Replenishment in a Distribution Environment “Education in Pursuit of Supply Chain Leadership” dp&c Chapter9 Chapter 9 Replenishment in a Distribution Environment

Learning Objectives Describe distribution channel dependencies Detail “push” system functions Detail “pull” system functions Define distribution requirements planning (DRP) Decide what to choose: reorder points or DRP? Explore DRP in a multiechelon environment Understand the DRP planning grid Calculate the projected available balance (PAB) and the DRP grid

Learning Objectives (cont.) Calculate net requirements and the DRP grid Review the DRP planned order generation Perform PAB and net requirements recalculation Outline the DRP planning process Perform a full DRP calculation Review supply chain capacity planning

Replenishment in a Distribution Chapter 9 Replenishment in a Distribution Environment Distribution Channel Basics

Distribution Channel Dependencies Product Flow Plant Information Flow Decoupling Point Replenishment Point Central Warehouse Decoupling Point Replenishment Point Local Warehouse Decoupling Point Replenishment Point Customer

“Push” or “Pull”? Plant Central Warehouse Local Warehouse Customer Channel Allocation Demand Requirement Local Warehouse Customer

“Push” System Functions Aggregate Channel Demand History Central Inventory Planning Yes No Stock OK? Resupply Order Review Branch Order Points Supplier Shipment Inventory Allocation “Fair-Share” Allocation Order Receipt Echelon Shipment

“Push” System Functions (cont.) Warehouses DCs 55% Manufacturing Plant 45% 60% 40% Forecasting – Aggregate Requirements 65% Production Lot Size Allocation 35% Allocation

Performance Measurement Advantages of a Push System Performance Measurement Enables performance management of the entire supply channel Central Planning Enables channel inventory planning to be centralized in a single plan By centralizing inventory planning and deployment, planners can remove planning redundancies Cost Reductions Safety Stock Control Push systems cut safety stocks by centralizing them at supply DCs

“Push” System Allocation – Example 15,000 x 12% = 1,800 units 1,800 x 40% = 720 units 720 x 30% = 216 units

“Pull” System Functions Local Facility Stock Status Customer requirements Stock OK? Order point/ DRP No Shipment Resupply Order Interbranch resupply order Interbranch shipments Distribution Center DRP Plant No Plant Order Point Plant Stock Resupply Order Purchase Receipt

“Pull” System Functions (cont.) Warehouses DCs Manufacturing Plant Master Schedule Plant MRP OP DRP Order Shipment Planned Orders Planned Orders Order Shipment

Advantages of a Pull System Planning is simplified because there is no centralized planning functions. Each facility does it own planning Planning Simplicity Because facilities calculate their exact requirements, push system stock excess is removed Turnover Overhead Cost Reduction By decentralizing planning, centralized planning overheads can be reduced Use of ROP and DRP techniques Pull system enable the effective use of ROP and DRP planning methods

BOMs and BODs Bill of Material Product A Component A Component B Component C Warehouse 1 Warehouse 2 Warehouse 3 Bill of Distribution Supply DC

Purchased Finished Product Flow Central DC LT=5 Outside Supply Source Lead Time (LT) = days LT=4 LT=4 Regional DC1 Regional DC2 LT=3 LT=3 LT=3 LT=3 Warehouse 1 Warehouse 2 Warehouse 3 Warehouse 4 LT=3 Warehouse 3 LT=2 Customer

Reorder Point Channel Management Warehouse 1 Warehouse 2 Warehouse 3 Inventory Inventory Inventory OP OP OP SS SS SS Resupply order LT=3 Resupply order LT=3 Resupply order LT=3 Central DC Regional DC1 Inventory Quantity Available Inventory LT=4 Resupply order OP OP X SS OP= order point SS=safety stock Time

Defining Distribution Requirements Planning (DRP) 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 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. What is distribution requirements planning (DRP)?

Manufactured Finished Product Flow Central DC LT=25 Manufacturing Plant Lead Time (LT) = days LT=4 LT=4 Regional DC1 Regional DC2 LT=3 LT=3 LT=3 LT=3 Warehouse 1 Warehouse 2 Warehouse 3 Warehouse 4 LT=3 Warehouse 3 LT=2 Customer

Time Phasing – The Heart of DRP Solving the question of when in the inventory replenishment equation!!

Replenishment in a Distribution Chapter 9 Replenishment in a Distribution Environment Basics of DRP

DRP Grid Rows

DRP Period Variations

Projected Available Balance Calculation

Net Requirements Calculation

DRP Planned Order Receipt

Two day lead-time offset DRP Planned Order Release Two day lead-time offset

DRP Recalculation

Order Policies Discrete (lot-for-lot) Fixed period requirements Discrete above the standard lot size Incremental above the standard lot size Multiples of a standard lot size EOQ models Min/max order quantity Lot costing models

Safety stock violations DRP Safety Stock Safety Stock = 75 units Safety stock violations

Covering planned order DRP Safety Stock Recalculation Covering planned order

Replenishment in a Distribution Chapter 9 Replenishment in a Distribution Environment The DRP Calculation

Basic DRP Calculation Data Elements Length of the planning horizon Size of the planning buckets Item forecasts by due date Open customer orders by item by due date Beginning on-hand quantities by item Purchase, interbranch, and postponement orders by item by due date Replenishment lead times by item Safety stock by item Order policy code by item Supply sources based on the bill of distribution

DRP System Outputs Exception Reporting Planned Orders Action Messages Availability of online displays and dashboards as a result of the DRP generation The DRP generation provides the planner with a window into the schedule of planned order release Planned Orders Generation of action messages to inform the planner of required planning and scheduling problems Action Messages Pegged Requirements Pegging enables planners to trace item resupply orders back to their sources

Bucketless DRP Display

Replenishment in a Distribution Chapter 9 Replenishment in a Distribution Environment DRP in a Multi-Echelon Environment

DRP Multiechelon Channel Implosion

DRP Planning Process DRP Generation DRP Order Release Determine Gross Requirements Review Inventory Balances Net Requirements Calculation Total Demand OK? Quantities OK? Shortages OK? Plan New Orders Orders OK? DRP Order Release

DRP Order Action Report

Replenishment in a Distribution Chapter 9 Replenishment in a Distribution Environment Stocking Multi-Echelon Supply Channels

Selective Stocking A method of maximizing available warehouse space in the channel by determining which items are to be stocked at what channel echelon level based on item ABC classification

Square-Root Rule Calculating the advantage gained through a channel inventory consolidation strategy where: CI is the inventory value if the entire network stock were to be centralized at n number of stocking locations SI is the amount of inventory stocked at n distribution locations n is the number of stocking points in the channel.

Square-Root Rule – Exercise Objective: Cost benefit of consolidating an item stocked in 10 warehouses to 3 warehouses Data: Stocking cost of item in 10 warehouses = US$20,554.80 Formula: where: CIn3 = total cost for three facilities n2 = 3 facilities n1 = number of existing facilities (10) X1 = total unit cost for 10 facilities Solution:

Push System With Stocking Constraint – Steps Determine the quantity of the production run or supplier purchase. Determine the forecast requirements of each of the channel locations between the current time and the next expected production run or supplier purchase. Calculate the adjusted requirements forecast by using the predetermined stocking target and the forecast error (standard deviation). Tally the existing on-hand balances at each channel location. Subtract the adjusted requirements forecast from the current on- hand balances at each warehouse to arrive at the warehouse’s net allocation. Sum the net allocations and then subtract it from the total push quantity determined in step 1.

Push System With Stocking Constraint – Steps Apportion the inventory excess over the adjusted requirements forecast to arrive at the proration of excess. Add each warehouse’s net allocation and the proration of excess to arrive at the new push allocation for each warehouse. Establish the normal capacity target for storing inventories at each channel location and the max stock quantity target. Divide the max stock quantity target by the prorated allocation to arrive at the percent utilization of capacity for each warehouse.

Push System Stocking Constraint – Exercise Objective: Reviewing the impact of an opportunity supply order Data: Supplier discount if 55,000 units purchased

Push System Stocking Constraint – Exercise Objective: Determine forecast allocation Formula: Forecast + (NORMSINV [Service target]) * Standard Deviation (s)

Push System Stocking Constraint – Exercise Objective: Determine allocation capacity Formula: Prorated allocation / max quantity target

Least-Cost Redistribution Objective: Restore channel warehouse inventory imbalances at the least cost Data: Transportation cost matrix Solution:

“Fair Share” Technique Objective: Provide branch locations with equal run out resupply sufficient enough to prevent stock out Formula 1: Days of total inventory at all facilities where DS = Common days supply for branch inventories AQ = Inventory units to be allocated from the DC Ib = Inventory in units for branch b Db = Daily demand for branch b

“Fair Share” Technique (cont.) Objective: Determine fair share allocation Formula 2: Calculate fair share allocation Ab = (DS – Ib/Db)Db, where Ab = Amount allocated to branch b DS = days supply provided for each branch Ib = Inventory in units for branch b Db = Daily demand for branch b

“Fair Share” Technique – Exercise Objective: Allocating 200 units across three branches Data:

“Fair Share” Technique – Exercise (cont.) Formula 1: Days of total inventory at all facilities Formula 2: Branch A fair share allocation Ab = (DS – Ib/Db)Db = ((10 – (30/8)) * 8) = 50 units Formula 2: Branches B and C fair share allocation Ab = (DS – Ib/Db)Db = ((10 – (37/10)) * 10) = 63 units Ab = (DS – Ib/Db)Db = ((10 – (33/12)) * 12) = 87 units

Replenishment in a Distribution Chapter 9 Replenishment in a Distribution Environment Supply Chain Capacity Planning

Labor and Equipment Capacity Supply Chain Capacity Planning Financial Estimating Labor and Equipment Capacity Transportation Planning DRP Warehouse Space Planning

Costed DRP Inventory Report

Transportation Report

Detailed Shipping Report

Warehouse Space Report

Chapter 9 End of Session dp&c Chapter9 “Education in Pursuit of Supply Chain Leadership” dp&c Chapter9 Chapter 9 End of Session