How can distribution requirements planning help inventory management?

Distribution requirements planning (DRP), also known as distribution resource planning, is similar to manufacturing's material requirements planning (MRP) in that it is a time-phased inventory replenishment planning technique that calculates when inventory is likely to be depleted, then plans a replenishment just in time to avoid the shortage. Both DRP and MRP depend on a forecast of demand with an objective of avoiding shortages with minimum inventory investment.

DRP applies to a network of distribution locations (warehouses) that are arranged in a tree-like structure where a central warehouse or plant feeds a number of regional warehouses, each of which supplies goods to more local warehouses or distributors, and so on. Any number of warehouses in any number of layers (tiers) can be planned.

Distribution inventory can either be "pushed" from the central supply down through the network or "pulled" up through the network by orders from the consumer. Pull provides the best availability for the customer (local management has control of what's available), but it is difficult to manage distribution inventory in a pull system environment because every order is a surprise to the supplying location as demand flows up the network. Pull is characterized by the so-called Bullwhip Effect: a small change in demand at the consumer end can generate large swings in demand higher up in the network and in the factory.

Push can generate the best inventory and transportation performance, resulting in the lowest cost. Shipments and stock levels can be centrally and globally planned. Central planning is furthest removed from actual demand, however, so service level is likely to suffer.

Distribution requirements planning can theoretically deliver the efficiencies of push with the service levels of pull. The hedging in that statement is a reflection of the dependence on the forecast and stable processes. With an accurate forecast and performance as planned (shipments arrive on time and there are no unexpected losses, damage, etc.), DRP can deliver high service with minimal inventory. Companies use safety stock to compensate for these two sources of variability and that reduces the effectiveness of the DRP strategy -- more inventory and more shortages -- exactly the way MRP works in the plant.