Inventory Management

Distribution Requirements Planning

Lecture 11 ESD.260 Fall2003 Caplice

Assumptions: Basic MRP Model

Demand Constant vs Variable Known vs Random Continuous vs Discrete Lead time Instantaneous Constantc or Variable (deterministic/stochastic) Dependence of items Independent Correlated Indentured Review Time Continuous vs Periodic Number of Echelons One vs Many Capacity/Resources UnlimitedvsLimited Discounts None All Units OrIncremental Excess Demand None All orders are backordered Lost orders Substitution Perishability None Uniform with time Planning Horizon Single Period Finite Period Infinite Number of Items One Many

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A Multi-Echelon Inventory System

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What if I Use Traditional Techniques?

In multi-echelon inventory systems with decentralized control, lot size / reorder point logic will:

Create and amplify "lumpy" demand Lead to the mal-distribution of available stock, hoarding of stock, and unnecessary stock outs Force reliance on large safety stocks, expediting, and re-distribution.

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Impact of Multi-Echelons
CDC Demand Pattern
RDC Ordering Patterns
RDC Inventory Cycles

Layers of Inventory Create Lumpy Demand

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What does a DRP do?

Premises

Inventory control in a distribution environment Many products, many stockage locations Multi-echelon distribution network Layers of inventory create "lumpy" demand Dependent demand versus independent demand Requirements calculation versus demand forecasting Schedule flow versus stockpile assets Information replaces inventory

Concepts

DRP is simply the application of the MRP principles and techniques to distribution inventories Andre Martin
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DRP Requirements
Information Requirements:

Base Level Usage Forecasts Distribution Network Design Inventory Status Ordering Data
Requirements Implosion Net from Gross Requirements Requirements Time Phasing Planned Order Release

DRP Process:

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Chris Caplice, MIT

A Distribution Network Example

Plant
Centra Warehouse

Regional Warehouse 1

Regional Warehouse 2

Regional Warehouse 3

Retailer A

Retailer D Retailer E Retailer E

Retailer G Retailer H

Retailer B Retailer C

Retailer I

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Example: The DRP Plan

Regional Warehouse One Q=50 , SS=15 , LT=1
Period Usage

Gross Rqmt
Begin Inv Sched Rcpt Net Rqmt Plan Rcpt End Inv PORt

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Chris Caplice, MIT

Central Warehouse Facility

Period Usage Gross Rqmt

The DRP Plan

Begin Inv
Sched Recpt Net Rqmt Planned Recpt End Inv Planned Order

Period Usage
Gross Rqmt Begin Inv Sched Recpt Net Rqmt Planned Recpt End Inv Planned Order

Period Usage Gross Rqmt Begin Inv Sched Recpt Net Rqmt Planned Recpt End Inv Planned Order

Period Usage Gross Rqmt Begin Inv Sched Recpt Net Rqmt Planned Recpt End Inv

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Chris Caplice, MIT

Example: The DRP Plan

Regional Warehouse Two Q=30 , SS=10 , LT=1
NOW Period Usage

Gross Rqmt
Begin Inv Sched Rcpt Net Rpmt Plan Rcpt End Inv

POR

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Chris Caplice, MIT

Example: The DRP Plan

Regional Warehouse Three Q=20 , SS=10 , LT=1
NOW Period Usage

Gross Rqmt

Begin Inv Sched Rcpt Net Rpmt Plan Rcpt End Inv POR

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Chris Caplice, MIT

The DRP Plan for All Locations

Rolling Up Orders
NOW CENTRAL Period Usage POR REGION ONE
100 200

20

50

30

100 200

100 200

Period Usage
POR REGION TWO Period Usage POR REGION THREE Period Usage POR

25 50

25

25
50

25

25
50

25

25
50

25

10 30

10

10

10 30

10 30

10

10 30

10

5 20

15 20

10

10

0 20

15

0 20

15

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Chris Caplice, MIT

Example: The DRP Plan

Central Warehouse Q=200 , SS=0 , LT=2

Period

Usage

Gross Rqmt

Begin Inv Sched Rcpt Net Rpmt Plan Rcpt End Inv POR

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Chris Caplice, MIT

Results and Insights

DRP is a scheduling and stockage algorithm -- it replaces the forecasting mechanism above the base inventory level DRP does not determine lot size or safety stock -- but these decisions must be made as inputs to the process DRP does not explicitly consider any costs -- but these costs are still relevant the user must evaluate trade-offs DRP systems can deal with uncertainty -- using "safety time" and "safety stock"
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MRP / DRP Integration

Purchase Orders MRP

MPS

Product

CDC

DRP
Retail

RDC

Retail

Retail

Retail

Sales/Marketing Plan

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Chris Caplice, MIT

Evolution of Inventory Management

Traditional Replenishment Inventory:

Lot Size/ Order Point Logic Single item focus Emphasis on cost optimization
Long run, steady state approach Scheduling emphasis Focus on quantities and times, not cost Multiple, inter-related items and locations Simple heuristic rules

The MRP / DRP Approach:

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Chris Caplice, MIT

Evolution of Inventory Management

MRP / DRP have limited ability to deal with:
Capacity restrictions in production and distribution set-up costs fixed and variable shipping costs alternative sources of supply network transshipment alternatives expediting opportunities

Next Steps in MRP/DRP

Establish a time-phased MRP/MPS/DRP network Apply optimization tools to the network Consider cost trade-offs across items, locations, and time periods Deal with shortcomings listed above

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Chris Caplice, MIT

A DRP Network Plan

What happens when actual demand in the short term doesnt follow the forecast exactly.. How should I re-deploy my inventory to take the maximum advantage of what I do have?

Plant RDC1 RDC2

LDC1
R1 R2 R3

LDC2
R4
19

LDC3
R5 R6

LDC4
R7 R8

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A DRP Network Reality

Plant RDC1 SHORTAGES LDC1 LDC2 RDC2 EXCESS LDC3 LDC4

R1

R2

R3

R4

R5

R6

R7

R8

Higher than expected demand

Lower than expected demand

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Chris Caplice, MIT

Optimal Network Utilization

Plant
RDC1 SHORTAGES LDC1 LDC2 RDC2

EXCESS
LDC3 LDC4

R1

R2

R3

R4

R5

R6

R7

R8

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Chris Caplice, MIT

Information and Control Impacts

Cenrtalized Control
Global Information

Decentralized Control

Vendor Managed DRP (most cases) Inventory (VMI) DRP (some cases) Base Stock ExtendedBaseStock Control ControlSystems

Local N/A Information

Standard Inventory Policies: (R,Q), (s,S) etc.

22 Chris Caplice, MIT

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