Wednesday, July 29, 2009

Demand Planning - DRP (Distribution Requirement Plan) - Part - IV

In this session, we will explore how DRP module works for Central Distribution Centre.

As stated earlier CDC act as a serving point to three Regional DCs. Hence, the Order Planned quantity (not Forecast Quantity or Net Requirement) of three regional DCs are aggregated to the CDC forecast quantity. For CDC we have assumed that the safety stock is nil. The Lot quantity for CDC is 300 units and lead time to get the stocks from CDC is 2 days.

We give below the DRP model used to compute the Order Planned quantity for CDC.

The Forecast Qty split is the aggregation of Order Planned Quantity of all three Regional DCs. Since the Safety stock is 0, Gross requirement is the same as Forecast Qty Split. Rest of the calculations are same, as explained in our earlier session.


- DRP is a scheduling and Stocking Algorithm. It replaces the forecasting mechanism above the base Inventory level.
- DRP does not determine the Lot Size and Safety stock. However Lot Size and Safety stocks are used as input to the DRP process
- DRP system can deal with market uncertainty through Safety stock and Lead time.

From the example, one can presume that DRP system is not that complicated as perceived. So far we are working under the assumption that there is no change in the demand (i.e., Forecast Quantity Split).

But in reality Market is more dynamic and hence the demand. What Happens when the actual demand differ from the forecast ? In such case should we follow the same DRP model as we worked out earlier. The DRP network in change in demand scenario is given below.

In the above scenario, the Regional DC 1 is facing shortage of stocks due to actual demand is more than expected demand (forecast). Regional DC 2 is facing excess stocks due to actual demand is less than expected demand. In such cases we have two options.

Option 1 – Manufacturing Plant should produce more to meet the Regional DC 1 requirement. Change in production schedule involves more cost and it is not viable option. Also the question arise what we are going to do with excess stock lying at Regional DC 2 ?

Option 2 – Is it possible to shift the stocks between the two Regional DC 1 & DC 2 so that excess stocks can be transferred to shortage DCs. This lead to re-deployment of existing inventory.
How do I re-deploy the inventory to take the maximum advantage of what inventory do we have ? The given below model explain about the re-deployment of inventory among the Regional DCs.

From the above diagram we can understand that the excess stocks from Regional DC 2 can be shifted to Local DC1 and DC2. Secondly even if we require more stocks then advise manufacturing plant to dispatch stocks from the existing safety stocks to Local DC1 & DC2 directly to avoid transit delay. Still we require more stocks then we can advise plant to produce more to meet the market requirements provided the cost is justifiable. If the production cost due to change in production schedule out weight the benefit from sales realization then it is not advisable to produce more items.

The Demand Planner is expected to take decisions on these issue in DRP system to meet the market demand. However he should be fully conversant with process mapping and IT architecture also. For example as per process if Regional DC 2 is expected to cater only Local DC3 & DC4 then Demand planner cannot transfer the stocks directly from Regional DC1 to Local DC1 & DC2. He has to transfer the stocks from Regional DC2 to Regional DC1. Regional DC1 will serve the Local DC1 and DC2 as per architecture.

So far we have discussed about Sales function modules like forecast and demand planning. In the next session we will focus our attention to Production function related topics like MRP (Material Requirement Planning) and MPS (Master Production Schedule), PPC (Production Planning & Control) etc.

Tuesday, July 28, 2009

Demand Planning - DRP (Distribution Requirement Plan) - Part III

In this session, we will learn about advanced models of Net Requirement calculations. In the previous session we learnt simple method of computing the Net Requirement assuming all stocks are connected to the Distribution centre in single lot with one day as lead time. But in practice the Net Requirement stocks are dispatched from manufacturing plant basis time phasing and lead time.

We will explore through the following illustrations how time phasing and lead time impact the order planning and Net Requirement calculation. Let us assume we are having the following “Distribution Network System”.

In this model we have a manufacturing plant dispatch items to central Distribution Centre (CDC). CDC in turn send items to various Regional DCs (RDC). We will learn how net requirement is computed through various advanced models.

Before we proceed further, we understand few terminology related to “Inventory Management”, which we will be used in the Net Requirement calculation. We will learn more about “Inventory Management” concepts and calculations in our latter session shortly.

Lot Size or Lot Quantity - A “Lot or Batch” size is the quantity that company either produces or purchases at a time.

The number of units of a product or item (Lot Quantity) to be manufactured at each setup or purchased on each order so as to minimize the cost of purchasing or setup and the cost of holding the average inventory over a given period usually annual.

Safety Stock - Safety Stock (also called Buffer Stock) exists to counter uncertainties in supply and demand. Safety stock is defined as extra units of inventory carried as protection against possible stock outs. It is held when an organization cannot accurately predict demand and/or lead time for the product.

Lead Time - is the time from the moment the supplier receives an order to the moment it is shipped

In the above explained model CDC is only serving point and catering to the need of Regional DCs. Hence safety stocks are calculated at Regional DC level and not at Central DC level. Net Requirements and planned orders are calculated at Regional DC and getting rolled up to CDC. We give below Net Requirement and order Planned calculations of three regional warehouses for clear understanding.

The users are requested to click on the table to get clear view of the data.

Let us take Regional Distribution Centre -1 as an example and explain how the calculation has been performed. In this case the Safety stocks is 30 units, Lot Quantity i.e., the minimum quantity required at this distribution centre for a given order is 200 units and lead time i.e., time taken to deliver stocks from CDC is 2 days.

Forecast Quantity Split - Monthly forecast quantity apportioned as per customer requirement. It could be daily, Weekly or Fortnightly dispatch plan.

Gross Requirement – Forecast Quantity + Safety Stock for a particular day or period

Opening Inventory - Previous day Closing Inventory will become today Opening Inventory
Schedule Receipt / Transit - Stocks which has already been dispatched earlier from CDC has yet to reach the RDC on a particular day

Net Requirement Calculation - The difference between the Gross requirement (Forecast quantity + Safety stock) and the (Opening Inventory + schedule receipt/Transit stocks) . NR Formula is given below

Net Requirement = (Forecast Quantity + Safety Stock) – (Opening Inventory + Schedule Receipt/Transit)

Order Planned – Order planned depends on two criteria i.e., Lot Quantity and Lead Time. RDC cannot place order in piecemeal quantity to CDC. The quantity should be in Lot Size. It also depends on Lead Time. For example if lead time is 2 days then Lot quantity dispatched by CDC today will reach the RDC after two days.

Since the lead time is two days as per our example the closing Inventory as on day 1 should be sufficient enough to cover next two days (day 2 and 3) gross requirements (Forecast quantity + Safety stocks). If the closing stocks is not sufficient then we need to plan order as per lot quantity.

In our above example the closing Inventory for DC 1 as on day 1 is 170 units. The Gross requirement for day 2 and day 3 is 190 units (100 + 90 units). There is shortfall of 20 units (closing inventory – 2 days cumulative gross requirements). Since the lead time is 2 days we need to consider next two days gross requirements as the stocks will get connect the DC after two days. If the lead time is 3 days (refer Regional Distribution centre 3 with lead time 3 days model) then we need to consider 3 days gross requirements. Even though the short fall quantity is 20 units only, we need to place order as per lot quantity i.e., 200 units. Order planned formula is given below

Order Planned = Closing Inventory as on day – cumulative Gross Requirements as per lead time

Planned Receipt – Order planned quantity received as per lead time. As per our example we have ordered 200 units on day 1 to meet cumulative gross requirements. Since the lead time is 2 days the stocks will be reaching DC on day 3 against the order planned on day.

Closing Inventory – The calculation is given below.
Closing Inventory = (Opening Inventory + Schedule Receipt / Transit + Planned Receipt) - Forecast quantity split
We consider Forecast quantity split to compute closing inventory and not Gross Requirement as gross requirements contains safety stock also.One may wonder why the Order Planned quantity is used for dispatching the stocks from plant to Distribution centre rather than Net Requirement ? Order Planned Quantity is based on Lot Quantity and Lead time and hence the same is considered for placing orders.

In the next session we will see how DRP is computed for Centre Distribution Centre by rolling up the orders of all three regional DCs.

Friday, July 17, 2009

Demand Planning - DRP (Distribution Requirement Plan) - Part II

In this session we will explore more about DRP.

DRP systems operate by breaking down the flow of finished goods from the manufacturing plant through the “Distribution Network” of warehouse and transportation modes. This is undertaken on a time-phased basis (in DRP terminology referred as time bucket) to ensure that the required goods flow through the distribution network system are available as and when required at right place, at the right time.

Integrated systems (Production, warehouse, transportation, forecast, Inventory etc) of this nature require sophisticated, computerized information systems as their basis.

DRP Requirements

Information Requirements :

a) Base Level Usage Forecast - Forecast data should be at SKU / Item level for Product axis and any level below warehouse or DC for customer. Product axis is SKU / Item level as the Company raise invoice at SKU / Item level to customer, whereas “Distribution Network Design” of that company decides the customer axis level.
b) Distribution Network Design - Distribution Network Design may change from company to company of similar Industry. For example HP and Dell company manufacturing computer machines belong to computer hardware industry but their distribution network design differ as per given below diagram.

c) Inventory Status - Inventory availability status at various distribution centre level. This includes Transit stocks (ie stocks already dispatched from factory but not reached DC)
d) Ordering data - Time phasing or schedule flow, the factory should deliver the materials to each DC. For example factory can be asked to dispatch an item to DC at Kolkata on weekly basis (Monday) whereas to another DC at Mumbai on Fortnightly basis due to lower demand in that region.

DRP Process Requirements :

a) Net Requirement (NR) computation - Forecast at SKU / DC level is used in the DRP process. However some Inventory referred as “opening stock” are already available at DC. There could be materials lying “In transit” i.e., materials which has already been dispatched from factory are yet to reach DC. These inventory i.e., opening and In transit stocks has to be adjusted or netted against the forecast volume to arrive net stock requirement at each SKU / DC.

Since demand is volatile in nature, the company may prefer to keep buffer stock referred as “Safety Stock” to meet unexpected demand fluctuation. Safety Stock criteria will differ for each item as per nature of product and each DC due to demand nature. For example Hundai Car company will keep different safety stock Norms for Santro and Accent Model due to categorization. Similarly the company keep different safety stock norms for Santro between DC at Northern and Southern Region due to demand nature.

Net Requirement is computed based on Forecast Volume + Safety Stock – opening physical stock – In transit stock.

Let us take an example of Santro car at Delhi DC. The forecast volume for next two months are 9,000 and 7,500 Units respectively. Delhi DC is already having 1,500 Units as opening stock and expected to receive In Transit stock of another 1,000 units in next two days. DC is expected to keep 5 days stocks of second month forecast volume as safety stock. Assuming 25 days are working days in a month. Then how to compute Net Requirements ?

Solution :

Ist Month Forecast Volume - 9,000 units
2nd Month Forecast Volume - 7,500 units
Opening Stock - 1,500 Units
In Transit Stock - 1,000 Units
Safety Stock - 2nd Month Forecast Volume *(Safety stock days/No of Working days)
- 7500 *(5/25) = 1,500 Units
Net Requirement = 1st Forecast volume + Safety Stock – opening Stock – In Transit Stock
Net Requirement (NR) = 9000 + 1500 – 1500 – 1000 = 8000 Units

Hence the Hundai Manufacturing plant will produce 8000 units of Santro instead of 9000 units against the Delhi DC requirements. Please note that Safety Stock computation methodology differ from company to company.

b) Time Phasing Requirement : Time Phasing means when the company wants to move the products from Manufacturing plant to DC. This could be monthly, fortnightly, weekly basis. As per above example if the Hundai plant decided to send 8000 units of Santro car so as to reach Delhi DC by 3rd of August to meet August Sales. Delhi DC has to keep huge godown to accommodate all 8000 units and require more manpower to maintain the santro cars at their end. However if the company decide to send 45% of NR i.e., 3600 units on 3rd, 35% of NR i.e., 2800 units on 13th respectively and 20% of NR i.e., 1600 units on 23rd August to Delhi DC. This enable the DC to keep minimal stocks at hand with optimum storage space and manpower by providing the good service level to the customers. For FMCG company like Cadbury the time phasing for Bournvita product could be once in 3 days. Time Phasing differs for each Product and DC.
Time Phasing depends on “Distribution Network Design”. For example if manufacturing plant is located at Singapore and Central Distribution is located at Mumbai, the lead time i.e., shipping the product from Singapore to Mumbai is three months then the time phasing could vary according to demand for the product. Let us assume perfumes manufacture at French has got CDC at Mumbai and their lead time is three months. In this case the CDC may plan to get three months consolidated stocks once in three months to avoid stock out situation.

c) Planned order Release - In the earlier time phase we have given exact quantity and schedule date of stocks to be received at DC. However we need to communicate when the dispatch to be effected from plant so that the materials reach DC on scheduled date. In order to calculate the Planned order Release, we need to know the Lead time from Plant to various DCs. For example in the Hundai example the plant is located at Chennai and Lead time from Chennai plant to DC at Delhi is 7 days. The planned order release date should be 7 days less of schedule date and also to ensure that that day is working day.

One can understand that DRP is effective only if there is timely data sharing between different functions. Managing time phasing manually is another cumbersome process and hence it is recommended to have proper DRP package at your disposal which should be flexible and properly designed to cater the “Distribution Network Design” changes. DRP package should be more robust and flexible so that it can compute the quantity basis UOM, FTL (Full truck load).

So far we have learnt about DRP and computation methodology with simple example. At the outset it may look easy but in reality defining time phase for each SKU at DC level is difficult part and this will keep on changing as per market dynamics. When the company is having more Products and DC then it lead to more complication and maintenance will become big issue. When the company changes its “Distribution Network Design” by opting for more plant or DC then the DRP module has to realigned accordingly.

In the next session we will learn more about DRP.

Tuesday, July 14, 2009

Demand Planning - DRP (Distribution Requirement Plan)

In our earlier blogs, we were discussing about one aspect of Demand Planning ie Forecasting. Demand Planning is incomplete without mentioning DRP (Distribution Requirement Planning).

So far we have learnt that how forecating has been done. The demand planner has to arrange the stocks as per the forecast volumes. At the outset this looks simple and straight forward approach without much complication. This is true if demand for the product is stable and forecast variations are within control. But in real life the demand for most of the products are volatile and forecast variations are on higher side. This opened up pandora's box with the following questions.

a) What quantity ? - Is it only the forecast quantity for given item. If so, when market is buoyant and require more stocks how are we going to tackle the situation. Are we going to build up some more additonal stock refferred as safety stock or buffer stock to meet the unexpected demand every month. If so what are the norms for building safety stocks for that item. You cannot keep more safety stocks every month as it involves Inventory cost and Inventory carrying cost.

b) When (Time Period) are we going to despatch the quantity ? On Monthly basis, Weekly basis or daily basis ? Lesser the time period is advantageous to the organization due to higher inventory turn, low inventory holding cost, low investment on raw materials and inventory etc.

c) Which locations are we going to despatch the quantity ? This requires clear understanding of "Distribution Network Design" of the organization. For example the manufacturing plant send items to Central Distribution Centre (CDC) through which Regional Distribution centres (RDC) receive the items. In some cases there may not be any CDC and hence manufacturing plant may send items to RDC. "Network Design" is an important concept in SCM and hence we will discuss about this in our subsequent blog.

These issues are addressed through DRP process. Let us first understand what is DRP and where does DRP fit in within the Supply Chain Management.

What is DRP ?

DRP provides the basis for integrating supply chain inventory information and physical Distribution activities with the Manufacturing Planning and Control (PAC) system.

Distribution Requirements Planning (DRP) is a systematic process for determining which item (Finished Goods), in what quantity, at which location, and when are required in meeting anticipated demand. It manages the flow of finished goods between firms, Distribution centres, warehouses.

DRP is the approach by which optimum stock levels of Finished Goods (FG) would be maintained in multiple warehouses usually serving different geographical locations. It is a time phased replenishment approach, in which inventory status and planned lead time are reviewed and new shipment plans are generated periodically.

Where DRP fits in the Supply Chain ?

Before exploring DRP further, we will introduce another concept MRP which stands for Material Requirement Planning. DRP and MRP are integrated and goes hand in hand even though DRP is meant for distribution and MRP for manufacturing. Given below diagram explains how DRP and MRP are integrated.

In the next few sessions we will discuss more about DRP and related terminology. Subsequently we will discuss about MRP, MPS (Master Production Schedule), PPC (Production Planning & Control) and more production related topics.

Now the user may feel why should we know about MRP, MPS, PPC which is a hard core production function. MRP, MPS, PPC are planning oriented activities in the production function which direclty impact Demand and Sales function. As a SCM Manager one should understand these concepts and terminology clearly, in order to function effectively.