How to Make a Time-Phased Replenishment Plan with Forecast Uncertainty

Distribution planning managers face considerable uncertainty in managing inventory at various distribution points, especially under recent supply chain disruptions. Variables such as changing customer demand, transportation time, and shifting production schedules make it difficult to ensure correct inventory levels at the proper locations, at the proper time. Distribution Resource Planning (DRP) systems plan and manage the many variables that cause distribution problems.

?A DRP system uses demand forecasts of independent demand—the demand of the consumer—rather than the dependent demand of the distribution center (DC) on the supplier/manufacturer. DRP starts with a forecast of consumer demand and calculates how long it will take to manufacture and move products through a distribution network to the customer.

?A manufacturing and distribution schedule, usually covering several weeks or months, is created to meet that order forecast. For example, a manufacturer of service parts may ship parts to several DCs that service dealers worldwide. If each DC tracks its own inventory and places orders independently, it will create a demand on the supplier/manufacturer that varies unpredictably.

By using DRP, the supplier/manufacturer obtains a greater visibility of upcoming orders. With accurate information about demand and inventory in each area, the DRP system can calculate a long-term plan for when each part should be produced and in what quantity, thus ensuring that each DC has the product it needs.

DRP is part of the demand management function that creates long-term schedules designed to meet customer needs without holding excess inventory demand.

A basic DRP calculation

The first spreadsheet shows a typical but simplified DRP allocation for a single product, in which the requirements needed are tied to the order quantity in a one-for-one relationship (i.e., need one, get one). The forecasts are assumed to be 100 units per period (typically a month or a week). With an on-hand inventory of 100 units, the ending inventory in period 1 is 0, which is also the beginning inventory for period 2. In order to keep a one-period supply of safety stock, we need to order 200 units in period 1, which will be received in period 2 (because lead time = 1). This same logic is used for the future periods.

A DRP calculation with minimum order quantity of 200 units

The second spreadsheet shows a DRP allocation with the added requirement that order quantity must be based on a minimum requirement (the lowest quantity that must be ordered). If the requirement is only one unit, the order must be 200 because the minimum is set to 200.

A?DRP calculation with minimum order quantity of 200 and multiples of five units.

The third spreadsheet shows a DRP allocation in which the requirements are tied to the order quantity based on a minimum requirement and multiple (quantities above and beyond the minimum amount). For example, if the total need is 22, the minimum is 20, and the multiple is 5, then the total order should be 25.?

Spreadsheet Example: How to Create a Time-Phased Replenishment Plan under Forecast Uncertainty

The basic function of DRP is to create a recommended order that is sent to manufacturing plants in order to plan production. The spreadsheet shows a layout involved in forecasting the Planned Orders and Months' Supply. There a number of inventory factors must be taken into account, such as on-hand, on-order, and backordered quantities.

In addition, if you want to include the uncertainty in the baseline forecast, you can do that by plugging in the desired quantile of the statistical baseline forecast distribution, (using ETS State Space Forecasting algorithms, for example) into the Total Forecast line and recalculating the DRP calculation. You will end up with an estimate of the uncertainty in the Firm Planned Orders.

Pegels classification of exponential smoothing techniques in a state-space modeling framework gives rise to 30 trend-seasonal forecast profiles with prediction limits for trend and seasonal patterns.?

Basic Distribution Resource Planning.

The basic DRP calculation starts with a demand forecast. The demand forecast (“Total Forecast” in the spreadsheets) is the total forecast of independent demand, namely the (unbiased) statistical baseline forecast plus judgmental overrides made by the planners and management. Other forecasts may need to be included, such as a forecast from a division or region that is not part of the main forecasting system. Also, samples, not for sale, are included here. These are handled in the lines below the final forecast.

The Gross Requirements are the sum of the forecast lines in each period. The gross requirements are determined for any practical number of periods into the future, with 12 to 18 months being typical. Next, we determine Planned Receipts.

?At time T = 2 (June 01, in this case), the gross requirements over a lead-time of one period are 1689 and the ending Projected Inventory at T = 1 (May 01) is 380. The gross requirements over safety time (months coverage) starting at lead-time-period ahead are 4168 units (= 1958 + 2210). The Planned Receipts are calculated as follows:

?Planned receipts = Gross requirements summed over lead times – Projected inventory + Gross requirements summed over safety times starting at lead-time-period ahead

For example, the planned receipts for period T = 2 are (1689 - 380) + (1958 + 2210) = 5477. Next, the Planned Orders are offset one month back, determined by the lead time, so that the orders can be received as planned. Scheduled Receipts are already committed. The Firm Planned Orders are the overridable receipts.

?The projected (ending) inventory for this period is determined thus:

?Projected inventory = Previous period ending inventory + Planned receipts – Gross requirements

The projected inventory at the end of period T = 2 (Jun 01) is 4168 (= 380 + 5477 – 1689). Once the projected inventory has been determined, a calculation of Months' Supply can be made as a measure of safety stock.

At the next period, the process repeats itself. Now, for T = 3 (Jun 01), the planned receipts are (1958 – 4168) + (2210 + 3314) = 3214. These are the planned orders offset to T = 2. The ending inventory is 5424 (= 4168+ 3214 – 1958).

For the very first period, things are a little different. The initial projected inventory is 380 (= 2000 + 1400 – 3020):

Projected inventory (initial period) = On-hand + On-order – Gross requirements

Minimum and Multiples. When we take minimum quantities and multiples into account, the DRP calculation needs to be augmented. In this example, a minimum order is 2000 and additional orders are placed in multiples of 50. At T = 2 (Jun 01), the planned receipts previously calculated (= 5477) become 5500 because of the minimum and multiple conditions. The projected inventory now includes 23 additional units and becomes 4191 (= 4168 + 23). The remaining calculations remain the same, taking the minimum order quantity and multiples in consideration.

Takeaways

• To fully balance the supply chain, an increased awareness and exchange of information must be established between the demand creation side of sales and marketing and the supply side of manufacturing and distribution. This should include both short-term communications about promotional programs that will affect demand and long-term communication for capacity planning.
• It is essential to keep the goal of balancing supply with demand in mind and to communicate it across all functional groups at the outset of each new sales initiative.
• Benefits from a DRP system include reduced transportation costs; higher customer-service levels; fewer stock outs; improved communication among sales, distribution, and production; and having the right product at the right place at the right time.