Distribution Requirements Planning (DRP) System

Distribution Requirements Planning (DRP) is defined as:

1 1. The function of determining the need to replenish inventory at branch
warehouses. A time phased order point approach is used where planned orders at
the branch warehouse level are exploded via DRP 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 DRP logic applies.

2 2. In certain cases where the distribution is for a limited number of items, but a
balance must be maintained between multiple warehouse sites, master schedules
based on actual schedules sales orders and sales forecasts may be used to drive the
planning process through standard DRP logic. This may result in master
production schedules for one or more production sites.

If multiple warehouses or distributor inventories are present, the DRP system will attempt
to balance their inventories by shifting available units between inventories based on
parameters established by the user that indicate the level at which inventories may
interact with one another.

DRP

The need for more detailed distribution planning led to the emergence of distribution
requirements planning (DRP) during the 1970s. DRP is a widely used and potentially
powerful technique for helping outbound logistics systems manage and minimize
inbound inventories. This concept extended the time-phase order point found in material
requirements planning (MRP) logic to the management of channel inventory. By the
1980s DRP had become a standard approach for planning and controlling distribution
logistics activities and had evolved into distribution resource planning. The concept now
embraces all business functions in the supply channel, not just inventory and logistics,
and is termed DRP II.

DRP is usually used with an MRP system, although most DRP models are more
comprehensive than stand-alone MRP models and can schedule transportation. The
underlying rationale for DRP is to more accurately fore-cast demand and then use that
information to develop delivery schedules. This way, distribution firms can minimize
inbound inventory by using MRP in conjunction with other schedules.

One of the key elements of DRP is the DRP table, which includes the following elements:

• Forecast demand for each stock-keeping unit (SKU)

• Current inventory level of the SKU
 • Target safety stock
• Recommended replenishment quantity
• Replenishment lead time

The concept of DRP very closely mimics the logic of MRP. As with MRP, gross
requirements consist of actual customer orders, forecasted demand, or some combination
of both; scheduled receipts are the goods the distributor expects to receive from orders
that already have been released, while goods that already are received and entered into
inventory constitute the on-hand inventory balance. Subtracting scheduled receipts and
on-hand inventory from gross requirements yields net requirements. Based upon the
distributor's lot-sizing policy and receiving behavior, planned order receipts are
generated. Firms may order only what they need for the next planning period or for a
designated time period. Known as economic order quantity (EOQ), this involves a lot
size based on a costing model. Alternatively, firms may be limited to multiples of a lot
size simply because the supplying firm packages or palletizes their goods in standard
quantities. Also, some distributors may require some time interval between the arrival of
goods on their docks and the entry of the goods into the inventory system. For example, a
firm may have a staging area where goods remain for an average time period while
awaiting quality or quantity verification. Hence, planned order receipt may be during the
planning period when the goods are needed, or they may need to be received earlier
depending on time requirements. Order release is then determined by offsetting the
planned order receipt by the supplier's lead time. Figure 1 is a representation of a DRP
calculation (ignoring possible safety stock requirements).