SUPPLY CHAIN MANAGEMENT DRP AND SCM

Vaisagh. R. Nath
School of Management Studies CUSAT, Kochi-22 E-mail:vizag.r@gmail.com

Abstract: The purpose of a distribution system is to give maximum service to the customer. The structure of the distribution network is designed to achieve this end. If the management of the network is not properly executed, the end result can be poorer service than planned, costly transportation expenses, high levels of inventory, conflicts between network levels, or a combination of any of the above. Prior to implementation of the dependent demand concepts of MRP, many distribution operations were based on reorder point replenishment systems. Products would be pulled from supplying centres when the inventory dropped to the reorder point. The reorder point system assumed that the material is available at the supplying centre location. If the demand of a single stocking location calls for an even continuous rate, the reorder point system will work. However, if there are multiple stocking locations, each having even, continuous demand, the combination of demands will be lumpy requirements for the supplying facility. This calls for an efficient Distribution Requirements planning (DRP). Managing the inventory of heterogeneous products among the different companies across the globe is a crucial task for any product based company. The objective of new system DRP is to control the inventory at the customer site (VMI) to the lowest permissible level defined as Minimum Inventory. Key words: DRP, SCM

1.0 INTRODUCTION
Resource management and product planning are two considerable things in supply chain model. Just-In-Time model is one of the techniques that give the best results for the inventory management but when the product company deals with heterogeneous products

among different customers then JIT will not sufficient to solve the purpose of the inventory management system. Just-In-Time (JIT) is the technique that attempts to improve any business in the aspect of return of investment such that there would be no underflow of the stock at the same time there should not be over dew of any product. DRP is based on the JIT. If the production company handles the B2B relations then it will be involving in both long term and short term demands. So the stock policy SCM should handle all the situations to maintain inventory management System. This DRP mainly deals with the B2B relations. Distribution planning involves managing sales forecasts, creating master schedules, and running DRP. Distribution Requirements Planning is a key tool for the planning and control of a companys distribution activities. Supply is measured against forecast and actual demand and actions are suggested to ensure a high level of customer service. The timely provision of accurate strategic information allows for more informed business decisions. The function of DRP is to determine the replenishment quantity for a particular time period. The inventory management is based on the time lines like daily, weekly or monthly demands. So the planned orders at the branches are fulfilled based on the DRP logic. The DRP logic decides what quantity at which location needs to be supplied on what date. In the case of multilevel distribution networks, this distribution 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. 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.

2.0 SUPPLY CHAIN MANAGEMENT

Supply chain management (SCM) is the management of an interconnected or interlinked between network, channel and node businesses involved in the provision of product and service packages required by the end customers in a supply chain. Supply chain management spans the movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption. It is also defined as the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally." SCM draws heavily from the areas of operations management, logistics, procurement, and information technology, and strives for an integrated approach. Problems addressed Supply chain management addresses the following problems:

Distribution network configuration: - the number, location, and network missions of suppliers, production facilities, distribution centers, warehouses, cross-docks, and customers. Distribution strategy:- questions of operating control (e.g., centralized, decentralized, or shared); delivery scheme (e.g., direct shipment, pool point shipping, cross docking, direct store delivery, or closed loop shipping); mode of transportation (e.g., motor carrier, including truckload, less than truckload (LTL), parcel, railroad, intermodal transport. Trade-offs in logistical activities: The above activities must be coordinated in order to achieve the lowest total logistics cost. Tradeoffs may increase the total cost if only one of the activities is optimized. The planning of logistical activities therefore takes a systems approach. These trade-offs are key to developing the most efficient and effective logistics and SCM strategy. Information: The integration of processes through the supply chain in order to share valuable information, including demand signals, forecasts, inventory, transportation, and potential collaboration. Inventory management: Management of the quantity and location of inventory, including raw materials, work in process (WIP), and finished goods. Cash flow: Arranging the payment terms and methodologies for exchanging funds across entities within the supply chain. Supply chain execution means managing and coordinating the movement of materials, information and funds across the supply chain. The flow is bi-directional. SCM applications provide real-time analytical systems that manage the flow of products and information throughout the supply chain network.

2.1 Advantages of SCM

SCM can help you transform a traditional linear supply chain into an adaptive network with the following benefits.

With the increased visibility into the supply chain and adaptive supply chain network, you can be more responsive. You can sense and respond quickly to changes and quickly capitalize on new opportunities. By offering a common information framework that supports communication and collaboration, SCM enables you to better adapt to and meet customer demands. You can track and monitor compliance in areas as environment, health and safety. Information transparency and real-time business intelligence can lead to shorter cash-to-cash cycle times. Reduced inventory levels and increased inventory turns across the network can lower overall costs. With SCM, you can lower operational expenses with timelier planning for procurement, manufacturing and transportation. Better order, product and execution tracking can lead to improvements in

performance and quality - and lower costs. You can also improve margins through better coordination with business partners. Tight connection with trading partners keep your supply chain aligned with current business strategies and priorities, improving your organization's overall performance and achievement of goals.

3.0 DISTRIBUTION REQUIREMENTS PLANNING (DRP) 3.1 Distribution Function

A supply channel is composed of three structures. At one end of the channel is the manufacturer. The manufacturer focuses on the development and production of products and originates the distribution process. The terminal point in the channel is the retailer who sells goods and services directly to the customer for their personal, non-business use. In between the two lies a process called distribution, which is more difficult to define. One involved in the distribution process is labelled a "distributor." The APICS Dictionary describes a distributor as "a business that does not manufacture its own products but purchases and resells these products. Such a business usually maintains a finished goods inventory." The proliferation of alternative distribution forms, such as warehouse clubs, catalogue sales, marketing channel specialists, and mail order, have blurred functional distinctions and increased the difficulty of defining both the distribution process and the term distributor. According to this definition, most companies that are involved with the disbursement of raw materials and finished products belong, in one sense or another, to the distribution industry. By adopting this definition, distribution is expanded to cover nearly every form of materials management and physical distribution activity performed by channel constituents, except for the processes of manufacturing and retailing. Distribution involves a number of activities centered around a physical flow of goods and information. At one time the term distribution applied only to the outbound side of supply chain management, but it now includes both inbound and outbound. Management of the inbound flow involves these elements: Material planning and control Purchasing Receiving Physical management of materials via warehousing and storage Materials handling Management of the outbound flow involves these elements: Order processing Warehousing and storage Finished goods management Material handling and packaging Shipping

Transportation

3.2 Role of the distribution function

There are a number of critical functions performed by the channel distributor these functions are: Product acquisition. This means acquiring products in a finished or semi-finished state from either a manufacturer or through another distributor that is higher up in the supply channel. These functions can be performed by independent channel intermediaries or by the distribution facilities of manufacturing companies. Product movement. This implies significant effort spent on product movement up or down the supply channel. Product transaction. Distributors can be characterized as selling products in bulk quantities solely for the purpose of resale or business use. Downstream businesses will then sell these products to other distributors or retailers who will sell them directly to the end customer, or to manufacturers who will consume the material/components in their own production processes.

3.3 Key elements in 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 Distribution resource planning (DRP) is a method used in business administration for planning orders within a supply chain. 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. DRP uses several variables:

The required quantity of product needed at the beginning of a period The constrained quantity of product available at the beginning of a period The recommended order quantity at the beginning of a period The backordered demand at the end of a period The on-hand inventory at the end of a period DRP needs the following information:

The demand in a future period The scheduled receipts at the beginning of a period The on-hand inventory at the beginning of a period The safety stock requirement for a period

3.4 Advantages of DRP

An efficient DRP system can yield the following benefits for the organization. Efficient DRP systems can reduce distribution centre freight costs resulting from coordinated shipments. It can reduce the inventory level. DRP helps in coordinating inventory with organisational functions. It leads to a decrease in the warehouse space requirements because of inventory reduction made possible through DRP. It can improve the service level by on time deliveries.

4.0 SUPPLY CHAIN AND DISTRIBUTION REQUIREMENT PLANNING

One important function of Enterprise Planning is logistic planning of items which are acquired from elsewhere within the organization. In Enterprise Planning, this type of supply is known as distribution. The distribution volume / quantity are planned in the form of planned distribution orders. Within the master-planning horizon, these planned distribution orders serve as a distribution plan. When a distribution quantity is planned, the related requirement of the item is passed on at the appropriate level of depot / warehouse, so that system can take this dependent demand into account. Setting up a structure for distribution planning is done by defining clusters and by modelling the goods flow through supply chain by supplying relationships and sourcing strategies. Clusters: Enterprise Planning uses clusters to model distribution structures within a site and/or between related sites. A cluster is a

group of entities such as warehouses/ work centers. A cluster normally represents a geographical location, consisting of one or more warehouses (usually non-nettable warehouses) that are considered as one unit for planning purposes. Clusters are used to specify groupings of entities so that relationships between entities can be defined. Entities belonging to a cluster do not have to belong to the same financial and / or logistic company of an organization. The notion of a clustered item is comparable to that of an item/warehouse combination under inventory module. The major difference is that a cluster can be an aggregate several warehouses. The concept of cluster is best illustrated by the following Example. Suppose distribution centers of a large retail organization are grouped into i) north, ii) south iii) east and iv) west clusters. All of them, in addition to getting some local supplies, are largely supplied by distribution orders from a central warehouse. The distribution requirement planning for north cluster, where supply chain comprises of one regional depot and three divisional depots, are shown in the following diagram: Cluster and Warehouse Hierarchy

Fig. 1 SCM and DRP

It may be noted that the flow of demand is upward and the flow of goods can be in any direction. Supply Planning - Supply planning is the next important element of distribution requirement planning, which comprises of following: Supply Sources Material requirements can be covered with three types of orders: 1. Production orders. 2. Distribution orders. 3. Purchase orders. Distribution orders move the goods between clusters. Distribution orders are especially suitable for the situation where depots/ sales channels of an organization are spread throughout a large area. The sourcing strategy determines whether a requirement is covered by production orders, distribution orders, or purchase orders. A combination of these sources is also possible.

4.1 Evolving from Distribution Requirements Planning to collaborative supply chain planning
Distribution and logistics managers are faced with managing increasingly complex supply chain networks, which include multiple suppliers, manufacturing sources, warehouses, and transportation providers, not to mention a multitude of product variations. Coordination among these disparate players is key to success. It is no longer acceptable to create plans for only one enterprise. The reality is that every distribution network has constraints and each action taken within the network has a cost. Systems that consider constraints can generate feasible plans. Traditional DRP doesnt recognize constraints. Collaborative supply chain planning not only respects constraints, but also understands cost and profit objectives. Meeting objectives without violating constraints allows the creation of an optimal distribution plan that is much better than traditional DRP. Storage, handling, and transportation are among the constraints considered by collaborative supply chain planning systems. Collaborative supply chain planning systems give your planners the flexibility to rapidly consider distribution alternatives. The systems respect relevant constraints and optimize final plans for cost and/or profit objectives. The results are improved service levels and lower costs.

5.0 SUMMARY
A supply chain is composed of all the companies involved in the design, production, and delivery of a product to market. Supply chain management is the coordination of production, inventory, location, and transportation among the participants in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served. The goal of supply chain management is to increase sales of goods and services to the final, end use customer while at the same time reducing both inventory and operating expenses. The business model of vertical integration that came out of the industrial economy has given way to virtual integration of companies in a supply chain. Each company now focuses on its core competencies and partners with other companies that have complementary capabilities for the design and delivery of products to market. Companies must focus on improvements in their core competencies in order to keep up with the fast pace of market and technological change in todays economy. To succeed in the competitive markets that make up todays economy, companies must learn to align their supply chains with the demands of the markets they serve. Supply chain performance is now a distinct competitive advantage for companies who excel in this area. One of the largest companies in North America is a testament to the power of effective supply chain management. Wal-Mart has grown steadily over the last 20 years and much, if not most, of its success is directly related to its evolving capabilities to continually improve its supply chain.

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