the projected shortage.

The advantages of a “push” system are described as follows:

 Performance measurement. The “push” system enables corporate planners to leverage the total
inventory and channel historical demand to meet shipment goals while minimizing channel
inventories. Performance is measured not just on the success of discrete stocking points, but on
how well the whole channel is meeting corporate sales and asset management targets.
 Central planning. By centralizing all inventory planning and replenishment allocation, channel
planners can create a single inventory plan for the ongoing ordering and deployment of channel
inventory. Central planning enables planners to determine global channel inventories and to
remove the normal supply point stock redundancies caused by inaccuracies in local replenishment
decision making. In addition, by strategically deploying inventory resources throughout the
channel, stocking inequalities among branches is reduced, further cutting costs arising from
interbranch transfer and lost customer sales.
 Cost reductions. By centralizing inventory planning and deployment, companies can reduce the
total working capital necessary to stock the supply channel. In addition, operating costs are
reduced by economies attained in transportation and purchasing. Instead of ordering products to
satisfy individual branch demand, central purchasing can combine requirements from all
branches, thereby reducing inbound transportation and acquisition costs while gaining quantity
price breaks and other order discounts. In addition, the presence of costly inventory planners and
planning functions can be removed from satellite warehouses.
 Safety stock control. Whereas safety stock is a characteristic feature of inventories subject to
independent demand, a “push” system enables planners to centralize safety stocks at the central
facility. By eliminating unnecessary safety stocks carried at each channel location, “push”
systems reduce total inventory costs while maintaining high channel serviceability.

Disadvantages of a “push” system center on organizational issues. An effective “push” system requires a
professionally trained central planning staff that can work with aggregate data and demand forecasting
techniques. In addition, inventory accuracy and timely transaction record posting normally requires a
computer system that combines the historical demand resident at each channel location. Finally, the
introduction of a “push” system requires changes in operational roles. As central planning is now
responsible for resupply planning and execution, branch management’s role migrates from a focus on
detailed inventory replenishment management to ensuring transmission of accurate stock status and sales
usage information to the channel’s central planning functions.

INDEPENDENT DEPLOYMENT “PULL” SYSTEMS

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Under an independent deployment system, each location in the supply channel is responsible for
determining its own ordering techniques, cost factors, service objectives, and resupply lead times. Each
location calculates its replenishment requirements and then draws inventory through the channel network
by resupply order from the supplying location. The branch warehouse determines order timing, which
items are to be ordered, and what are the resupply order quantities and delivery requirements. The next
higher echelon could be a regional distribution center within the internal channel network or an
independent channel intermediary. The distribution centers, in turn, receive a sequence of resupply orders
by due date from their branches and attempt to fill and ship them according to some priority rule, usually
first-come first-serve. Finally, the distribution center acquires its replenishment inventory directly from
the manufacturer or the supplier.

As illustrated on Figure 9.6, in a “pull” system each facility in the distribution channel is responsible for
inventory reordering based on demand requirements. Facilities have a choice of selecting either statistical
order point or distribution requirements planning (DRP) or a combination of both as their ordering
system. Normally, executing a pull system requires the presence of an enterprise resources planning
(ERP) system shared by all facilities in the channel network. Based on the ordering method, each facility
generates its own resupply orders consisting of the items and resupply quantities to be ordered. These
orders, in turn, are transmitted to predetermined supplying facilities located upstream in the distribution
network. Supply facilities, in turn, receive the resupply orders from their satellite warehouses and attempt
to fill and ship them according to order due date. The supplying facilities, in turn, pull their resupply
inventory from higher channel echelon supplying facilities, the supplying production plant, or outside
suppliers.

The advantages of a pull system are the following:

1. Planning simplicity. Pull systems are easy to operate. Because each supply node is responsible for
inventory planning, there is no need of a centralized planning DC or plant and there is no need for
the laborious process of aggregating channel demand and developing allocation plans. Upper-
level

9
 supplying echelons must plan only for the total requirements placed on them by the lower-level
echelon warehouses they resupply.
2. Turnover. Because satellite locations draw exactly the necessary resupply quantities they need
versus being shipped large lot quantities characteristic of a push system, inventory carrying costs
at the warehouse level normally decline. Since they have just the right amount of inventory
turnover to satisfy the projected demand quantities, they can operate with lower stock levels,
turning inventory faster than would be possible in a push system.
3. Overhead cost reduction. Branch locations in a pull system leverage the economies of scale
resulting from lower inventory acquisition and material distribution costs incurred by central
functions in planning for the entire supply channel while receiving the benefits of short delivery
and planned storage and warehouse space allocation.
4. Use of replenishment and DRP ordering techniques. Standard reorder point and DRP computer
system logic provide excellent tools to operate pull systems. Both techniques enable local
warehouses to determine the exact timing and quantities of replenishment orders. Once these
requirements have been calculated, the computer system can then pass the resupply orders
through the bill of distribution (BOD) directly to the supplying warehouse or production facilities
so that resupply can then be passed back down the channel to respond to the pull of the demand
source.

The disadvantages of a pull system, for the most part, center on overall inventory carrying costs and
deficiencies in information flows, particularly in a supply chain driven by statistical replenishment
techniques. Although it is true that branch inventory turns will be high and overhead costs low, the exact
opposite can be said of the profitability of the central supplying facilities who must shoulder the cost of
housing resupply inventories versus simply being transition points where push inventories are
disaggregated and immediately passed on to the end-level echelon warehouses. Channel systems using a
“pull” system must be sure that aggregate costs incurred are offset by higher inventory turns in the branch
locations.

To counterbalance pull system deficiencies, a number of techniques may be deployed. Inventory planning
can be governed by implementing a channel-wide periodic review system. Operationally, branch
warehouse inventories are reviewed periodically and resupply orders generated with sufficient quantities
necessary to restore channel-wide stocks to a targeted level. Another technique is to utilize a double
reorder point. Each branch’s inventory has its reorder point set by calculating the normal reorder point
plus the average demand during the central warehouse’s procurement, transportation, and production lead
time. Theoretically, this technique enables the central supplying location to review its inventory levels
relative to anticipated branch orders and plan acquisition and transportation accordingly.

Another method, the base stock system, requires each location in the channel to maintain a base level of
inventory determined as the facility’s statistically computed demand plus stock at all upstream
warehouses.

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Bill of Distribution (BOD)

The mechanics of both push and pull systems require inventory planners to formally determine the
linkages and dependencies between the various entities constituting a multiechelon channel. When
inventory replenishment is required, the supply channel structure enables planners and their planning
systems to know exactly where orders and information is moving in the supply network. The technique
that enables these linkages is termed the bill of distribution (BOD).

The benefits of using the BOD are summarized as follows:

 The BOD enables the structuring of a comprehensive distribution channel that guides the
computerized implosion process and provides planners with full visibility of supply and demand
relationships up and down the channel.
 Supplying and satellite warehouse dependencies are clearly established.
 The DRP processor begins its low level coding by beginning with the last warehouse (s) in the
channel and then progresses up through each echelon to the appropriate supplying facility. This
process ensures that the resupply orders are posted to the correct supplying facilities and that
shipments will follow channel dependencies.
 The BOD establishes the framework for total inventory control originating with the inventory
source and progressing through each channel echelon, ending with the customer.

WHICH TO CHOOSE: ORDER POINTS OR DRP?

Choosing a replenishment technique for a pull system with multi-channel echelons requires a thorough
understanding of the channel environment. When a company decides to adopt a pull system strategy, it
can choose from two possible techniques to manage channel resupply: reorder point (ROP) and
distribution requirements planning (DRP). The decision to use one or the other technique depends on how
inventory moves through the multiechelon channel and the level of control required by management.

It’s a Matter of Lead Time

The decision to choose between ROP and DRP is fundamentally driven by two essential factors.

 he first centers on the length and homogeneity of the lead time it takes for items to flow from
facility to facility in the supply channel.
 The second factor is driven by how items enter the supply chain. There are two basic ways supply
chains acquire items. In the first, finished goods are purchased from suppliers and then
transported through the various channel echelons until they reach the end-use customer. In the
second, items originate at an internal company production plant.

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ROP Mechanics in a Multi-echelon Supply Channel

This type of channel stocks only finished goods originating from outside suppliers. The key factor to note
is the shortness (expressed in days) of the replenishment lead times separating each channel facility. In
essence, the only factor driving item lead times everywhere in the channel is the time it takes to identify a
resupply order and have it transported from the supplying facility in the next higher echelon in the
channel to the satellite facility. Planners in this type of channel structure normally use reorder points.

DRP Mechanics in a Multi-echelon Supply Channel

For distribution channels supplied from a production plant or have long-lead time items made-to-order at
outside suppliers, planners would most likely choose to use the distribution requirements planning (DRP)
technique. To understand what DRP is, it is advantageous to begin with the definition from the APICS
Dictionary.

The function of determining the need to replenish inventory at branch warehouses. A timephased
order point approach is used where the planned orders at the branch warehouse level are
“exploded” via MRP logic to become gross requirements on the supplying source. In the case of
multilevel distribution networks, this explosion process can continue down through the various
levels of regional warehouses (master warehouse, factory warehouse, etc.) and become input to
the master production schedule. Demand on the supplying sources is recognized as dependent
and standard MRP logic applies.

Note the following key concepts in the definition:

 Replenish inventory at branch warehouses. DRP is the most effective tool for companies that
build their own products and then distribute them through a distribution channel.

 Time-phased order point approach. Unlike reorder point systems that do not look at future
requirements, DRP provides distribution channel planners with a window into demand across a
time horizon. This feature is absolutely necessary for the effective planning of production items.

 Explosion of planned orders via MRP logic. DRP uses a material requirements planning (MRP)
implosion technique by which the time-phased requirements from local facilities are driven up the
distribution channel to become gross requirements on a predetermined supplying facility or
facilities using bill of distribution (BOD) logic. Similar to ROP logic, the satellite facility will
transmit a planned resupply order directly to the supplying facility. The difference is that instead
of a single resupply order characteristic of ROP, the DRP system transmits a schedule of planned
order requirements as far out as is permitted by the item-planning horizons set at each satellite
facility.

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  Input to the master schedule. The end point of the DRP channel explosion process is to drive
demand through the various echelons of the distribution channel and end in the product plant’s
master production schedule (MPS). At this point, normal MRP scheduling communicates build
requirements to the production function. Following production order completion, the item
quantities are distributed to the satellite warehouses based on their original resupply order
requirements.

The reason that planners use DRP when the supply source is a company plant or an outside make-to-order
producer is purely one of lead time. In a distribution channel that does not produce its own inventory,
replenishment lead times are normally short, consisting literally of the time it takes to transport inventory
from facility to facility plus some administration time for order management. Reorder point techniques
work very well in this environment.

The advantage of DRP is that the system will not only automatically generate planned resupply orders
whenever demand exceeds supply, it will also use the date requirements on the orders as the dates
replenishment orders must arrive at the DC. As the planning horizon expands out for weeks and months,
these planned resupply orders will be automatically positioned in the demand row of the time-phased
master schedule for the plant. As a result, planners at the production plant have visibility to resupply order
demand as it occurs not only inside the cumulative lead time, but as far as the planning horizon extends.

THE BASICS OF DRP

Utilizing DRP to manage supply chains when inventory originates from a manufacturing plant requires
a firm understanding of the concepts and applications of DRP. The first place to start is to investigate
the DRP grid.

INTRODUCTION TO THE DRP GRID

Before functions of the DRP

planning grid can be discussed, it is
essential to define the data rows
constituting the grid as illustrated in
Figure 9.13.

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1. Time Periods. Since timing is the critical driver of DRP, the DRP grid is organized around
periods or time buckets. A period can be as short as a day or less, or as long as a week, a month,
or even longer.

2. Gross Requirements. This row in the DRP grid defines the total demand placed on an item.
Demand on an item originates from forecasts, the backlog of open customer orders, and resupply
orders originating from dependent warehouses.

3. DRP in transit receipts. This term defines the total quantity of released replenishment orders for
an item due within a specific time period. Replenishment orders in the distribution environment
can take three forms: supplier purchase, postponement, and interbranch resupply orders. Purchase
orders specify products and inventory quantities purchased from the firm’s suppliers. A second
form is a postponement order where a channel member performs functions such as bulk breaking,
sorting, kitting, light assembly, and other processing activities. Finally, for companies with
distribution channels, branch warehouses draw replenishment inventories from their parent
warehouses through the use of a resupply order.

4. Projected available balance (PAB). Unlike the statistical replenishment calculation, which only
shows the current available balance of an item, DRP provides the planner visibility to current and
projected on-hand quantities in all periods constituting the planning horizon. The calculation of
the on-hand computation is expressed as:

the opening inventory balance at the beginning of each period, plus the total of scheduled
receipts due in the current period minus the total of gross requirements in the current
period equals the projected on-hand balance at the end of the current period

5. Net requirements. Once the gross requirements and the PAB have been determined, the next task
for the planner is to calculate the net requirements row on the DRP grid. The net requirements
row is extremely important. It indicates in which time periods the gross requirements (demand)
exceed the available inventory supply. If the resulting PAB is negative, that value becomes a net
requirement and is entered into the net requirements row for that period.

6. DRP planned order receipt. A net requirement indicates that demand for a product is projected to
exceed supply in that period. The DRP system will respond to this impending shortage by
generating a DRP planned order receipt. The order is considered as “planned” because it has not
been released into an actual order and placed at the supply source. The quantity of the distribution
order is determined by the product’s order policy. The generation of a planned order is governed
by the following elements:
a. The date when the net requirement is recorded.
b. The order policy rule which determines the lot-size quantity necessary to satisfy the
net requirement.

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 7. DRP planned Order Release. Once a planned resupply order is generated, the DRP system will
determine the release date of the order. The date a DRP planned order is to be released is
calculated by subtracting the item’s replenishment lead time from the planned order receipt date.

PAB and Net Requirements Recalculation

The generation of DRP planned replenishment orders requires recalculation of the projected available
balance (PAB) and net requirements rows to reflect the planned availability of the additional quantities of
inventory.

The formulas for the recalculations are described as follows:

 PAB row. Two formulas are needed to calculate the PAB row. The first determines the PAB cell
in the first period. The calculation starts by taking the opening inventory balance and adding any
resupply orders in the DRP in transit receipts and DRP planned order receipts rows occurring in
the first period. The gross requirements in the first period are then subtracted from this value. The
ending value provides the PAB at the end of the first period.

The second formula determines the PAB for all periods beyond the first period. Starting with the
second period PAB, the calculation begins by first taking the PAB from the past period and
adding all DRP in transit receipts and DRP planned order receipts as they occur in each period.
The gross requirements are then subtracted from this value to determine the PAB at the end of
each successive period.

 Net requirements row. Similar to the PAB, there are two formulas for calculating the net
requirements row. The first calculation occurs in period 1 by taking the beginning on-hand
inventory plus any DRP in transit receipts and then subtracting the gross requirements. If the
resulting value is negative, it is placed in the net requirements row.

DRP ORDER POLICIES AND SAFETY STOCK

Before the DRP system can effectively process demand and supply data, other key pieces of additional
item- level information must be added to the equation. In the standard DRP system, these data are input
into each product’s planning data master file.

Order Policies

When a resupply order action is triggered for an item, the system must know the replenishment quantity
lot-size associated with the product. In contrast to a reorder point system, which usually uses some form
of economic order quantity (EOQ) to determine order quantities, a DRP system uses one of several
possible order policies which calculate the order lot size based on demand requirements. The most
common order policies used in DRP systems are the following:

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 Discrete (lot-for-lot). This order policy recommends a resupply quantity that matches exactly
each item’s net requirements by due date. This technique must be used with caution. It will
generate a planned order pegged to each requirement, even if multiple requirements occur on the
same day. The faulty use of this technique results in potentially masses of planned orders that will
have to be managed by the inventory planners.

 Fixed period requirements. In this technique, the system calculates the replenishment quantity
based on a simple rule of ordering n period’s supply. A field in the item record is input with a
value representing the number of periods forward the DRP looks when processing begins. All the
net requirements spanning the periods defined are then summed, and a single discrete planned
order quantity matching this sum is placed in the DRP Planned Order Release row in the first of
the defined set of periods.

 Discrete above the standard lot size. Often an item is resupplied in quantities of a certain lot size
because of discounting, minimum quantity lot sizes, or shipping purposes. This order policy
requires the user to set the required lot-size quantity in the item’s master record. In the first period
in which the product has a net requirement, the system will recommend purchase of a minimum
of the lot size plus additional quantities sufficient to cover exactly the remaining net requirement.

 Incremental above the standard lot size. This order policy is based on two values entered in the
item master record: the lot size and an incremental quantity that is added to the lot size when the
net requirement is greater than the lot size.

 Multiples of a standard lot size. When using this order policy, the system will attempt to satisfy
the net requirement with the item’s replenishment lot size. If the requirement is greater than the
lot size, the system will counter with multiples of the lot size until the planned order quantity
covers the net requirement.

 Min/max order quantity. This model uses the minimum/maximum logic. When requirements
occur during the DRP planned order generation for an item with a min/max order policy, the
suggested DRP planned resupply order cannot be less than the preset minimum nor greater than
the preset maximum. If demand exceeds the maximum, the DRP generation will create two
orders, one with the maximum quantity, and one containing the remaining balance, but not less
than the minimum quantity. Both are combined to provide the total replenishment inventory for
the period.

 Lot costing models. The final order policy model is based on some form of lot size that, like the
EOQ, seeks to minimize the sum of inventory carrying costs. Least unit cost, least total cost, and
various forms of mathematical or computerized lot sizing techniques, such as the Wagner-Whitin
algorithm, fall within this model.

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Safety Stock

The use of safety stock plays an important role in distribution inventory planning. The APICS Dictionary
defines safety stock as “a quantity of stock planned to be in inventory to protect against fluctuations in
demand or supply.” Safety stock is used to cover instances of unplanned variability in demand and
supply. Variability arises from changes to customer demand that exceeds the forecast or variability in in-
transit delivery times. Safety stock acts as a buffer to probabilistic variability, decoupling demand from
stocked inventories thereby sheltering inventory from the threat of stock out. The safety stock quantity is
normally based on a company decision to support a targeted customer service percentage. The higher the
targeted service percentage, the higher the safety stock.

There are several methods that DRP uses to determine the safety stock quantity. A simple model is a
predetermined safety stock quantity entered into the item master record. A more robust method is to use a
predetermined “number of days” of safety stock multiplied by the daily average usage. Another, yet more
sophisticated model is to set a safety stock percentage that is then multiplied first by the item lead time
and then by the daily consumption. The most sophisticated model is the standard deviation and MAD.

DRP uses safety stock in a very different way than statistical reorder point. When the DRP computer
processor generates resupply planned orders to respond to uncovered demand through the planning
horizon, it first seeks to preserve the integrity of the safety quantity associated with the item. If the
beginning on hand balance of the item is below the safety stock value, the DRP system generates a
planned replenishment order using the associated item order policy and assigns it first priority before all
other subsequent planned orders. The DRP system, in essence, treats a safety stock violation with a higher
urgency than any other unfulfilled demand.

THE DRP CALCULATION

The generation of planned orders to cover all future item net requirements is the cornerstone of the DRP
planning process. For each product with a net requirement, DRP develops a schedule of planned
replenishment orders necessary to cover all net requirements out through the planning horizon. Finally,
the DRP schedules inventory resupply action that will have to be taken in the future if stock out is to be
avoided.

BASIC DATA ELEMENTS

The DRP process is generated by using the data input from the following sources:
 Length of the planning horizon
 Size of the planning buckets
 Item forecasts by due date
 Open customer orders by item by due date

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  Beginning on-hand quantities by item
 Open purchase, interbranch, and postponement orders by item by due date
 Replenishment lead times by item
 Safety stock by item
 Order policy code by item
 Supply sources based on the bill of distribution

(BOD) The outputs from the DRP calculation are the

following:

1. Exception reporting. Current commercial DRP systems provide planners with the ability to view,
through online displays, dashboards, or reports, the results of the DRP generation. An important
feature of these sources of DRP output is the availability of planning by exception. Depending on
the size and complexity of the DRP generation, the volume of output data can be immense. Data
exception selecting greatly assists planners to easily identify those items that require resupply
order action while ignoring the remainder of the items that have sufficient inventories to satisfy
demand, at least in the short term. Many DRP systems have sophisticated “workbench-type”
maintenance screens in which planners can review, change resupply recommendations, and
generate resupply orders automatically.

2. Planned orders. The DRP generation provides planners with a window into the schedule of
planned resupply order release. At a minimum, planners must release planned into actual resupply
orders for all items that have a value greater than zero in their current period planned order
release bucket. If order action is not taken, the item will slip inside its replenishment lead time,
causing expediting and possible premium ordering costs. This first period is often termed the
action bucket period. Planned resupply orders are at the core of the DRP system, illuminating
future item requirements, and forming the basis for such projections as on-hand inventory,
supplier scheduling, and logistic capacity planning.

3. Action messages. As an aid to the planner in interpreting DRP exception reporting and
performing order maintenance, commercial DRP systems provide detailed action messages.
These messages inform the planner what actions are needed to solve planning and scheduling
problems. The following are core DRP action messages.

a. Release planned order. The planned resupply order has reached the replenishment lead
time and must be converted into a released order.
b. Lead-time violation. The planned resupply order has slipped inside the replenishment
lead time. Immediate order action should be taken and the order expedited.
c. Expedite in scheduled receipt. The due date of a released resupply order should be
scheduled in to cover a new net requirement.
d. De-expedite a scheduled receipt. The due date of a released resupply order should be
moved out because of changes in the item’s original net requirements.

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 e. Cancel. A released resupply order should be canceled due to changes in net requirements.

4. Pegged requirements. The pegging of requirements provides the planner with the ability to trace
item resupply orders back to their sources. A window into the actual source of demand assists
planners to perform purposeful resupply order action.

BUCKETLESS DRP

Although DRP permits the planner to define system output in the form of time periods (buckets), in
reality the system records all demand and supply orders by actual due date. The time bucket format is
merely a convenient way to aggregate demand and supply data for viewing purposes. Most commercial
DRP systems provide a bucketless display, permitting the planner to see the orders in ascending or
descending order by actual due dates and quantities along with a running projected available balance.

DRP REGENERATION FREQUENCY

The frequency of DRP regeneration is a critical decision in system use and needs to be set as a policy
standard by each planning organization. Each DRP regeneration represents a complete repositioning of
requirements and supply orders and the deletion and recalculation of planned orders in the DRP grid.
Although some DRP systems recalculate product statuses, such as open order and projected available
balances, dynamically in between regenerations, actual planned order creation is reserved for the DRP
processor. As a general rule, the more dynamic the planning environment, the more frequently the DRP
will have to be regenerated to keep demand and supply in balance. As a rule of thumb, the DRP processor
should not be re-run until all actions messages generated from the previous run are reviewed and acted
upon. Failure to satisfy all action messages results in a persistent demand and supply imbalance.
Normally, most firms using DRP generate the system at least weekly. In addition, DRP is essentially a
continuous rather than a cyclical planning tool. The DRP planning information is in reality a snapshot of
current demand and inventory availability. However, because item balances change immediately after
generation, frequent regeneration will constantly realign demand priorities necessary for timely order
action.

DRP IN A MULTI-ECHELON

ENVIRONMENT DRP PLANNING

PROCESS

Now that the concepts and processing logic of DRP have been described, it is possible to explore the
planning process used by distribution planners. Overall, the objectives of DRP are the creation of an
inventory replenishment plan that optimizes targeted customer service levels while minimizing channel
inventory costs. In developing the DRP plan, inventory planners consider questions such as the following:

 Is the planning data for each DRP planned item accurate and up-to-date?
 Have BODs been created that accurately reflect the structure of the distribution channel?

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  Are on-hand balances being updated accurately and on a timely basis?
 Are open customer and purchase order due dates and quantities accurate?
 Have replenishment order policies been accurately defined?
 Do product replenishment lead times reflect current delivery realities?
 Have safety stocks been calculated correctly?
 Have DRP regeneration and planning procedures been formalized?

As illustrated in Figure 9.25, the DRP planning process consists of several steps. The process begins with
the generation of the DRP replenishment plan. This could be done on a facility-by-facility basis or once
across the entire distribution channel on a set recurring date. The first step for inventory planners at each
facility is to review and validate the gross requirements on all items and ask, “Is the total demand OK?”
To be effective, it is necessary for all sources of demand to be available for the DRP computation.
Demand normally consists of forecasts and resupply orders by planning time period. Each requirement is
pegged to a demand source and has a due date and quantity. The system records planned interbranch order
requirements as gross requirements in the demand records of supplying facilities at each level of the bill
of distribution (BOD).

The second step in the DRP planning process focuses on running the DRP processor and reviewing the
resulting net requirements and generated DRP resupply planned orders. This step is the core of DRP and
should be closely monitored by inventory planners. Net requirements occur in a given period when the
anticipated gross requirements for an item exceed projected available supply. Each time a net requirement
occurs and there are insufficient supply quantities in the planning horizon, DRP generates a planned order
governed by replenishment order policies and aligns the order by due date with the demand. In addition,
the resupply order’s release date is determined by backdating the item resupply lead time from the due
date. The schedule of planned order releases defines the scope of replenishment order action to be
performed by the planner. Most commercial DRP systems provide online displays and output reports
advising planners of required order release and reschedule activities.

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Once net requirements are identified, DRP references each item’s DRP in transit receipts to ensure that
the replenishment order due dates are correctly scheduled to satisfy demand. If a particular order’s due
date does not correspond to a planning period’s gross requirements, the order needs to be rescheduled in
or out. For example, if a new customer order caused a net requirement to occur in a period before a
previously released resupply order, DRP would prompt the planner to expedite in the resupply order to
meet the new statement of demand. If the scheduled resupply order quantity is insufficient to cover the
new demand, the system generates a new planned resupply order to cover the balance of the requirement.
Likewise, if a demand is canceled or moved back, DRP responds by prompting the planner to de-expedite
the resupply order to a future period or cancel it if not needed. DRP’s ability to provide the planner with
timely order action information necessary for effective open supply order rescheduling is one of the
technique’s most powerful features that is lacking in statistical replenishment planning.

eplenishment planning. The final step in the DRP planning process is the calculation and review of the
logistics capacities necessary to deliver the schedule of resupply planned orders. Logistics capacities are
composed of four elements: inventory investment, transportation, warehouse space, and labor and
equipment. If the priority plan of inventory requirements established by the DRP process is to be executed
successfully, it is essential that planners ensure that logistics functions have the required capacities. By
extending the schedule of resupply planned orders by the planning factors found in each capacity area,
planners can review the viability of the inventory plan. If insufficient capacities are found in any of the
four areas, either the inventory plan must be changed or additional resources acquired to supplement the
shortfall. Once the priority and the capacity plans are in place, planners can confidently begin the process
of inventory procurement.

DRP offers the distribution enterprise a new opportunity for attaining the highest levels of customer
service while maintaining low inventory costs. By illuminating the relationship of supply and demand
through the planning horizon, the DRP planning process provides inventory planners on all echelons in
the distribution network with a detailed window into the status of inventory in the channel. By effectively
linking together marketing and sales planning with inventory investment, warehouse size, labor and
equipment, and existing transportation capacities, DRP offers distribution functions an effective method
of integrating the resources of the entire channel with the requirements of the marketplace.

STOCKING MULTI-ECHELON SUPPLY CHANNELS

An important problem facing planners is determining which items are to be stocked at each warehouse
and in what quantities. Obviously, not every item the firm offers for sale can be stored at the same
inventory level at every location in the network. Solving this basic multiechelon problem is often
perceived as consolidating inventories into fewer stocking locations in order to reduce total inventory
costs. The downside to this strategy is that supply chains will require flexible transportation and
information resources to ensure targeted customer service levels are maintained everywhere in the
channel. This problem dramatically expands when a company distributes its products by using various
independent channel intermediaries such as wholesalers and retailers. Not only can imbalances in
inventory availability occur in

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the supply channel, but variability in demand can significantly affect how inventory is ordered and stored
in the channel.

BULLWHIP EFFECT

If the demand in a multi-echelon supply chain was stable, channel inventory imbalances would be
insignificant, channel producers and intermediaries would be able to stock the right products in the right
quantities close to the demand pull, and reservoirs of safety inventories stationed in the supply chain
would be minimal. Regrettably, several dynamics make this condition impossible. To begin with, demand
is uncertain with the result that supply channel nodes must keep inventory reserves to avoid stock out.
What is worse, because of replenishment lot-sizing, demand variability tends to be magnified up the
supply chain from the retailer back to the producer. Additionally, uncertainty arises because companies
occupying positions in the supply chain often have conflicting objectives or because information moving
between channel echelons is delayed or distorted.

While there are several outcomes due to these channel dynamics, one of the most important is termed the
bullwhip effect. The 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.” Basically, this phenomenon occurs when a small variation in customer demand ripples back up
the supply chain in successively wider peaks and troughs.

Several dynamics have been identified as the cause of the bullwhip effect

 Lack of collaboration and information sharing. Probably the foremost cause of the bullwhip effect
is a lack of collaboration and information sharing among supply channel members as to the actual
state of demand and supply. The application of demand sensing and demand event management
technologies, for example, provide visibility to all channel members of impending inventory
shortages and overstocks so that appropriate action can be taken ahead of time. For example, if a
defective component is found at a channel manufacturer, suppliers and suppliers’ suppliers can
respond to the problem as a team instead of individually being blindsided by large replacement
orders making their way back up the supply chain.

 Demand forecast updating. A critical feature of the bullwhip effect is the nature of the forecasts
generated in the channel. In past chapters, the difference between independent, derived, and
dependent demand was emphasized as a critical component in channel replenishment planning.
Retailers, who experience independent demand, create forecasts based on past sales histories
consisting of small, incremental drawdowns in stock by end-use customers. When they generate
replenishment orders for their distributors, however, demand is aggregated, and passed up the
supply chain in large lot-sized quantities with longer lead times. Item quantities of derived
demand orders increase at each channel node ending with the producer. Finally, the producer
generates large-quantity supplier orders based on the MRP output. What is worse, often extra lead
times and safety stocks are added to the forecasts to cover for unplanned channel delivery
variability.

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  Order batching. Disconnected channel forecasting is further heightened by the practice of order
batching. Instead of generating resupply orders based on the demand pull, planners wait until an
economical order quantity, an MRP order policy driven lot size, or a periodic review occurs.
Cycles could be weekly, biweekly, or monthly. These order cycles are directed at realizing
economies of scale in pricing and delivery costs. The results are very large orders pushed
upstream followed by periods of no orders at all which destroys previously constructed forecasts.

 Price fluctuations and promotions. Pricing issues can lead to an increase in demand variability.
For example, a decision to offer a discount on large lot-size quantities results in large resupply
order quantities that magnify the bull whip effect. Trade promotions and other short-term
discounts offered by producers and distributors result in forward buying by which large quantities
are purchased during the discount period and used to cover demand during future periods.
Beyond the promotion, smaller lot sizes are purchased, further increasing channel demand
variability. Finally, sales force incentives may cause channel members to purchase more
inventory than needed as the sales team offers discounts as the sales campaign cycle draws to a
close so that volume targets are reached.
 Rationing and shortage gaming. When demand exceeds supply, channel nodes may respond by
partially filling replenishment orders. The result is inventory planners “gaming” the system by
hiding their real needs from the supplier. Suppliers misinterpret the demand and alter forecasts,
acquire additional capacity, and build more product. Trouble begins when the shortage period
passes and waves of cancelled orders are received further distorting real channel demand and
supply requirements.

Solving the bullwhip effect requires entire supply chains to work closely together to overcome obstacles
and achieve channel coordination. According to Chopra and Meindl, there are five basic actions that can
be pursued to tame the sting of the bullwhip effect.

 Aligning of channel goals and profitability. Achieving synchronization of goals and profitability
requires channel members to develop strategies that ensure profitability and risk are shared
equally by all channel nodes. Pushing risk to the weakest member of the supply chain simply
increases the likelihood that the weakest link will break, endangering the entire supply chain
system. In addition, all facility, transportation, and inventory decisions should be evaluated on
profitability versus total cost, or even worse, just local cost. For example, an approach to
centralize inventories to cut costs should not be done at the expense of customer service flow
through. Finally, managers should use programs, such as sales incentives based on a rolling
horizon and reduction in forward buying, to help reduce fluctuations in the order stream.

 Improved information accuracy. A variety of computerized applications provide planners with

increased visibility to supply chain disruptions and improve the accuracy of available
information. For example, sharing point-of-sale (POS) data helps reduce the bullwhip effect by
providing the

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 entire supply chain with the latest sales information so that forecasts are more accurately
determined. Electronic data interchange (EDI) enables supply chains to formalize data sharing
through rapid, automatic transmission of demand data to all channel network nodes. Another
important application is collaborative planning, forecasting, and replenishment (CPFR). This
application enables supply chain companies to automatically pass demand data into each trading
partners’ planning and forecasting systems.

 Improved operational performance. By improving operational performance, planners can reduce

the bullwhip effect. Reducing replenishment lead times and lot sizes will significantly assist in
decreasing demand uncertainty during the replenishment process. Activities, such a deploying
EDI, increased operational flexibility, advanced shipping notices (ASN), and cross-docking,
dampens channel demand distortions. Also, planners must discourage channel partners from
distorting demand information by using rationing schemes that inflate forecasts and cause
inventory buildup at channel distribution points. Channel partners can enact more stringent
cancellation policies to prevent the effects of over-order gaming by imposing penalties for
cancelled and returned orders.

 Designing pricing strategies to stabilize orders. Effective pricing strategies encourages smaller
lot- sized ordering and inhibits forward buying practices. An important pricing strategy is to
move from lot-size to volume-based quantity discounts. Another practice is to restrict or eliminate
promotions and to establish standardized prices with the goal of linking prices directly to
customer sales. These practices directly translate to everyday-low-cost pricing at the retail level.

 Building strategic partnership and trust. Supply chain planners can significantly reduce the
bullwhip effect by building a culture of trust and strategic partnership within the supply chain.
Supply chain coordination takes the form of two broad categories. The first, action-oriented
levers, includes information sharing, changing incentives, operational improvements, and
stabilizing of pricing. The second category, relationship-oriented levers, involves the construction
of cooperation and trust within the supply chain by detailing the benefits to each party,
identifying operational roles and decision rights for each channel member, establishing effective
contracts, and designing effective conflict-resolution mechanisms.

Selective Stocking

A simple technique to stock channel locations is a technique known as selective stocking. The objective
of this technique is to provide planners with a method of maximizing available warehouse space in the
channel by determining which items are to be stocked at what channel echelon based on item ABC
classification. As an example, Class A items might be carried by all locations in the channel. Class B
items, on the other hand, might reside at regional distribution centers servicing several local warehouses.
Finally, Class C items might only be stocked at the firm’s national distribution center. In determining
stocking levels, planners must be careful to calculate the trade-off costs of lowering channel carrying
costs against increases to other

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logistics costs and decreasing customer service. Savings realized by centralizing certain classes of items
might be lost to increased transportation costs.

Square-Root Rule

The square-root rule is a technique that assists planners to calculate the advantage gained through a
channel inventory consolidation strategy. The assumption is that the greater the number of channel
locations, the greater the amount of inventory needed to maintain targeted customer service levels. The
square-root rule seeks to attain the inverse by assuming that as inventories are consolidated into fewer
stocking locations, total channel costs will decline.

Channel Distribution Using a Push System with Facility Stocking Constraints

As detailed earlier in this chapter, the strategy of a “push” system is to stock inventory in a centralized
location and then allocate quantities to satellite warehouses based on a predetermined percentage. A
potential problem arises when the total replenishment quantities to be pushed through the channel system
exceed the original push percentages. If these excess inventories cannot be stored at the central
distribution site, they must be allocated to the channel warehouses. In solving this problem, several
questions must be answered. How much inventory is targeted to be stored at each channel location? When
an item is to be pushed out to the channel, how much should be allocated to each warehouse? If there is
an excess, how should the extra inventory be apportioned among the channel stocking points?

The procedure for managing this problem involves the following steps:

1. Determine the quantity of the production run or supplier purchase.

2. Determine the forecast requirements of each of the channel locations between the current time
and the next expected production run or supplier purchase.
3. Calculate the adjusted requirements forecast by using the predetermined stocking target and the
forecast error (standard deviation).
4. Tally the existing on-hand balances at each channel location.
5. Subtract the adjusted requirements forecast from the current on-hand balances at each warehouse
to arrive at the warehouse’s net allocation. This value represents how much inventory is to be
pushed to each warehouse from the adjusted requirements forecast.
6. Sum the net allocations and then subtract the quantity from the total push quantity determined in
step 1.
7. Apportion the inventory excess over the adjusted requirements forecast to arrive at the proration
of excess.
8. Add each warehouse’s net allocation and the proration of excess to arrive at the new push
allocation for each warehouse.
9. Establish the normal capacity target for storing inventories at each channel location and the max
stock quantity target.

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 10. Divide the max stock quantity target by the prorated allocation to arrive at the percent utilization
of capacity for each warehouse.

ADJUSTING CHANNEL IMBALANCES

From time to time, inventory quantities in the channel network will get out of balance. Because of
variances in demand and supply over time, some locations will have excess quantities of an item while
other warehouses may be out of stock. Normally, there is a group of corporate planners whose job it is to
monitor channel-wide stocking imbalances and then generate interbranch transfers to redistribute excess
inventory in the channel rather than purchasing or producing more inventory. This function requires the
existence of inventory control systems that permit visibility into both aggregate inventory levels and the
detail plans of each channel location. Currently, there are a number of computerized applications
available that not only provide for the timely update of local inventory records but also present corporate
planners with the information necessary to keep channel inventories in balance. Two conventional
methods of solving this problem are least-cost redistribution and the fair-shares technique.

Least-Cost Redistribution

The objective of this method is to restore channel imbalances at the least cost. A common technique used
to address this problem is to set up a sequence of default interbranch transfer relationships. The resupply
sequence is determined by comparing the normal transportation cost from the source to the destination,
the cheapest being the first in the sequence and so on. The problem with the technique is that when more
than one channel warehouse requires inventory and excesses exist in several other warehouses, it becomes
difficult to determine the least-cost interbranch transfer. It is important to note that interbranch shipments
designed to remedy channel inventory imbalances should not be posted as demand in the computation of
sales usage used in developing warehouse level forecasts. Although it is true that the stock is deducted
from the supplying warehouse’s inventory balance, the interbranch inventory transaction must be coded
so as not to post such shipments in the demand files used to compute forecasts.

Fair Share Techniques

Despite the added control offered by centralized channel planning, there are often occasions when
distribution centers possess insufficient stock to fill the inventory needs of the entire distribution network.
Such an event could occur because of the normal lag time in channel information and material flows or
because of unplanned demand or supplier stock out. In responding to such a problem, inventory managers
often use a technique called “fair share.” The basis of this technique is to provide branch locations with
equal run-out replenishment resupply that should be sufficient to prevent stock out during the lead time
until supplier receipts arrive at the deployment warehouse.

SUPPLY CHAIN CAPACITY PLANNING

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The capability to maintain effective multi-echelon inventory control is only half of the benefit a DRP
system offers supply chain planners. Just as important as maintaining the critical balance between supply
and demand is the balance that is maintained between demand requirements and supply chain operations
capacities. A distribution channel that blindly pursues a policy of demand management without critical
attention to channel facility capacities is courting disaster.

While the effective management of inventory is fundamental in assuring channel responsiveness, the
ability to also effectively manage supply chain constraints is absolutely critical for a competitive supply
chain network. Today, producers have computerized tools, such as capacity requirements planning (CRP),
advanced planning systems (APS), theory of constraints (TOC), and constraint programming (CP)
technologies, to assist in managing production bottlenecks. Distribution planners have similar toolsets to
assist in removing capacity constraints in channel inventory deployment by providing visibility to
possible bottlenecks in capital, the work force, equipment, and space availability. Being able to optimize
the supply chain means that distribution points anywhere in the channel network are agile enough to
overcome current and future constraints that threaten to impede the flow of goods through the distribution
pipeline. Achieving these goals requires that supply chain planners possess information systems that
provide a schedule of priority requirements that is translated quickly and accurately into detailed channel
capacity planning elements. DRP provides planners with such a window into required channel capacities.

FINANCIAL ESTIMATING

The fundamental responsibility of inventory management is to ensure that inventory is on hand to respond
to customer demand. But in planning for inventory, it is also important that companies possess sufficient
capital to fund the replenishment plan. Although inventory is considered a current asset on the financial
statement, it is not cash, and poor inventory planning can drive a company to financial ruin. Businesses
utilizing statistical replenishment techniques have difficulty estimating the investment necessary to support
marketing and sales plans. For the most part, estimates are made using spreadsheet simulators based on
aggregate item usage histories.

With the use of DRP, on the other hand, inventory planners have the ability to view, as part of the DRP
process, output that is used to project the financial investment necessary to support the inventory stocking
plan through the planning horizon. This process could be performed by individual warehouse as well as
for the whole distribution channel. The steps in developing a DRP inventory asset plan are relatively
simple. To begin with, the size of the DRP planning horizon is defined. The length should correspond to
the length of the financial time period: for example, 6 months, 1 year, or multiple years. Second, expected
forecasts are developed for each product family or each stocked item matching the length of the planning
horizon. Finally, the cost of product families or individual items determined by the firm’s costing method
are calculated. Once these elements are defined, the DRP processor is then run.

then run. The results of the DRP generation is easily turned into a projected cost report by multiplying the
generated planned order quantities by the cost for each item by period in the planning horizon.

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The advantages of using DRP in developing inventory asset planning are the following:

 Ease of planning. Instead of laborious data calculation and spreadsheet development needed for
statistical inventory management, DRP provides planners with the projected costs over a
specified planning horizon by family and by total warehouse. The system, in fact, calculates the
necessary data elements as part of the normal DRP generation. Planners merely have to format
the required output reporting.

 Accuracy. DRP provides planners with an accurate calculation of projected inventory costs driven
by estimated forecast demand. By extending each product family’s planned orders by the cost,
DRP provides a window into the financial assets necessary to respond to each family’s schedule
of net requirements. The more accurate the forecast, the more accurate the financial projection.

 Simulation. By inputting alternate forecasts into the system, DRP provides planners with the
ability to simulate product level, individual warehouse, and aggregate channel costs. By
analyzing each DRP simulation generation, the optimal forecast that fits both the inventory plan
and the firm’s asset budget can be selected.

 Productivity. The choice of the right inventory plan is critical for the success of the enterprise and
the entire supply chain. DRP permits planners to make the right inventory decisions so that
targeted customer service levels are met while reducing inventory costs.

TRANSPORTATION PLANNING

Perhaps the single most important factor inhibiting transportation planners from effectively controlling
transportation costs is lack of visibility into future shipping requirements. Often firms are faced with the
problem of having to ship products in quantities that do not take full advantage of rate structures. For
example, transportation is forced to ship less-than-full truckloads (LTL) because of low current
shipments. What transportation planners really need is to be able to view not only current but also the
anticipated shipping requirements of future periods when developing a cost-effective shipping plan.
Instead of just shipping those products due for current shipment, visibility into the schedule of demand for
the next couple of days and weeks provides transportation planners with the ability to move in and
combine future shipments with current requirements so that full truckloads are shipped.

Because of its ability to time-phase supply and demand, DRP provides transportation planners with a
window into both current and future shipping requirements. By referencing individual item master
information relating to weight, volume, number of pallets, and other relevant data, DRP easily converts
each product family’s schedule of planned orders into transportation planning data elements.

The advantages provided by DRP in assisting transportation managers to plan and control transportation
capacities are significant. There are four key areas to review:

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  The transportation planner has the critical information necessary to schedule costeffective
transportation and loading. DRP provides a window into future requirements, permitting planners
to develop transportation plans that extend beyond just today’s shipping requirements.

 Through the use of simulation, planners have the ability to see the effect of different forecast
plans and provide essential input into selecting the optimal forecast that minimizes total
transportation cost. For example, planners may total the shipping requirements for the entire year
and then contrast them against available capacity. This would be particularly important if the firm
possessed its own transportation fleet.

 The aggregate shipping schedule assists in planning other critical logistics components. It could
be used to develop transportation freight budgets, negotiate freight rates, and justify the
acquisition of additional equipment such as trucks, trailers, and rail cars.

 Because the schedule of planned orders generated by DRP is truly a schedule of what is planned
to happen, the shipping plan represents what the firm is planning to ship. This information can be
used by other business functions, such as accounting and sales, in their planning processes.

WAREHOUSE SPACE PLANNING

Calculating warehouse capacities is one of the most neglected of the four areas of logistics capacity
planning. The failure to effectively plan warehouse space can have an enormous financial impact on the
whole distribution channel. When it is considered that warehousing activities account for roughly one-
fifth of a typical distributor’s logistics expenditure, effective warehouse management is an important
element in increasing company profitability. Poor warehouse planning results in such problems as
unnecessary material handling costs, item damage and obsolescence, record-keeping redundancies and
errors, time wasted in item search, excess transportation costs, the cost of public warehousing or other
extra storage facilities, or the opposite, the cost of unused warehouse space and equipment.
Generating warehouse capacities involves the addition of the following data elements to the DRP output:

 Item level storage profile. The starting point of the capacity calculation is defining the weight,
volume, and number of pallets required to store the stocking unit of measure for each item in the
DRP plan by time period. Most commercial DRP systems provide these data elements as part of
the item master record. Planners must make sure that the data are loaded correctly and that there
is an audit program in place to keep item sizing profiles up to date.

 Warehouse storage capacities. Each storage type in the warehouse must be defined in the DRP
system’s location master record. Shelf racks, bins, bin boxes, barrels, floor space, and pallets are
possible examples of storage types. Next, each of these storage types must be assigned a stocking
volume based on their space dimensions and allowable weight capacities. Finally, each stocked

29
 item is assigned a storage-type code based on its size and projected stocked quantities. The result
of the process is a list of total available locations in the warehouse.

 Warehouse space calculation. Computing storage space requirements from DRP output consists
of two calculations. In the first, the capacity requirements for each stocked item is determined by
extending the schedule of actual and planned orders by each item’s storage profile. Next, the
storage requirements are computed by dividing each item’s available capacity requirements by
time period by the storage type.

By reviewing warehouse space capacities each time the DRP is generated, logistics planners can plan for
both long- and short-term capacity requirements. As the schedule of planned orders changes, DRP assists
planners to assess the ability of existing warehouses to meet storage requirements, and to reveal serious
under-capacity and overcapacity conditions. Effective capacity reporting assists planners in n controlling
storage costs and improving overall operating efficiency and profitability.

LABOR AND EQUIPMENT CAPACITY

Effective logistics planning requires planners to predict labor and equipment capacities. Too much or too
little labor is expensive, as is the cost of unused equipment or poor customer service due to equipment
shortages. DRP significantly assists logistics managers keep their labor and equipment needs in balance
with demand requirements. The schedule of planned orders provides managers with a statement of which
and when products have to be ordered, received, put-away, picked, and shipped. Warehouse managers, in
turn, have to develop material handling standards for these critical warehouse functions. As an example,
after a time study was performed, one distributor set the order picking standard in their bin warehouse to
60 lines per operator-hour, and the stock put-away in the same area to 30 receipts per operator-hour. By
matching the schedule of planned order requirements by time period to standard labor and equipment
capacities, warehouse managers can readily ascertain each warehouse’s total daily, weekly, and period
capacities, identify capacity constraints and excesses, and plan accordingly.

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Learning Activity

INSTRUCTIONS:
DISCUSSION QUESTIONS
To answer your learning activity go to Google Classroom. Be carefull on what you click, you are
only entitled
1. What is the impact on inventory planning when atodecision
one take.
is made to create a distribution channel?
2. What is the impact on inventory planning when a decision is made to establish a “pull” system
for channel inventory management?
3. What would be the criteria driving a company to adopt the use of an order point system or DRP to
run their channel networks?
4. What are the differences between a “push” and a “pull” system?
5. What are the different rows in the DRP grid? Explain each briefly.
6. Briefly describe the functioning of a distribution requirements planning (DRP) system.
7. The issue of lead time is critical in deciding whether order point or distribution requirements
planning (DRP) technique should be used. Why is this statement important?

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