Chapter 9 - Discussion Questions - Answers
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.
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 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
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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 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 manu-
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facturing 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 value to determine the PAB at the end of each successive period.
Explain the calculation of the net requirements row in the DRP grid.
8.
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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.
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

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.
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