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DRP Overview

Courtaulds Aerospace Distribution Requirements Planning

White Paper

Dan Rivera, CPIM, CIRM

1400 North Central Ave., #1

Glendale, CA 91202

(818) 243-2659

A brief overview of Distribution Requirements

Planning (DRP): its purpose, how it

functions, and typical methodologies utilized.

Developed for Courtaulds Aerospace (1996).

By Daniel Rivera, CPIM

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Distribution Requirements Planning (DRP)

Tying the physical distribution system to the

manufacturing planning and control system.

Traditionally, most manufacturing companies have used order-point logic to manage

inventories. But order-point logic, particularly in multi-echelon warehousing systems (such

as Courtaulds’), provides only limited visibility of actual demand at the regional warehouses.

Inventory planners and production planners react to replenishment orders from a warehouse,

not to actual usage and current system-wide inventory levels. This can lead to shortages when

several warehouse orders arrive simultaneously or to excess inventory when sales slow down

and production is not adjusted.

Distribution requirements planning was first implemented in 1975 at Abbott Laboratories,

Canada. DRP has had over twenty years to develop and to prove itself in a number of

different environments, and it has withstood the test of time well. During the past twenty-two

years DRP has been expanded to embrace not only inventory planning and control, but also

the enterprise’s logistics functions.

Distribution requirements planning systems provide a full view into the warehousing network

by first examining demand at the end of the channel and accumulating requirements back

through the warehouse network. This approach allows for full visibility of needs and better

management of inventories. DRP, if implemented correctly, can reduce costs, improve

customer service, and better leverage a company’s inventory investment.

What is Distribution Requirements Planning?

Today, a company’s finished-goods inventories are often positioned in a complex physical

system, consisting of field warehouses (such as Courtaulds’ ASC’s), intermediate distribution

centers, and a central supply (such as Courtaulds’ Glendale and Mojave facilities) that can be

a manufacturing facility, a central distribution center, or both. In such systems, a key task is

effectively managing the required flow of goods and inventories between the firm and the

market/customer. In performing this task, Distribution Requirements Planning (DRP) has a

central coordinating role similar to Material Requirements Planning’s (MRP) role in

coordinating materials in manufacturing. DRP’s role is: to provide the necessary data for

matching customer demand with the supply of products at various stages in the physical

distribution system and products being produced by manufacturing.

When it comes to supplying distribution centers (syn. ASC’s) inventory planners have a

choice between two basic inventory ordering techniques: some form of statistical

replenishment and Distribution Requirements Planning (DRP). Compared with

replenishment methods that utilize statistical calculations to determine when orders should be

released and what the order quantity should be, DRP determines resupply by time-phasing

demand and supply for each item at each distribution center in the distribution channel.

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One simple definition of Distribution Requirements Planning is:

“The function of determining the need to replenish inventory at

branch warehouses.”1

The Basics of DRP

The ability to time-phase the interplay of supply and demand is the very foundation of DRP.

Adding the element of time to the basic perpetual inventory equation requires that the

inventory planning system be able to record and store the specific due dates and quantities of

forecasts and open customer and supply orders. In addition, the system must be able to time-

phase by due date the traditional elements of on-hand, demand requirements and resupply

stock on order, and calculate the inventory equation each time an order due date appears.

This means that the system must be able to subtract the supply from the demand, or add on-

order quantities to on-hand quantities, as the due dates of each are referenced through time. If

sufficient inventory remains after each calculation, then there is no resupply action to

perform. If, on the other hand, the result is a negative, the system should alert the planner that

a potential stockout will occur at that point in time so that a counterbalancing planned order

quantity can be placed in anticipation of a future shortage. Although, in reality, DRP reviews

by due date each occasion of item demand and the corresponding availability of supply stock,

a visual format, similar to an MRP grid, can significantly assist in making the computations

clear.

Distribution Requirements Planning’s Similarities to MRP

Utilizing the same logic as Material Requirements Planning (MRP), DRP performs a gross-to-

net requirements calculation of demand and supply in each time period. When demand

exceeds supply, the system:

Generates a planned resupply order

Alerts the planner that replenishment action is required if a stockout is

to be avoided

Through the Bill of Distribution (BOD), DRP implodes the time-

phased requirements up through the distribution channel, which

emphasizes and links together the replenishment needs of both

supplying and branch warehouses

Distribution Requirements Planning Compared to

Statistical Order Point Methods

The advantages of DRP are best understood when contrasted with conventional statistical

replenishment methods.

1 APICS Dictionary, eighth edition (1995).

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Distribution Requirements Planning Statistical Replenishment Methods

DRP develops an entire schedule of planned

replenishment orders for the planner.

Statistical Order Point (SOP) methods only alert the

planner to release one order at a time.

The point in time when forecast demand is expected

to drive the inventory below safety stock is

transparent to the planner in DRP.

Under SOP the planner never knows when the order

point will be tripped until it actually happens.

DRP will assist in keeping open supply order due

dates valid. DRP will continually reschedule open

orders to align them with projected requirements

and keep their relative priorities valid.

SOP does not help out the planner in these areas.

This means it is up to the planner to keep up with

monitoring due dates and maintaining their validity.

DRP has the ability to overcome forecasting

inaccuracies. The self-adjusting nature of DRP

enables DRP to replan with ease regardless of

whether poor forecasts or a variance between

forecast and actual demand caused the error.

Typically, no matter how large the forecast error,

DRP provides the mechanism for automatic

adjustment of demand and supply and timely

resupply order action.

SOP techniques are totally dependent on accurate

forecast usages for their validity and accuracy.

DRP is also able to work with inaccurate lead times.

When actual purchase order receipt occurs, DRP

can quickly adjust and plan for the new net

requirements that are calculated. In this sense, DRP

techniques enable the inventory planner to adjust

quickly to what is actually happening, rather than

what was planned to happen.

Again, SOP techniques are totally dependent on

accurate lead times for their validity and accuracy.

DRP can effectively respond to the problems

associated with lumpy demand. As irregular

demand arising from lot/batch sizes, promotions,

and so forth occur, the gross-to-net requirements

calculation provides the planner with the ability to

respond quickly with targeted order action to avoid

stockouts while keeping inventory levels in line

with future demand.

SOP is notoriously poor at enabling a company to

respond to the problems associated with lumpy

demand.

DRP is easy to understand and manipulate; there are

no complicated formulas to memorize.

SOP is relatively complex and has a number of

formulas that need to be understood and utilized.

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DRP Logic: The Big Picture

DRP is a management process that determines the needs of inventory stocking locations

(ISL’s)2 and ensures that supply sources will be able to meet the demand. This is

accomplished in three distinct phases. First, DRP receives input from the following:

Sales forecasts by stock keeping unit (SKU) by ISL

Customer orders for current and future delivery

Available inventory for sale by SKU by ISL

Outstanding purchase orders and/or manufacturing orders by product

purchased and/or manufactured

Logistics, manufacturing, and purchasing lead times

Modes of transport used, as well as deployment frequencies

Safety stock policies by SKU by ISL

Normal minimum quantity of product to be purchased, manufactured,

and distributed

Second, once all inputs have been received, DRP generates a time-phased model of resource

requirements to support the logistics strategy. These include:

Which product is needed, how much, and where and when it is needed

Transportation capacity needed by mode of transport by ISL

Needed space, manpower, and equipment capacity by ISL

Required inventory investment by ISL and in total

Required level of production and/or purchases, by product and by supply

source

Third, DRP compares the required resources to what is currently available at supply sources, and

what will be available in the future. It then recommends what actions must be taken to expedite or

delay purchases and/or production, thereby synchronizing supply and demand. This third phase

forces integration and feedback into the system, thus closing the loop among manufacturing,

purchasing, logistics, and the customers.

2 For the purpose of this explanation, an inventory stocking location (ISL) can be any store, distribution

center (DC), regional distribution center (RDC), central DC, manufacturing DC, or warehouse that

maintains product for sale. The supply source can be a third party supplier, a regional distribution point,

or a factory.

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DRP

Open

PO’s/MO’s

Inventory

Control Forecasting

Order

Entry Bill of

Distribution

Transportation

Planning

and Scheduling

Resources

Requirements

Planning

and Scheduling

Realistic?

Yes

Make Buy

(MPS)

Sales and

Operations

Planning

Purchase

and/or

Inventory

Planning

Key input

Interfaces = DRP plans/schedules

And key output interfaces =

No

Figure 1-1. The DRP management process

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DRP Logic: The Math

At the core of this management process is a very simple, yet very powerful, logic. Its power

is not found in mathematical calculations, but in the overall system’s ability to time-phase

future activities, predict possible outcomes, critique ongoing activities, and recommend

action.

The advantage of DRP over order point techniques lies in the ability of the inventory planner

to see the relationship of supply and demand, not just as it occurs in the current planning

period but also as it is projected out through time. The time-phasing technique permits the

user to be proactive to potential inventory shortages before they occur to ensure the highest

service level at the least inventory cost.

Here’s how the logic works. Let’s assume you’re a retail store manager, and you have been

asked to predict when you will run out of product. The data given to you states that you will

sell a given item at the rate of 400 per week. You have 1,000 on hand and 1,200 in transit,

due to arrive at your store next week. If asked how long your inventory will last, your

response probably will be, “Roughly five and a half weeks.” In a nutshell, that’s how the

math of DRP works. It attempts to predict future shortages, then recommends action to avoid

them. Figure 1-1 shows the entire DRP management process

The Bill of Distribution (BOD)

One of the fundamental requirements of the DRP technique is the Bill of Distribution. Statistical

replenishment does not provide for a formal connection between supplying and satellite

warehouses in a distribution channel. Whether employing a “push” or a “pull” system, the

communication of resupply requirements through the channel depends for the most part on

informal, often ad hoc rules of thumb procedures. In such an environment, replenishment

decisions are often made without a clear understanding of the impact they will have on the rest of

the channel. DRP solves this lack of integration and coordination among channel stocking

locations through the use of the Bill of Distribution (BOD).

Utilizing the concept and structure of the manufacturing Bill of Material (BOM), the BOD

links supplying and satellite warehouses together similar to the way the BOM links

component items to their assembly parents (Figure 1-2). The difference between the two is

subtle but critical. When demand is posted on a parent assembly item, the MRP processor

references the assembly’s BOM and “explodes” the requirement through the product

structure, placing demand on the component parts. The structure of the BOD, on the other

hand, has been designed to facilitate the transfer of requirements from the components (the

satellite warehouses) to the parent (the supplying location). This structure, often called an

inverted BOM, performs an implosion where requirements are passed up the structure rather

than down. The exact structure of a BOD can be configured to match a variety of channel

inventory flows. For example, not all items may be stocked in every warehouse. Again, a

mixture of products might be sold to the customer from the central warehouse or from several

regional or even local distribution points. In any case, for the DRP implosion to work

effectively, the proper BODs must be structured detailing the flow of each and every product

in the distribution channel.

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Figure 1-2. BOMs and BODs.

The benefits of using the BOD can be summarized as follows:

A comprehensive distribution channel can be structured, thus providing

inventory planners with full visibility of supply and demand relationships

up and down the channel.

Supplying and satellite warehouse dependencies are clearly established.

The resupply path of each item in each stocking point is clearly defined.

The DRP processor can begin its low level coding by beginning with the

last warehouse(s) in the channel and progressing up through each level to

the appropriate supplying warehouse.

The BOD establishes the framework for total logistics control from the

distributor, up the network, and out to the vendor.

Product A

Component 1 Component 2 Component 3

Supply Warehouse

Branch

Warehouse

2

Branch

Warehouse

3

Branch

Warehouse

1

Bill of

Distribution

Bill of

Materials