In the previous blog a variety of pull system techniques were introduced: electronic techniques (EDI, CPFR, QR, and POS); a lean technique (kanban); and computer application-based (ROP and DRP). It was also stated that there are two essential criteria to consider when selecting a pull technique: 1) distribution lead time, and 2) the originating source of replenishment: either an outside supplier or an internal plant. Finally, it was stated that the most popular technique used when the originating supply source is an outside supplier is ROP. 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. Baring an outlier requirement, when a satellite facility needs inventory and places a replenishment order with the supplying facility, there is sufficient time for the supplying facility to service the satellite’s order while at the same time enabling the facility to itself acquire replenishment inventory as stocks are drawn down.
In this blog we will be considering the ROP technique. The below figure provides an example of the mechanics of how the ROP works in a multi-echelon environment. (This diagram works for classical ROP, min/max, and periodic review techniques.)
The scenario focuses on ROP functions involving Warehouses 1, 2, and 3; their supplying facility, Regional DC1; and DC1’s supply facility, the Central DC. When an item at Warehouse 1 triggers its ROP, a distribution order (DO) is sent directly to DC1 via a networked information system. After shipment, the inventory balance is reduced at DC1. The same process occurs if the same item in Warehouse 2’s inventory triggers its ROP. The result is that DC1’s inventory balance of the item is further reduced. At this point, there is still enough inventory at DC1 for the item to keep it above its own ROP. However, the ROP for the item at Warehouse 3 is soon afterwards triggered with the result that a DO is sent to DC1. However, when the item is shipped, the inventory balance for the item triggers DC1’s ROP. At this point, DC1 releases a resupply order for replenishment from the Central DC. Eventually, when the ROP is tripped at the Central DC, a purchase order is generated and sent to the outside supply source.
Let’s stop and look at the dynamics of the technique. To begin with, notice that there is no “allocation” of inventory as is the case in a push system. Nothing occurs unless an item’s ROP at the satellite facility is tripped. Once this occurs the satellite facility’s system generates a DO and places it directly in the requirements of the supplying facility. Notice also that each trading dyad is considered as independent of other facilities in the distribution system. For example, the interaction between Warehouse 1 and Regional DC1 occurs in isolation from other possible replenishment activities in the supply channel. In this sense, classical ROP, min/max, and periodic review are true pull systems where inventory replenishment is driven on a DO-by-DO basis from satellite to the supplying warehouse.
In the next blog we will be considering the role of DRP in a multiechelon environment.