Distribution Requirement Planning (DRP)

Distribution Requirement Planning (DRP) is a more sophisticated approach that considers multiple distribution stages and the characteristics of each stage. It is a logical extension of Material Requirements Planning (MRP), although there is one fundamental difference between the two.

  • MRP is determined by a production schedule that is defined and controlled by the enterprise. On the other hand, DRP is guided by customer demand, which is not controllable by the enterprise.
  • So, while MRP generally operates in a dependent demand situation, DRP operates in an independent environment where uncertain customer demand determines inventory requirements. The manufacturing requirements planning component coordinates the scheduling and integration of materials into finished goods.
  • MRP controls inventory until manufacturing or assembly is complete. DRP then takes coordination responsibility once finished goods are received in the plant warehouse.

The fundamental DRP planning is the schedule, which coordinates requirements across the planning horizon. There is a schedule for each SKU and each distribution facility. Schedules for the same SKU are integrated to determine the overall requirements for replenishment facilities such as the plant warehouse. The schedules are developed using weekly time increments known as ‘buckets’. The schedule reports current on-hand balance, safety stock, performance cycle length and EOQ.

Distinction between DRP and MRP

  MRP DRP
Guiding factor Guided by production schedules  Guided by customer demand
Control of the firm Under control of the firm  Not under control of the firm
Demand situation Operates in dependent demand situation Operates in independent demand situation
Area of operation and coordination Coordinates scheduling and integration of materials into finished goods Coordinates demand between outlets and supply sources
Stage of functioning Controls inventory until manufacturing and assembly is complete. Controls and coordinates inventory after manufacturing and assembly of finished goods

The figure below shows the areas of functioning of MRP and DRP. MRP plans the procurement of raw materials as per their requirements, right from the first stage till the final assembly.

After the goods have been manufactured, DRP plans the distribution of finished goods from the plant warehouse to the wholesalers and retailers till it reaches the customer.

The integrated model seeks to combine these two areas. Taking into consideration the requirements of both MRP and DRP, it provides integrated planning.

Distribution Requirement Planning (DRP) Benefits and Constraints

An inventory management system such as Distribution Requirement Planning offers a number of benefits for management. The major organizational beneficiaries include marketing and logistics.

The major marketing benefits of DRP are:

  • Improved service levels that increase on time deliveries and decrease customer complaints.
  • Improved and more effective promotional and new product introduction plans.
  • Improved ability to anticipate shortages so that marketing efforts are not expended on products with low stock.
  • Improved inventory coordination with other enterprise functions, since DRP facilitates a common set of planning numbers.
  • Enhanced ability to offer customers a coordinated inventory management service.

The major logistics benefits of DRP are:

  • Reduced distribution center freight costs resulting from coordinated shipments.
  • Reduced inventory levels, since DRP can accurately determine what product is needed and when.
  • Decreased warehouse space requirements because of inventory reductions.
  • Reduced customer freight costs as a result of fewer back orders.
  • Improved inventory viability and coordination between logistics and manufacturing.
  • Enhanced budgeting capitability, since DRP can effectively simulate inventory and transportation requirements under multiple planning scenarios.

The constraints of DRP are:

  • Inventory planning systems require accurate and coordinated forecasts for each distribution center. The forecast is necessary to direct the flow of goods through the distribution channel. To the extent that this level of forecast accuracy is possible, inventory-planning systems operate well. However, this requires forecasts for each distribution center and SKU as well as adequate lead-time to allow product movement. However there are 3 potential sources for error exist. The forecast itself may be wrong, it may have predicted demand at the wrong location, or it may have been predicted demand at the wrong time.
  • Inventory planning requires consistent and reliable performance cycles for movement between the distribution centers. While variable performance cycles can be accommodated through safety lead times, performance cycle uncertainty reduces planning system effectiveness.
  • Integrated planning is subject to system nervousness and frequent rescheduling, because of production breakdowns and delivery delays. The system nervousness leads to fluctuations in capacity utilization, rescheduling cost, and confusion in deliveries. This is intensified by the volatile operating environment characteristic of distribution. Uncertainties such as supply transportation performance cycles and vendor delivery reliability can cause an extremely nervous DRP system.
  • DRP is not the universal solution for inventory management.

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