DRP and PDM

Lecture 9
• Front end of Supply Chain Management.
• Distribution Requirement Planning (DRP) and
• Physical Distribution Management (PDM) in global perspective.

• Operational issues in PDM

• Customer service expectations and their fulfillment.
Front end of Supply Chain Management
• Front-end is Business Development, Sales and Marketing.
• Understanding and responding to customer needs
• Pricing
• Product and market strategy
• Discounts
• Customer management
• Product portfolio management
• Back-end is doing accounts and sending out invoices and purchase
orders for components and services.
 DISTRIBUTION REQUIREMENT PLANNING (DRP)
• DRP is a software supported, time based planning of distributing resources to satisfy
demand at all stages of the distribution channel.
• General method of inventory model for both dependent and independent demand.
• Extends supply chain management to customer’s end.
• Begins with identification of the time & place at which product SKU (stock keeping units)
will be required.
• Analyses demand for individual SKUs at each customer service location and produces
the aggregated time-phased requirement schedule for each level in the distribution
system.
• These schedules are then fed into the Master Production Schedule.
• Ensures co-ordination between
• Production,
• Marketing and
• Distribution management. to maximize the customer satisfaction.
• Implementing demand management: Improves performance by observing
customer’s behavior while closely forecasting the demand for a product, product
range or an individual item.
• Implements scheduled distribution specifying closely the conditions, specially the
timing within which deliveries must be made.
• Creating time and place utility for a particular product and service.
• Reduced finished product inventories and better customer service.
• Provides the opportunity for timely re-planning the distribution as market
conditions change.
• Produces the ‘Production schedule’ with valid priorities with common basis of
information to enhance communication and hence build the company-wide plan.
• Changes the paradigm from Control to Coordination in Supply Chain Management.
• By moving away from separate control of departments towards overall co-ordination
of effort, all the major movement activities, both of information and
materials/products are brought together in a single system.
 SUPPLY CHAIN MANAGEMENT
OBJECTIVES
• To reduce pre and post-production Inventory levels, tending towards minimum level.
• Leads to implementation of a “FLEXIBLE SYSTEM”.
• Small lot sizes in the Supply Chain Management prevent losses from unsold stock and
allow flexibility through accommodating small changes.
• Prevents the product obsolescence in today’s shorter product life cycle.
• Ensures maximum efficiency in using labor, capital and plant throughout the company.
• Provides a scope for the ‘Flexible planning and control’ procedures.
• Leads to a system of performance with the minimum variances due to the reduced
uncertainty.
• Creates an organization which incurs minimum total cost.
• Ensures product quality by preservation (i.e. Value addition)
• Faster delivery to the point of consumption from the point of manufacturing.
• This is particularly true for the food products and pharmaceutical products.
 Pre-requisites for success of MRP, DISTRIBUTION
REQUIREMENT IN PLANNING, AND SCM
• For all these systems to be effective, accurate information and control to the extent
of atleast 98% is mandatory.
• The fool proofing of the system is necessary.
• Adoption of methods like Bar coding, Kanban or J-I-T, computer communication
and linkage for ordering and billing, cycled stock-taking, statistical expertise and
education and training are must.
• All the parties including Supplier, Materials, Stores, Production, Marketing, Logistics,
Distributors, Branches and Dealers are all to play well coordinated, and well versed
role for making the above activities successful.
• The security of the system implementing the Supply Chain Management is
extremely important since the system will provide limited access to the network to
so many of its vendors and dealers apart from the organizational offices.
PHYSICAL DISTRIBUTIOIN MANAGEMENT (PDM)
• PDM is the flow of goods through the economic system consisting of flow of raw materials
and bought out components from suppliers to the Production process of the firm as well as
the flow of products from the organization to its customers.
• PDM is the art and science of determining requirements; acquiring them; distributing
them and finally maintaining them in an operationally ready condition for their entire life.
• PDM is the planning, organizing and controlling of all move-store activities that facilitates
product flow from the point of raw material acquisition to the point of final consumption
with relevant information flow and cost effective service overcoming the resistance of time
and space.
• PDM is the management of all activities which facilitate movement and coordination of
supply and demand in the creation of time and place utility in the goods.
• PDM activities include freight transportation, warehousing, material handling, protective
packaging, inventory control, plant and warehouse site selection , order processing,
marketing, forecasting and customer services.
 CURRENT FORESEABLE BUSINESS ENVIRONMENT
• AN INCREASE IN THE NUMBER OF ECONOMIC POWER
BASES – EU, NAFTA, ASEAN etc.
• FOCUSING ON LOW MANUFACTURING AND LABOUR
COST AREAS – ASIA/PACIFIC AREA.
• GLOBALISED SOURCING.
 
• SOPHISTICATED AND EXPANDING SERVICE INDUSTRIES.
 
• LEANER FLATTER ORGANISATION STRUCTURE.
 
• Customer Service explosion.
• Time Compression.
 
• OPEN DEREGULATED MARKET.
• DEREGULATED FINANCIAL MARKETS.
 
• FLOATING VOLATILE EXCHANGE RATE.
• INCREASING DE-UNIONISED LABOUR
STRUCTURES.
• ORGANIZATIONSAL INTEGRATION.
 
• PREVIOUSLY POLARISED POLITICAL VIEWS
BECOMING MORE CENTRALISED.
• FLUCTUATING SHORT TERM GOVERNMENT
FISCAL & MONETARY POLICIES.
 FOCUS OF PDM IS CUSTOMER
SERVICE
• Customer service is making a product of right quality available to the
customer in right quantity at right time, right place and right price.

• Customer service may be seen as a way in which value is added to the

purchase of a customer.

• Value added is the difference between what the customer pays and cost of
providing the service.
 Operational Issues: the emphasis of physical
distribution management
Order administration and
Information costs
Inventory Transportation
carrying Operational service costs
costs response

Order
Customer service characteristic Facility
quantity
costs
costs • order cycle profile
•inventory availability
•order processing & progressing
•delivery times
Market •flexibility
segment/ •invoicing
customer •returns
logics •company investment
 DISTRIBUTION CHANNELS
• Producers sells their products through marketing intermediaries like wholesellers, dealers,
retailers etc.

• These marketing intermediaries are called the Channels of Distribution, Trade Channels or
the Marketing Channels.
 
• DIRECT SELLING – is directly from the Producer to the Consumer. This is effective, profitable.
This is particularly applicable for technical and industrial products. This establishes close
contact with customer & maximum control over selling practices and policies.
 
• INDIRECT DISTRIBUTION : This is through a middle man i.e. dealer, distributor, whole seller
or a franchise. This is applicable more to the consumer durable and non durables. This
maximizes the distribution outlet and reach to the consumers. However this is costlier and
creates a communication gap between the distributor and the consumers.
 FACTORS DETERMINING CHANNEL
STRUCTURE
• Functions in a marketing Channel can’t be eliminated, but can be shifted upward and
downward.
• Channel members specialize in certain functions and participate in channel flows.
• There is growing emphasis on “Green Marketing” i.e. reverse marketing channels for
recycling product packaging / wastage after use or consumption.
• New computer technology, video text and electronic ordering is changing the buyer’s
behavior.
• Wal-Mart in USA & 7-Eleven in Japan improved and reduced 20% to 30 % of retail
price by eliminating whole sellers from the supply chain.
• Electronic Malls & PC based shopping network is becoming popular.
• Home shopping network – to tie is responsible for $2 billion of electronic shopping.
• The manufacturers are increasingly using outside Logistics specialists to provide
transport, warehousing and delivery services.
Performance Characteristics of Distribution
Network
A. SERVICE FACTOR PERFORMANCE –
• Quick Response Time.
• Large Product Variety.
• Easy Product Availability.
• Customer experience as per fulfillment of needs.
• Fast Time to Market.
• Order Visibility.
• Returnability.
 
B. COST FACTOR PERFORMANCE-
• Inventory Cost.
• Transportation Cost.
• Facilities & Handling Cost.
• Information Cost.
 Design Options for a Distribution Network
• Manufacturer Storage with Direct Shipping- Industrial products as per
specific order or slow moving consumer product are drop shipped
directly to Customers.
• Manufacturer Storage with Direct Shipping and in transit Merge- Sony
Monitors & Dell computer are in transit merged and drop shipped directly.
• Distributor Storage with Carrier Delivery- Shipping of Books by Amazon.
• Distributor Storage with last mile Delivery- Albertsons Grocery delivery.
Needs more warehousing cost
• Manufacturer/Distributor Storage with Customer Pickup- Seven-eleven,
Big bazaar, Life style etc.
• Retail Storage with Customer Pickup- a typical conventional Grocer.
Criteria for NETWORK DESIGN
• FACILITY LOCATION.
• FACILITY ROLE. 
• CAPACITY ALLOCATION.
• SUPPLY ALLOCATION.
• MARKET ALLOCATION.
 Network Design Decision factors
STRATEGIC FACTORS –
• Off-shore facility – low cost facility for export production.
• Source Facility - low cost facility for Global Production.
• Server Facility – Regional Production facility is built to take advantage of nearness
to market, tax incentives, favorable tariff barrier or high logistic cost. Euro Market
• Contributor facility - Regional Production facility with developmental skill of New
Product, customization, process improvements for better operational efficiency.
e.g. Maruti for Suzuki.
• Outpost facility – regional Production facility to gain local skill & knowledge. e.g.
BPOs in India.
• Lead facilities – facility that leads in development and process technologies. e.g.
Indian Pharmaceutical industries taking over R&D facility of European enterprises.
• Technological factors – Flexibility of the Production technology and its
related cost affect the degree of consolidation that can be achieved in the
network. E.g. Computer chip mfg. factories needs high cost and easy to
transport & hence centralized distribution & Manufacturing facility. On
the other hand bottling plant for coca-cola are low cost and hence put up
regionally.
• Macro Economic Factors – As Global trade has increased macro-
economic factors have a significant influence in the success or failure of
supply chain networks. The factors are Tariff, Tax incentives, trade
barriers, Trade groups like ‘ASEAN’, ‘EU’, ‘NAFTA, etc., exchange rates.
Free trade zones etc.
• Political Factors – Stable political system where rules of commerce &
ownership are well defined with a free and fair judiciary is preferred as
facility.
• Competitive Factors – Companies must consider competitors’ strategy,
size, location along with the products & services offered with their core
competencies play vital role in designing the supply chain. Sometimes
positive externalities between firms give advantage to each other like
location of similar shops in a wholesale market or a Mall. The other factors
are locating to split the market, customer response time and local
presence as well as the logistics and facilities cost to derive competitive
edge in the market.
INVENTORY STRATEGY :
• Service level Policy.
• Replenishment Strategy.
• Differential Deployment (Pareto
principle)
• Stock- turn over Ratio.
TRANSPORTATION STRATEGY
• Own account / Third party split.
• Lease/buy decision.
• Customer pick-up/ Direct delivery/
other options.
• Vehicle utilization Targets.
• Routing Flexibility.
• Modal Split.
• Time- cost trade off.
WARE HOUSING STRATEGY.
• Number of Stock holding Points.
• Location of Depots.
• Use of Public warehouses.
• Warehouse design & layout.
• Material handling methods.
CUSTOMER COMMUNICATION STRATEGY.
• Order cycle time policy.
• Differential customer response strategy.
• Order Processing Systems.
• Damages/ Claim/ Return strategy.
• Order Status Reporting.
A SUITABLE FOCUS FOR SUCH A MONITORING SYSTEM IS
CUSTOMER SERVICE BOTH FROM THE VIEW OF PERFORMANCE
AND THE COST OF SETTING UP THE SERVICE FOLLOWING A
SYSTEMATIC PROCEDURE OF A SUGGESTED SEQUENCE.
Short term and
Long term levels.
 DISTRIBUTION PLANNING PROCESS
• Develop through understanding of Business Strategies and marketing plan.

• Move towards a Distribution system that balances service and cost effectiveness.
 
• Evaluate customer service requirements and determine the vital few elements.
 
• Determine the level of performance expected against these key elements and how the business measures up
against its competition.
 
• Analyze and work out least cost for production and distribution to accomplish customer, marketing and customer
requirements.
 
• Develop a viable Distribution strategy in line with the customer’s service requirement, the associated cost and
corporate goal.
 
• The distribution plan should include sections on corporate objectives, marketing strategy, inventory details,
warehousing, transport and customer communication strategy.