Comparison of DRP and TOC financial performance within a multi-product, multi-echelon physical distribution environment

This paper propositioned and tested whether a heuristic based on Theory of Constraints logic could improve system financial performance beyond traditional supply chain methods in a multi-product, multi-echelon physical distribution environment exhibiting seasonality and partial lost sales. A review of the literature was conducted about current distribution management and Theory of Constraints techniques. Next, field research was conducted with a major US manufacturer in order to capture the structure of its multi-product, multi-echelon physical distribution system. The field research facilitated the development of a baseline computer simulation of a fully distributed inventory system with orders planned by Distribution Resource Planning. That model served as the basis for development of comparative multi-echelon distribution models, one employing partial centralization of inventory with orders planned by Distribution Resource Planning, the other two models employing a Theory of Constraints-based heuristic for buffering and inventory replenishment. Simulation results show the Theory of Constraints-based systems are more effective on a financial basis when considering inventory carrying costs, retail-level transhipment and obsolescence expenses than either the existing distributed inventory system or the partially centralized system when orders are based on Distribution Resource Planning logic.