Distribution Requirements Planning

Distribution requirements planning (DRP) is a systematic process to make the delivery of goods more efficient by determining which goods, in what quantities, and at what location are required to meet anticipated demand. The goal is to minimize shortages and reduce the costs of ordering, transporting, and holding goods.

Also known as distribution replenishment planning, DRP is a time-based approach that determines when inventory is likely to be depleted and plans replenishment to avoid shortages. DRP uses a tree-like structure where a central facility, such as a warehouse, supplies regional facilities which then supply other facilities in the tree. This structure can contain any number of layers.

A key element of DRP is the DRP table, which usually includes elements that are important in the process, including:

forecast demands
current inventory levels
target safety stock
recommended replenishment quantities
replenishment lead times

DRP distribution works by either a pull or push method. The pull method has goods move up through the network by fulfilling customer orders. This provides more availability for consumers because local management controls the availability of the goods. However, managing distribution inventory can be difficult because every order is new to the supplying location as demand flows up the network. This is called the “Bullwhip Effect:” small changes in consumer demand that generate large swings in demand higher up the network.

In contrast, the push method sends goods down through the network. It generally has lower costs because shipments are planned globally and stored centrally. However, service levels can suffer if central planning is too far removed from the actual demand.

DRP ideally combines the service levels of pull with the efficiency of push, but this depends on accurate forecasts and stable processes to be successful. If both of these exist, DRP produces high fulfillment performance with minimal inventory. Companies usually try to hedge their bets by using safety stock, but that can reduce the overall effectiveness of the DRP strategy, resulting in higher inventory levels or shortages.

DRP enables the user to set certain inventory control parameters (like a safety stock) and calculate the time-phased inventory requirements. This process is also commonly referred to as distribution requirements planning.

It is similar to materials requirements planning (MRP) except that MRP is used in manufacturing companies and DRP is used in logistics companies.

DRP tries to efficiently carry out the whole process of completing customer orders by minimizing shortages and reducing the overall costs comprising of ordering, transporting and inventory holding costs.

DRP Evolution

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.