Chapter 9 - Discussion Questions - Answers

a.i.1. What is the impact on inventory planning when a decision is made to create a distribution channel? Answer: Companies create a channel of distribution because they have determined that the best way to serve the marketplace is to have inventory close to the customer. The effect on inventory management of creating a distribution channel is that each facility in each echelon acts as an inventory decoupling point. The goal is to sever the plant or main warehouse and higher level echelons from direct customer demand by placing inventory buffers at critical points in the distribution channel. The decision to decouple inventory comes with a price. Beyond the inventory cost, the firm must shoulder the responsibility for planning inventory replenishment at each facility in each echelon. The more echelons in the channel, the higher the cost and the more complex the replenishment process. a.i.2. What is the impact on inventory planning when a decision is made to establish a “pull” system for channel inventory management? Answer: In a “pull” system, replenishment management is decentralized and is the responsibility of each facility in the distribution channel. Instead of a central planning function determining inventory replenishment for the entire distribution channel, each facility determines its own requirements and then “pulls” inventory from supplying facilities in the next higher channel echelon. As such, a “pull” system requires each facility in the distribution channel to determine its own ordering techniques, forecasts, demand information, cost factors, service objectives, and resupply lead times. Facilities then have a choice of selecting either statistical reorder point or distribution requirements planning (DRP) or a combination of both as their ordering system. Normally, executing a pull system requires the presence of an enterprise resources planning (ERP) system shared by all facilities in the channel network. Based on the ordering method, each facility generates its own resupply orders consisting of the products and quantities to be ordered. These orders, in turn, are transmitted to predetermined supplying facilities located in the distribution network.

3. What would be the criteria driving a company to adopt the use of an order point system or DRP to run their channel networks? Answer: The decision to use order points or DRP will depend on how inventory enters the distribution channel and the level of control required by management. For companies that 2

are pure distributors (wholesalers) and that acquire their products from outside suppliers, planners normally use the reorder point technique. In this strategy, each channel facility would determine its own reorder points for stocked items. When the inventory levels on items at a facility fell below their reorder points, a resupply order is generated. On the other hand, in a distribution channel fed from an originating manufacturing plant, DRP would most likely be chosen. The crucial reason revolves around the extended lead times for processing and purchasing needed by manufacturing planners. Since a material requirements planning (MRP) system would be used to manage manufacturing, DRP provides the necessary schedule of future requirements to drive the MRP calculation. Once channel demand is in the MRP system, planners can effectively schedule production and purchase the necessary components and raw materials. Since the order point generates a single replenishment order it cannot perform this function and should not be used in distribution channels with manufacturing functions.

4. What are the differences between a “push” and a “pull” system? Answer: In a coupled deployment ("push") system, all channel resupply activities are conducted by the supplying facilities. Since replenishment planning is centralized, channel resupply is performed first by aggregating the demand arising from all dependent facilities in lower echelons, and then using an allocation metric to push or disburse the actual inventory to these dependent facilities. In distribution channels characterized by an independent deployment ("pull") system, inventory planning is decentralized. Each facility in the channel maintains its own inventory management system and determines its own replenishment requirements. When the local facility’s planning system indicates that inventory needs to be reordered, a resupply order is placed on the designated

2 supplying facility. The use of either method is not exclusive: aspects of the two systems can be combined in a distribution channel to respond to unique network needs.

5. Briefly describe the functioning of a distribution requirements planning (DRP) system. Answer: DRP uses a material requirements planning (MRP) implosion technique by which the time-phased requirements from a local facility are driven up the distribution channel to become gross requirements on a preset supplying facility or facilities using bill of distribution (BOD) logic. Similar to reorder point logic, the satellite facility will transmit a planned resupply order directly to the supplying facility. The big difference is that instead of a single resupply order characteristic of reorder point, the DRP system will transmit a schedule of planned order requirements as far out as is permitted by the item- planning horizons at each satellite facility. The end point of the DRP channel explosion process is to drive demand through the various echelons of the distribution channel and end in the manufacturing plant’s master production schedule (MPS). Following production order completion, the item quantities are distributed to the satellite warehouses based on their original resupply orders.

6. The issue of lead time is critical in deciding whether order point or distribution requirements planning (DRP) technique should be used. Why is this statement important? Answer: The decision to use reorder point or DRP rests on the issue of replenishment lead time. In a distribution channel that does not produce its own inventory, replenishment lead times are short. Order point techniques work very well in this environment. In fact, the lead time can be calculated as the time it takes to transport inventory from facility to facility plus some administration time for order management.

In a distribution channel fed from an originating manufacturing plant, lead times are much more complicated. Manufacturing planners must factor in processing and purchasing lead times, as well as transportation time when planning distribution channel replenishment. As such, manufacturing planners using a material requirements planning (MRP) system need channel demand to extend out at least as far as the cumulative lead time it takes to buy the components and make the products. Achieving this objective means the distribution system must provide a time-phased plan of finished goods requirements extending into the future that can be fed directly into the MRP master schedule. Once channel demand is in the MRP system, planners can effectively schedule production and purchase the necessary components and raw materials. Since the reorder point generates a single replenishment order, it cannot perform this function and should not be used in distribution channels with manufacturing functions.

7. Explain the calculation of the projected available balance (PAB) row in the DRP grid. Answer: Two formulas are needed to calculate the PAB row. The first determines the PAB cell in the first period. The calculation starts by taking the opening inventory balance and adding the supply orders in the DRP in transit receipts and DRP planned order receipts rows occurring in the first period. The gross requirements in the first period are then subtracted from this value. The ending value will provide the projected PAB at the end of the first period. The second formula determines the PAB for all periods beyond the first period. Starting with the second period PAB, the calculation begins by first taking the PAB from the past period and adding all DRP in transit receipts and DRP planned order receipts as they occur in each period. The gross requirements are then subtracted from this

4 value to determine the PAB at the end of each successive period. 8. Explain the calculation of the net requirements row in the DRP grid. Answer: Similar to the PAB, there are two formulas for calculating the net requirements row. The first calculation occurs in period 1 by taking the beginning on-hand inventory plus any DRP in transit receipts and then subtracting the gross requirements. If the resulting value is negative, it is placed in the net requirements row. For all periods beyond period 1, the calculation starts with the PAB from the past period plus all DRP in transit receipts occurring in each period. The gross requirements occurring in each period are then subtracted from the total projected available inventory in each period. If the requirements exceed the available inventory, the quantity short is placed in the net requirements row for that period.

9. What is the bill of distribution (BOD) and why is it important to a valid DRP calculation? Answer: Before the application of a DRP system to a multiechelon environment, it is essential to structure the firm’s distribution channel network or bill of distribution (BOD). Utilizing the logic and structure of the manufacturing bill of material (BOM), the BOD links supplying and satellite facilities together similar to the way the BOM links component items to their assembly parents. The difference between the two is subtle but critical. In a BOM, when resupply is required by a manufactured parent, the MRP processor references the assembly's BOM and "explodes" the requirement through the product structure, placing demand on the component parts. The BOM component quantities are then issued to production to build the parent item. The structure of the BOD, on the other hand, has been designed to facilitate the transfer of requirements from the “children” (the satellite warehouses) to the parent (the

supplying facility). This structure, termed an inverted BOM, performs an implosion where requirements are passed up the structure rather than down. The exact structure of a BOD can be configured to match a variety of channel inventory flows. For example, a channel may consist of satellite warehouses supplied from local and regional warehouses. Then again, a channel may consist of satellite warehouses supplied from a regional distribution center (DC) and directly from the firm’s manufacturing plant. In any case, for the DRP implosion to work effectively, the BODs must be accurately structured, detailing the flow of each and every product inventoried in the distribution channel. The benefits of using the BOD can be summarized as follows:  A comprehensive distribution channel can be structured, that can guide the computerized DRP implosion process and provide planners with full visibility to supply and demand relationships up and down the channel.  Supplying and satellite warehouse dependencies are clearly established.  The DRP processor can begin its low-level coding by beginning with the last warehouse(s) in the channel and progressing up through each level to the appropriate supplying facility.  The BOD establishes the framework for total logistics control from the distribution facility that is the greatest distance away, up the supply network, and ending with the manufacturing plant or outside supplier.