Distribution Requirements Planning (DRP)

Distribution Requirements Planning (DRP): A Comprehensive Guide for CPIM Exam Success

Distribution Requirements Planning (DRP): A Complete Guide

Why Is Distribution Requirements Planning (DRP) Important?

Distribution Requirements Planning (DRP) is a critical component of supply chain and distribution management. It serves as the bridge between the manufacturing planning system (MRP) and the physical distribution network. Understanding DRP is essential for several reasons:

• Customer Service Optimization: DRP ensures that the right products are available at the right locations and at the right time, directly supporting customer satisfaction and service-level targets.
• Inventory Investment Reduction: By using time-phased logic to plan replenishment, DRP helps organizations reduce excess inventory across the distribution network while maintaining adequate stock levels.
• Improved Coordination: DRP integrates demand information from multiple distribution centers (DCs) and feeds it back into the master production schedule (MPS), enabling better coordination between supply and demand.
• Transportation Efficiency: By anticipating future requirements, DRP allows for better transportation planning, consolidation of shipments, and more efficient use of logistics resources.
• Proactive Decision-Making: DRP provides visibility into future supply and demand imbalances, enabling planners to take corrective action before problems occur rather than reacting to stockouts or overstock situations.

What Is Distribution Requirements Planning (DRP)?

Distribution Requirements Planning (DRP) is a time-phased planning methodology used to determine when, how much, and where inventory needs to be replenished across a distribution network. It applies the logic of Material Requirements Planning (MRP) to the distribution environment.

Key Definition:
DRP is the function of determining the need to replenish inventory at branch warehouses over a planning horizon. It uses time-phased order point logic, where planned orders at the branch warehouse level are "exploded" via MRP logic to become gross requirements at the supplying source.

Core Concepts of DRP:

• Time-Phased Order Point (TPOP): DRP uses a time-phased approach rather than a simple reorder point. Demand forecasts are projected into the future, and planned replenishment orders are generated to cover those projected needs. This is a significant improvement over traditional order point methods because it provides visibility into future requirements.

• Bill of Distribution (BOD): Similar to a bill of materials in manufacturing, the bill of distribution defines the network structure — which facilities supply which other facilities. It maps the flow of products from the central supply source (plant or central warehouse) through regional distribution centers to branch warehouses or customer-facing locations.

• Planned Orders: DRP generates planned orders at each stocking location. These planned orders at downstream locations become gross requirements (demand) at the upstream supplying location. This cascading logic is fundamental to how DRP works.

• Integration with MPS/MRP: The planned orders generated at the highest level in the distribution network (typically the central supply point) feed directly into the Master Production Schedule or MRP as sources of demand. This creates a seamless link between distribution and manufacturing planning.

How Does Distribution Requirements Planning (DRP) Work?

DRP follows a systematic, bottom-up planning process that mirrors the logic of MRP but applies it to the distribution network. Here is a step-by-step explanation:

Step 1: Establish the Distribution Network Structure
The first step is to define the bill of distribution — the hierarchical relationship between stocking locations. For example:
- Factory Warehouse → Regional DC 1, Regional DC 2
- Regional DC 1 → Branch Warehouse A, Branch Warehouse B
- Regional DC 2 → Branch Warehouse C, Branch Warehouse D

Step 2: Develop Demand Forecasts at Each Location
Independent demand forecasts are generated for each end stocking location (branch warehouses) based on historical demand, trends, seasonality, and promotional activity. These forecasts represent the gross requirements at the lowest level of the distribution network.

Step 3: Apply Time-Phased Planning Logic at Each Location
For each stocking location, starting at the lowest level, DRP applies the following logic (similar to MRP):

For each time period:
- Gross Requirements: The forecasted demand (or actual customer orders) for that period.
- Scheduled Receipts: Orders already in transit or confirmed for delivery.
- Projected Available Balance (PAB): Beginning inventory + Scheduled Receipts – Gross Requirements.
- Net Requirements: If the projected available balance falls below the safety stock level, a net requirement is identified.
- Planned Order Receipts: Orders planned to arrive to cover net requirements, sized according to the lot-sizing rule (e.g., fixed order quantity, lot-for-lot, EOQ).
- Planned Order Releases: Planned order receipts offset by the lead time (transit time from the supplying source).

Step 4: Cascade (Implode) Demand Upward Through the Network
The planned order releases at the branch level become gross requirements at the supplying regional DC. The same time-phased logic is then applied at the regional DC level. The planned order releases from the regional DCs then become gross requirements at the factory warehouse or central supply point.

Step 5: Feed Into the Master Production Schedule
The aggregated planned order releases at the central supply point become input to the MPS. This ensures that manufacturing plans account for the true distribution demand, not just a single aggregate forecast.

Step 6: Execute and Monitor
Once plans are generated, planners review exception messages (e.g., expedite, de-expedite, cancel) and take appropriate action. DRP is typically re-run frequently (daily or weekly) to reflect changes in demand, supply, or network conditions.

Key DRP Planning Parameters:
• Lead Time: Transit time from the supplying source to the receiving location.
• Safety Stock: Buffer inventory to protect against demand variability and supply uncertainty.
• Lot-Sizing Rules: Fixed order quantity, lot-for-lot, periods of supply, economic order quantity, etc.
• Review Period: How frequently the plan is updated.
• Forecast: The projected demand at each location.

Example of DRP Calculation:

Consider Branch Warehouse A with the following parameters:
- Lead Time: 2 weeks
- Safety Stock: 50 units
- Lot Size: 200 units (fixed order quantity)
- Beginning On-Hand: 280 units

Week: 1 2 3 4 5 6 7 8
Gross Req: 60 70 80 60 90 70 80 60
Sched Receipts: 0 0 0 0 0 0 0 0
Proj Avail Bal: 220 150 70 10 -80 ...

When the projected available balance drops below the safety stock of 50 (which happens in Week 3 where PAB = 70, approaching safety stock, and Week 4 where PAB = 10, below safety stock), a planned order receipt of 200 units is needed in Week 4. Since lead time is 2 weeks, the planned order release occurs in Week 2. This planned order release of 200 units in Week 2 becomes a gross requirement at the supplying location in Week 2.

DRP vs. Traditional Order Point Systems:

• Visibility: DRP provides future visibility of requirements; order point systems only react when inventory hits the reorder point.
• Proactive vs. Reactive: DRP enables proactive planning and anticipation; order point triggers reactive replenishment.
• Transportation Planning: DRP allows for advance planning of shipments and consolidation; order point leads to unpredictable ordering patterns.
• Integration: DRP connects distribution to manufacturing planning; order point systems operate independently.

Benefits of DRP:
• Reduced inventory levels across the network
• Improved customer service and fill rates
• Better utilization of transportation and warehouse resources
• Enhanced visibility and coordination across the supply chain
• More accurate input to the master production schedule
• Ability to simulate and plan for changes (promotions, new product launches, seasonality)

Limitations and Challenges of DRP:
• Requires accurate forecasts at each location — forecast error is amplified across many locations
• Dependent on accurate data (lead times, inventory records, lot sizes)
• Can be complex to manage in large distribution networks
• Does not inherently account for capacity constraints in transportation or warehousing (this is where DRP II and capacity planning come in)
• Bullwhip effect can occur if not managed carefully

DRP II (Distribution Resource Planning):
DRP II extends DRP by incorporating resource planning — it considers not just what needs to be shipped but whether there is sufficient capacity in terms of transportation, warehouse space, labor, and financial resources to execute the plan. DRP II is to DRP what MRP II is to MRP.

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Exam Tips: Answering Questions on Distribution Requirements Planning (DRP)

1. Understand the MRP Analogy:
The CPIM exam frequently tests your understanding that DRP applies MRP logic to the distribution network. If a question asks about the fundamental concept of DRP, remember: DRP is MRP applied to distribution. Planned orders at one level become gross requirements at the next higher level in the supply chain.

2. Know the Difference Between DRP and Order Point:
A common exam question compares DRP to traditional reorder point (ROP) systems. Key distinction: DRP uses time-phased logic and provides future visibility, while ROP is reactive and triggers replenishment only when inventory reaches the reorder point. DRP is always the superior choice when questions ask about proactive planning or integration with manufacturing.

3. Master the Bill of Distribution Concept:
Understand that the bill of distribution defines the network hierarchy. Questions may ask you to identify how demand flows through the network — always remember it flows from the lowest level (customer-facing locations) upward to the central supply source.

4. Be Comfortable with Time-Phased Calculations:
You may encounter calculation questions. Practice the DRP grid: Gross Requirements → Scheduled Receipts → Projected Available Balance → Net Requirements → Planned Order Receipts → Planned Order Releases. Remember to offset planned order receipts by lead time to get planned order releases.

5. Remember the Link to MPS:
A critical exam concept is that DRP feeds demand information into the Master Production Schedule. When a question asks about the source of demand for the MPS, distribution planned orders from DRP are a key input alongside customer orders and independent demand forecasts.

6. Understand Safety Stock's Role in DRP:
Safety stock in DRP serves as the trigger point. Net requirements are generated when the projected available balance falls below the safety stock level, not when it reaches zero. This is a subtle but important distinction in exam questions.

7. Recognize Exception Messages:
DRP generates action/exception messages similar to MRP: expedite, de-expedite, cancel, and release. Exam questions may ask what a planner should do when certain conditions change — the answer often involves reviewing and acting on these exception messages.

8. Distinguish DRP from DRP II:
If the exam asks about resource planning in distribution (transportation capacity, warehouse space, labor, and financial resources), the answer is DRP II (Distribution Resource Planning), not DRP. DRP plans what is needed; DRP II ensures the resources are available to execute the plan.

9. Watch for Bullwhip Effect Questions:
DRP can help reduce the bullwhip effect by providing visibility across the supply chain, but poor implementation or inaccurate forecasts can actually amplify demand variability. If asked about mitigating the bullwhip effect, DRP with accurate data and proper lot sizing is a valid answer.

10. Focus on Key Vocabulary:
Exam questions often hinge on precise terminology. Make sure you clearly understand these terms:
- Time-phased order point (TPOP)
- Bill of distribution
- Planned order release vs. planned order receipt
- Gross requirements vs. net requirements
- Projected available balance
- Implosion (demand cascading upward through the distribution network)

11. Eliminate Wrong Answers Strategically:
When uncertain, eliminate answers that suggest DRP is reactive, operates independently from manufacturing, or does not use time-phased logic. These are hallmarks of traditional order point systems, not DRP.

12. Practice Scenario-Based Questions:
The CPIM exam often presents scenarios where you must decide the best planning approach for a distribution network. If the scenario describes multiple warehouses, a need for coordinated replenishment, and integration with manufacturing — the answer is almost always DRP.

Final Exam Reminder:
DRP is fundamentally about translating independent demand at the point of consumption into dependent demand at the point of supply, using time-phased logic, to create a coordinated and efficient distribution plan that integrates seamlessly with manufacturing planning. Keep this core principle in mind, and you will be well-prepared to answer any DRP question on the CPIM exam.