Ramlee Ibrahim & Associates

Demand can be classified into two types: dependent and independent. Demand for a finished product is independent; demand for a component used in making the product is dependent. Forecasting should be done only for the independent demand; dependent demand can be calculated from the forecast.

Like MRP, distribution resources planning (DRP) organizes dependent demand. Before we look more closely at DRP, we’ll draw a distinction between systems that pull inventory through the distribution chain toward the retail end and systems that push inventory down the chain. In reality, many distribution chains include elements of both push and pull systems. The question for the supply chain manager is which system is best adapted to the needs of his or her chain.

The traditional approach to distribution replenishment is to pull inventory through the chain toward the end customer. In a typical retail chain, the retailer enters orders to meet projected demand and the distributor orders from the manufacturer. The benefit of this approach accrues mostly to the entity doing the ordering, because it is able to operate independently to balance its supply and demand requirements as it sees fit. This of course assumes that the firm orders intelligently. At the retail end, for example, the firm might be a grocer or hardware franchise with a history in the community and good franchising instincts.

As a system it’s not especially systematic. It doesn’t take advantage of the essential strength of supply chain management, which is collaboration and mutual decision making. There are three particular drawbacks to the pull system:

• Orders are likely to be increased as they travel back up the chain
• The firm dooing the ordering knows nothing about the needs and plans of the other chain partners, who may have a greater need for the stock to meet customer service goals
• The order doesn’t take into account the supplier’s situation

The push systems solve some of these problems, but with a tradeoff. A push system sends distribution inventory down the chain based on decisions and forecasts made cebtrally. The downstream partners receive shipments on schedules developed elsewhere in the network rather than when they order it. While this can be beneficial to the supply chain by providing systemwide coordination of inventory management, it is less likely than the pull system to be sensitive to conditions in local markets.

DRP Components

DRP uses dependent demand models to develop a stock replenishment program that works through out the network. DRP combines the following ingredients:

• Demand forecasts to determine the gross requirement
• A minimal amount of safety stock for customer service
• Accurate lead time information
• Overall knowledge of the distribution system

DRP Requirements

The gross requirement in a DRP system is the demand or sales forecast – that is, the expected independent demand at the retail level. All other levels are calculated from that number and are therefore dependent demand. To use this approach, you need to forecast accurately at the lowest level.

The net requirement is equal to the gross requirement plus allocations reduced by scheduled receipts and projected on-hand. The net requirement may also include other items, such as safety stock.

Accurate information about lead times is necessary to define release dates for orders that will ensure receipt of goods on time. The order date is offset from the release date to accomodate the lead time.

DRP combines the coordinated planning and control offered by the push systems with the respponsiveness to local demand that characterizes pull systems.

Although orders originate downstream (i.e. toward the retail end), they are evaluated at the supplying locations before being released to determine the actual need at the ordering location and the availability of goods at the sites receiving the order. This helps prevent shortages at supplying sites and overstock at ordering sites. In this way, DRP keeps inventory in balance throughout the network.

Because DRP system combines information from both the supplying and ordering locations, it can in theory provide more accurate allocations of stock than either straight pull or straight push systems, which take into account only the needs of the ordering or of the supplying location. Because it’s based on more accurate data and more thorough assessments of need and available supply, it shouold allow release of smaller, more frequent orders than straight pull or push arrangements. And this in turn provides the supply chain with the benefit of better customer service and lower inventory costs.

DRP focuses on the network as a whole, not merely the individual partner. The figure below (courtesy of APICS Illustrated Dictionary) illustrates the way that DRP works to optimize all aspects of the distribution chain, from warehousing through transportation, and all the distribution centers in the network.

I have designed a fully functional computer-based DRP application that covers the requirements mentioned earlier. Inputs into the DRP application are effected via various integration options from FTP to XML with order management, inventory, warehousing, or transportation management systems. For more information, please contact me.