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Distribution Requirements Planning

The Next Level's Distribution Requirements Planning Module is simple and flexible. It is based upon weekly summaries of inventory units sold, the volatility of the weekly volume of units sold, the lead time for the each inventory unit, and the desired service level for the inventory sold. These data points, all captured by TNL software, or manually overridden by the inventory manager, are plugged into a straight forward equation to create recommended purchase orders.

The TNL Order Processing Module builds the DRP weekly movement file. Mechanisms exist in the OP module to automatically reduce the DRP demand units for circumstances such as distressed merchandise sales, highly discounted merchandise, or any other situation that could improperly "spike" an inventory item's demand curve and thus cause a larger than required purchase. The system builds weekly demand based upon ORDER DATE. This properly tracks when the units are demanded rather than other methods that use shipping date: shipping date could be affected by improper inventory management, causing an inventory demand "spike."

The order processing system can also create "non-inventory" orders. These orders will properly price and ship an order but the demand is not seen by the DRP system. This is useful when a large customer orders an unusually large quantity of an item. It is likely that this order quantity should not be factored into the demand units for the product line. Of course these orders can also be granted an inventory demand of 0% to accomplish the same result.

The TNL Inventory Control Module captures information critical in planning inventory requirements. This information, lead demand, safety stock, reorder point, reorder quantity, and item ranking are all calculated by the DRP Module but can be overridden by the inventory manager to allow for special circumstances.

The lead demand is the expected quantity that will be distributed within the lead time. This is needed so the question "If we placed an order today, would we have enough inventory to cover our customers' expected orders?" can be answered.

Every DRP system needs a safety stock to compensate for unforeseen real world circumstances such as leaps in demand or extension of supplier's delivery times. The calculation of safety stock is done by the DRP system based upon a statistical analysis of demand volatility or a simple proportion of lead demand. This is often the most critical component of an inventory management software package since safety stock (in a perfect world) never moves and thus becomes an expensive insurance cost against customer dissatisfaction. TNL allows balancing the carrying costs versus service level based upon how important an inventory item is to the company's overall sales mix.

The reorder level quite simply is the level of on-hand inventory that should trigger an order. This can be manually set or automatically calculated by the DRP system to reflect the item's lead demand and safety stock.

The reorder quantity is based upon the demand for the unit, the amount of time it takes to receive it, and the number of times you want to order that item in a year (this is also known as review cycle). Again the review cycle is based upon the item's overall contribution to the company's sales mix. This allows the inventory manager to balance put-a-way costs for slow moving items with inventory carrying costs.

An item's rank is based upon its contribution to the company's sales. In a "typical" inventory situation, the company's high selling "hot" items will be given a higher service level and will be ordered more often to reduce carrying costs. A company's slow moving items will be ordered less frequently and will have a lower service level. These standard levels of control are easily managed by the DRP system and again, manual override is always available to the seasoned inventory manager who knows his/her business.

The DRP Module allows the inventory manager to set guidelines for the company's products when it comes to planning purchases to coincide with expected demand. The demand periods are set (weekly buckets), the ranking associated with the level of sales contribution is managed, and any demand adjustments to provide for seasonality can be made. The critical variable of lead demand can be calculated based upon a management set number of weeks. This allows the inventory manager to put more importance on more recent history on some items while relying upon the time proven history of more mature, stable items.

Reports of the last 10 weeks of history are available with flags to indicate items that have higher than expected variance in recent weeks than the historical demand curve indicates. These reports can assist an inventory manager in identifying potential problem areas in the inventory distribution cycle.

Safety stock is calculated by using one of two methods. The first method uses the standard deviation of demand. This method is sensitive to swings and spikes in the weekly sales of an item: if these swings did not exist, it would be unnecessary to carry safety stock! Once the standard deviation is calculated, the service level desired is used to derive a factor by which the standard deviation and lead time are used to calculate an appropriate safety level. The second method is to arbitrarily proportion a percentage of lead demand to safety stock. This simple and straight forward method is preferred by many inventory management theorists!

Once the inventory parameters are set and the inventory needs determined, a recommended purchase list is created. This can be inquired upon, printed, and changed. Once the edit list is complete, it is transferred to active purchase orders.