If we summarize the discussion in the previous blogs, inventory replenishment in a multiechelon supply channel occurs in three possible ways: product is allocated down the supply chain using some form of dispersion algorithm; a form of reorder point pulls product from supplying to satellite facilities; and distribution requirements planning (DRP). For distribution channels supplied from a production plant or have long-lead time items purchased from outside suppliers, planners would most likely choose DRP. 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 time-phased order point approach is used where the planned orders at the branch warehouse level are “exploded” via material requirements planning (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.
- Generation of planned distribution orders (DOs) by “exploding” demand in the channel via MRP-type logic. DRP uses a form of material requirements planning (MRP) 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 the bill of distribution (BOD) instead of bills of material (BOMs). Similar to ROP logic, the satellite facility transmits a planned DO directly to the supplying facility. The difference is that instead of a single ROP DO, the DRP system transmits a schedule of planned DOs as far out as is determined by the item-planning horizon set for each product in the supply chain.
- Input to the master schedule. The end point of the DRP process is to drive demand through the various echelons of the distribution channel ending in the plant’s master production schedule (MPS). At this point, normal MRP scheduling communicates build requirements to the production function. Following production, the item quantities are then sent to the satellite warehouses using their original DO 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 DO administration time. Reorder point techniques work very well in this environment. On the other hand, in a distribution channel fed from a production plant, lead times are much more complicated. Production planners often must manage significant processing and purchasing lead times before finished goods are made and available to channel members.
To solve this problem, planners need to implement a replenishment system that provides a time-phased plan of product requirements originating in the supply channel and extending into the future that can be fed directly into the plant’s master production schedule (MPS). Once channel demand is in the MPS, planners can effectively schedule production and purchase the necessary components and materials to meet future demand. Since the ROP generates a single replenishment order, it cannot perform this function and should not be used in distribution channels where finished goods are derived from production plants.
In the next blog in the series we will be exploring the mechanics of the time-phased order point (TPOP).