In the previous blog we revisited the concepts of push and pull as a prelude to a full discussion of pull system inventory replenishment techniques. To summarize, in a push system inventory flows down the bill of distribution echelon structure in anticipation of customer demand. Inventory is allocated at each echelon by a percentage or channel dispersion algorithm from the initial channel forecast developed at the plant or central distribution facility. In contrast, in a pull system inventory is resupplied one linked channel dyad at a time in response to customer and derived satellite facility demand. Nothing is “allocated” in a pull system. When a facility needs more inventory, the requirement is pulled directly from the linked predefined supplying warehouse(s). Therefore, pull systems are reactive and push systems are speculative.
There are a variety of pull system techniques available. Fully automated pull systems include electronic data interchange (EDI), collaborative planning, forecasting, and replenishment (CPFR), quick response (QR), and point-of-sale (POS). The goal of these techniques is to electronically link the inventory requirements (both forecasted and actual) of channel facilities directly to supply sources. Distribution channel could use kanbans as triggers to pull product from supplier to satellite facility. In the vendor managed inventories (VMI) technique, the supplier assumes responsibility for replenishing inventories, setting target inventory levels, and making restocking decisions for satellite channel partners.
Probably the most widely used pull techniques are reorder point (ROP) and distribution requirements planning (DRP). With this said, what is the difference between ROP and DRP, and when would a distribution channel use one or the other or both?
The decision to choose between ROP and DRP is fundamentally driven by two essential factors.
- The first centers on 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.
The below figure illustrates a classic bill of distribution (BOD) flow for companies that are pure distributors. 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 channel facilities. Channel lead times in the example are defined as the time it takes to identify a resupply order and have it transported from the supplying facility to the satellite facility. Planners in this type of channel structure normally use reorder points. The technique works in this environment because the lead times necessary to replenish items in the supplying facility are the same or less than the lead time to transport those items from the supplying to the satellite facility. If it took significantly longer to replenish inventory at the supplying facility than the lead time to replenish the satellite facility, the supplying facility would soon be starved for inventory and would eventually stock out. Of course, such planning elements as replenishment lot sizes, safety stocks, safety times, and risk pooling enable supplying facilities to have slightly longer lead times from their supply sources than the shipping time to satellite facilities. In fact, this is the case between the Central and Regional DCs in the above illustration. Without this homogeneity of channel replenishment lead times, the ROP method results in the entire supply network quickly coming to a grinding halt.
In the next blog we will be investigating the reorder point (ROP) mechanics in detail.