The objective of the Supply Chain is to ensure the right amount of the right product is in the right place at the right time with minimal investment and operating costs.
The Supply Chain is performing well if:
- the product is available when a customer wants to buy it – high availability,
- the stock is sold to a customer as soon as it is received by the point of sale – high Inventory turns
A number of common complaints organisations have in their supply chain are:
- Too many lost sales
- Too many products not available
- Too many products in stock that are not selling
- High amounts of working capital tied up in stock for too long
- Slow response time to changes in end consumer demand
- Too many cross shipments in the supply chain
- Inaccurate forecasts
- Products are heavily discounted when new products are introduced
The TOC Supply Chain solution has been developed to address the above complaints resulting in significant increased sales, release of working capital, increased Inventory Turns and improved profit margins. The key elements of the solution are:
- Aggregation of Inventory at the plant or central warehouse
- Reduction in the Time to Reliably Replenish to the stock locations
- Monitor the stock buffers against consumption and dynamically readjust them accordingly
Aggregation of Inventory at the plant or central warehouse
In a supply chain after the goods have been manufactured at the plant they are often distributed first to regional warehouses, which hold quantities of the same product. This is the first divergent point in the supply chain and can result in frequent cross shipments between the regional warehouses. The next divergent point is often the distributor’s own warehouses, which once again all hold the same product, and the next divergence is the customer’s point of sale or stores.
The greatest variation in product demand is seen at the points of sale. As you come nearer the manufacturing point the variation in demand is hugely reduced. Demand of the products then can logically be better forecasted at the point of manufacture and not at the points of sale, where they are traditionally forecasted from.
Using the power of aggregation enables most of the stocks in the supply chain to be held at the plant warehouse and not elsewhere. This much smaller supply chain stock is better able to serve many different destinations in the supply chain to increase the availability of products at the points of sale. The stocks are pulled from the plant warehouse to replenish the points of sale based upon consumption and are not pushed to replenish a forecasted demand.
This guarantees we keep the lowest possible stock in the overall supply chain whilst maximising the availability of product. The overall supply chain also becomes much more stable due to the reduction in variation.
Reduction in the time to reliably replenish to the stock locations
The size of the stocks at the different locations is dependent upon the demand for the product; how quickly the product is consumed and the supply of the product; how quickly the product can be replenished.
Most improvement initiatives are focused upon better forecasting demand, however the TOC Supply Chain solution focuses upon reducing the replenishment time.
Replenishment time is made up of three different parts:
- Order Lead Time – this is the time it takes from the moment a unit is consumed until an order is issued to replenish it. In other words, this is the frequency of ordering of the same product. This is often ignored when conventionally people talk of replenishment time
- Production Lead Time – this is the time it takes the manufacturer from issuing the order until he finishes producing it
- Transportation Lead Time – this is the time it takes to actually ship the finished product from the manufacturer to the stock location
The TOC Supply Chain solution focuses on each of the different elements of the Replenishment Lead Time:
- Order Lead Time – understand daily from each consumption point how many of the products were consumed that day, this reduces order lead time to one day..
- Production Lead Time – Drum-Buffer-Rope implemented and the priority of the manufactured parts is dictated by the stocks at the plant warehouse, this reduces production lead time by half
- Transportation Lead Time – this is usually the most difficult area but transporting different products in the same container is one possibility to reduce transportation time.
Monitor the stock buffers against consumption and dynamically readjust them accordingly
For each product a target stock level is determined based upon the demand and the time to reliably replenish. This target stock level is now called our stock buffer. The target stock level is split into three equal zones. The bottom zone equal to a third of the target stock is red, the middle zone equal to two thirds of target stock is yellow and the top zone equal to target stock is green. As a product is consumed the stock goes down and when it is replenished it increases.
By monitoring the buffer levels for each product over time using these three coloured zones, we can identify whether the buffer size is about right. By monitoring the buffers and their respective colours the Dynamic Buffer Management approach adjusts the target stock levels and hence the buffer sizes to ensure we hold the right stock to cover the demand and not too much stock.
Dynamic Buffer Management identifies when a buffer size is too large and when the buffer size is too small.
When the buffer size is too large, the buffer stock is said to be too much in the Green, meaning it has spent too many days in the green zone within any one replenishment time period. This means that we have too high a buffer of stock to support the demand, at least for this time period, which suggests:
- Demand has gone down
- The supply side has improved
- The initial buffer size was too large
The recommendation for dealing with too much green is to decrease the buffer by 33%, but this is a guideline and depends on several factors:
- How fast we want to lower inventories once we see that demand is going down
- How risky/important do we think the product is
A very similar mechanism is used for determining whether the buffer is too small, this is when the buffer stock has been said to be too much in the Red, meaning it has been in the red zone for too many days within any one replenishment time period. This means we do not have enough stock of the product to support the demand, at least for this time period, which suggests:
- Demand has gone up
- The supply side has deteriorated
- The initial buffer size was too small
The recommendation for dealing with too much red is to increase the buffer by 33%, and again this is just a guideline.
After adjusting the buffer, the product needs to be given time in which no buffer re-sizing suggestions are given until the system adjusts to the revised buffer size. This time period should be long enough to let the adjustment take place and the new quantities ordered to arrive to replenish the stock. However, it must be short enough to ensure a sudden real change in the market demand will not occur without it being identified.
The time period for too much red is normally a full replenishment time, and for too much Green the time period is sufficient to let the inventory cross over the new green target inventory, since lowering the buffer size probably caused the current stock to be above the target stock level.
Adjusting the buffers too frequently can cause stock levels to go out of control.
The benefits typically seen from applying the TOC supply chain solution are:
- Products are always available to the end consumer
- Inventory Turns doubled
- Inventory in the supply chain is reduced by more than 50%
- Cross shipments eliminated
- New products are introduced quickly without the need to discount old products
- Scraping obsolete products is a thing of the past
Contact us to find out more about the difference that the Theory of Constraints can make to your organisation, either complete the form below or call us on (0) 1234 834510.
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