Distribution Requirements Planning (DRP)

Distributors keen to replicate MRP success hence

DRP developed

DRP mirror image of MRP, i.e. it seeks to identify

requirements for finished product at the point of demand

Aggregated, time phased requirements schedules

for each echelon are then produced.

(Compare with typical MRP example.)

DRP continued

• DRP is a "Pull" rather than "Push" philosophy

• Customer requirements are identified or anticipated at

the point of demand and "pulled" down the distribution pipeline

• DRP relies upon forecasts of end demand generated at

the lowest point in the distribution echelon.

MRP/DRP - ERP

– From regional depots - central warehouse and then the plant. This demand is aggregated on a time phased basis.

– Significant advantages can be gained by DRP.

– The biggest pay-off is through the linking of MRP and DRP into an integrated planning system. This is called "Logistics Requirements Planning" (LRP). Or “Enterprise Resources Planning” (ERP)

Supply-Chain Management?

• Supply-chain management is a total system approach to managing the entire flow of information, materials, and services from raw-material suppliers through factories and warehouses to the end customer

Formulas for Measuring Supply-Chain Performance

• One of the most commonly used measures in all of operations management is “Inventory Turnover”

• In situations where distribution inventory is dominant, “Weeks of Supply” is preferred and measures how many weeks’ worth of inventory is in the system at a particular time

valueinventory aggregate Average

sold goods ofCost turnoverInventory valueinventory aggregate Average

sold goods ofCost turnoverInventory

weeks52 sold goods ofCost

valueinventory aggregate Averagesupply of Weeks

weeks52

sold goods ofCost

valueinventory aggregate Averagesupply of Weeks

Example of Measuring Supply-Chain Performance

Suppose a company’s new annual report claims their costs of goods sold for the year is $160 million and their total average inventory (production materials + work-in-process) is worth $35 million. This company normally has an inventory turn ratio of 10. What is this year’s Inventory Turnover ratio? What does it mean?

Suppose a company’s new annual report claims their costs of goods sold for the year is $160 million and their total average inventory (production materials + work-in-process) is worth $35 million. This company normally has an inventory turn ratio of 10. What is this year’s Inventory Turnover ratio? What does it mean?

Example of Measuring Supply-Chain Performance (Continued)

= $160/$35 = 4.57

Since the company’s normal inventory turnover ration is 10, a drop

to 4.57 means that the inventory is not turning over as quickly as it

had in the past. Without knowing the industry average of turns for

this company it is not possible to comment on how they are

competitively doing in the industry, but they now have more

inventory relative to their cost of goods sold than before.

= $160/$35 = 4.57

Since the company’s normal inventory turnover ration is 10, a drop

to 4.57 means that the inventory is not turning over as quickly as it

had in the past. Without knowing the industry average of turns for

this company it is not possible to comment on how they are

competitively doing in the industry, but they now have more

inventory relative to their cost of goods sold than before.

valueinventory aggregate Average

sold goods ofCost turnoverInventory

valueinventory aggregate Average

sold goods ofCost turnoverInventory

Bullwhip Effect O

rder

Q

uan t

ity

Time

Retailer’s Orders

Ord

er

Qua

n tit

y

Time

Wholesaler’s Orders

Ord

er

Qua

n tit

y

Time

Manufacturer’s Orders

The magnification of variability in orders in the supply-chain

The magnification of variability in orders in the supply-chain

A lot of retailers each with little variability in their orders….

A lot of retailers each with little variability in their orders….

…can lead to greater variability for a fewer number of wholesalers, and…

…can lead to greater variability for a fewer number of wholesalers, and…

…can lead to even greater variability for a single manufacturer.

…can lead to even greater variability for a single manufacturer.

MRP/DRP

• Combining MRP and DRP into a closed loop system is likely to offer a number of benefits

• High degree of integration from Raw Materials to WIP to Finished Goods

• Better control of material flow

• Reduction in total investment in inventory

• Increased utilisation of warehouse space, plant and transportation

• Greater flexibility in the systems can improve response to customers' requirements

Distribution Network: Milan winery and its outlet

WineryMilan

Distribution CentreZURICH

Distribution CentreTORINO

Retail outletBADEN

Retail outletSt GALLEN

Retail outletBERGAMO

Retail outletCOMO

Retail outletPIANCENZO

Retail outletZUG

Informationflow

Physicalflow

Wine Distribution Centre, Switzerland & Italy

Retail

outlet

Weekly

Demand

(cases)

Inventory

on hand

(cases)

Order

Quantity

(cases)

Baden, Switzerland

8 12 15

Zug, Switzerland

9 14 20

St Gallen, Switzerland

12 19 15

Como, Italy 15 18 25

Piancenzo, Italy 18 21 35

Bergamo, Italy 22 32 30

Distribution centre with inventory on hand

Distribution centre Inventory on hand Order quantity

Zurich, Switzerland 65 50

Torino, Italy 105 70

Milan Winery inventory on hand and production lot

Inventory on hand Production lot

Milan 80 160

Winery example

Assignment:• Develop a ‘pull’ distribution requirements plan, over

an 8-week period, using the weekly demand from each retails outlet as the independent demand, which pulls the product through the network

• Assume lead time of 1 week for all outlets

Enterprise Resource Planning (ERP) Systems

• What is Enterprise Resource Planning?

• Software systems

• SAP R/3 System Components

• Benefits and Implementation of ERP

ERP Systems Defined

• ERP is a computer system that integrates

application programs in accounting, sales,

manufacturing and other functions in the firm

• This integration is accomplished through a database shared

by all the application programs

What is ERP?

DistributionPlanning

ManufacturingPlanning

CorporateAccounting

Sales & MarketingAutomation

New Product & ProcessDevelopment

ManufacturingProcess

Automation

HumanResources

CorporateManagement& Strategy

• ERP Vision

• One Database• One Application• One User Interface

Major Developers of ERP software• AIM computer solutions (Comprehensive selection of software

www.aimcom.com)

• American Software (Comprehensive selection: focus on supply chain management www.amsoftware.com)

• The Baan Company (Baan IV client/server: dynamic enterprise modelling www.baan.com)

• Chesapeake Software systems (Optimised manufacturing scheduling www.chessie.com)

• i2 Technologies (Forecasting flow manufacturing www.i2.com)

• Manugistics (Optimisation of logistics functions www.manugistics.com)

• Oracle (Comprehensive system: major database vendor www.oracle.com)

• Peoplesoft (Comprehensive selection: client/server products www.peoplesoft.com)

SAP AG’s R/3 (www.sap.com)

• SAP AG (a German firm) provides ERP - its flagship product - R/3

• R/3 comprises four major modules: – Financial Accounting– Human Resources– Manufacturing & Logistics– Sales & Distribution

• The software is designed to operate in a three-tier client/server configuration– at the core is a high-speed network of database servers– the applications have a range of modules which are networked

through a front-end application server

• The key to SAP success is its comprehensive coverage of business applications

R/3 System Functional Components

R/3 System

Functional Component

s

Sales & Distribution

Financial Accounting

Human Resources

Manufacturing & Logistics

Financial Accounting

• Financials (FI)

• Controlling (CO)

• Asset Management (AM)

Human Resources (HR)

• Payroll• Benefits administration• Applicant data administration• Personnel development planning• Workforce planning• Schedule & shift planning• Time management• Travel expense accounting

Manufacturing & Logistics

• Materials management (MM)

• Plant maintenance (PM)

• Quality management (QM)

• Production planning & control (PP)

• Project management system (PS)

Sales and Distribution (SD)

• Prospect & customer management

• Sales order management

• Configuration management

• Distribution

• Export controls

• Shipping and transportation management

• Billing, invoicing, and rebate processing

Reasons for Implementing SAP R/3

• Desire to standardise and improve processes

• To improve the level of systems integration

• To improve quality of information

Benefits of ERP

• Why Invest in ERP?– Sharing of information - quick decisions, less admin– Schedule production, utilise capacity– Guides staff through processes– Less IT maintenance

• The Future of ERP– New modules– Electronic Commerce - bypass distribution chain– Standards– Decline of costs - new easy to use tools– Optimisation of Resources and Processes (ORP)

Enterprise Requirements Planning (ERP) in practice

• extremely difficult to implement. • a number of prerequisites exist. These include:• accurate bottom up forecasts• open lines of communication• flexible manufacturing and distribution systems• improved communications with suppliers and

customers• accuracy in the collection of data, i.e. Bill of

Material (BOM) and Inventory Records• a high level of management commitment

SAP R/3 Application Modules

• Financial Accounting (FI)• Financial Controlling (CO)• Fixed Assets Management (AM)• Human Resources (HR)• Workflow (WF)• Industry Solutions (IS)• Plant Maintenance (PM)• Project System (PS)• Quality Management (QM)• Sales and Distribution (SD)• Production Planning (PP)• Materials Management (MM)