Friday, June 24, 2011

Focus and Leverage Part 40

TOC Replenishment Model
As I said to finish my last blog posting, even though the Min/Max type of system “appears” to control the supply needs of your plant, in reality there are some very negative effects that we see and feel with it. In this blog posting, we will discuss these negative effects and then present at least part of the TOC alternative.

The first problem we experience with this Min/Max System is that you are continuously in a reactive and knee-jerk state, rather than a proactive and practical mode. This is simply because the Min/Max System is almost always assured to have “stock-out” conditions regularly and repeatedly. So the questions we must answer is why do these stock-outs occur and what can we do to prevent them? Very simply put, stock-outs occur principally because it’s not unusual for the lead time to replenish the minimum amount of parts left in the bin, quite regularly exceeds the time remaining to build products with what’s left in the part bin. And because of the inherent variation in demand, stock-outs can occur in both shorter or longer times than the min/max model might propose. The problem with this is that when you do have a stock-out, your production stops until new parts arrive and it usually happens often.

Figure 1 Min/Max Inventory by Week
Remember, in my last posting, the flow in the Min/Max Parts Supply System where the parts are distributed to the lowest level of the distribution (i.e. to parts bins) and are also re-ordered from this same low point in the system? Figure 1 below displays what typically happens in this Min/Max System in terms of parts availability. As you can see, in this example, we start with the maximum and then slowly use the parts until we read the minimum or the re-order point. In the example below, there were three different points in time that reflect stock-outs and one of them had a duration that lasted three weeks. During this stock-out period, no products could be made without unless emergency shipments were made from the supplier which you pay for. Does it really have to be this way? Let’s take a look. 

So what must be done differently to avoid these stock-out periods? Wouldn’t it be great if we had a system that would operate with much less on-hand inventory without stock-outs? There is a system and it comes to us from the Theory of Constraints. The TOC Distribution and Replenishment Model states that, unlike the Min/Max system, most of the inventory should be held at the highest level in the distribution chain and not at the lowest level (i.e. the bins).  Of course you must hold some inventory at the Point Of Use (POU) for your assembly work, but this model tells us that the majority of it should be held at the warehouse from where it’s ordered and received from the supplier. The bottom line is this, instead of using some minimum quantity to trigger the re-order of parts, the re-order process should be triggered by daily usage and the time required for the vendor to replenish the parts. That is, it tells us to simply replace what we’ve used on a very frequent basis rather than waiting for some minimum quantity to be reached. When this system is used, there will always be enough parts on hand to produce your products and no stock-outs will occur!

As an added bonus for using this system, the average overall inventory will be significantly lower. This happens because when an order is place under the min/max system, the system automatically re-orders, but does so to the maximum quantity. Since the TOC Replenishment System simply re-orders what’s been used, the amount of inventory required to be on hand drops significantly. In fact, you’ll see a drop in inventory levels in the neighborhood of 40-50%! Imagine what that means to your cash flow. Figure 2 displays what the TOC model will bring to you in terms of stock-outs and inventory reduction.

Figure 2 TOC Replenishment Inventory by Week
So to summarize the differences:

• The TOC Replenishment Model holds a small amount of inventory at the POU while holding the majority of the inventory at the highest level of the organization, typically in a central warehouse. The Min/Max System holds all of the inventory at the POU.

• The TOC Replenishment Model re-orders parts based upon real usage on a frequent basis (i.e. typically weekly) and orders parts from the central warehouse. The Min/Max System re-orders to the maximum level when the number of parts remaining in the parts bin meets or goes below the calculated minimum quantity and then orders directly from the POU. Many times the time required to replenish the part exceeds what’s left in the parts bin and a stock-out occurs.

• Because the TOC Replenishment Model re-orders what’s been used on a frequent basis, no stock-outs occur and typically the level of inventory is reduced by almost 50%.

In my next posting, we’ll talk about something new that I’ll inform you about as I present it.  Don't forget, because of problems with all Google Blogs, it is impossible to leave comments, so please send them directly to me at  Google is working on this problem.

Bob Sproull

Sunday, June 19, 2011

A Problem

I have just been informed that none of my readers are able to post comments in response to my blog postings.  Google engineers have been working on this issue for some time, but have not resolved it.  Until they do, please feel free to send me any comments or questions to my personal email address which is:  Sorry for this inconvenience.


An update.......

Hi everyone.  I just wanted to give everyone an update on the status of Bruce Nelson and my new book.  Bruce and I just signed a publisher's agreement with North River Press (NRP) this weekend.  NRP is the publishing company that published The Goal, by the now late, Eli Goldratt.  We are very proud to have such a prestigious publisher interested in our book, especially knowing that our book will be side-by-side with all of Eli's books.  I'll keep all of you up-to-date on the book's status.  Oh, and by the way, the tentative title of the book is, Epiphanized - A Business Novel About Integrating the Theory of Constraints, Lean and Six Sigma (TLS).  This title could, of course, change, but it's the starting point.

This book is written as a business novel, but we've added an extensive Appendix so that the readers don't have to go to an internet search engine or a different book to read about unfamiliar topics.  We wanted the readers to be able to stay with the flow of information and by including this Appendix in our book, we believe that we will at least somewhat stop the need to search for these topics outside the book.  Hopefully the book will be published later on this year.

Bob and Bruce

Friday, June 17, 2011

Focus and Leverage Part 39

In my last blog I told you that, in the next several blog postings, I will be discussing the Theory of Constraints parts replenishment model. If you’re like many companies, you have a problem with parts stock-outs on a regular basis and you always seem to be at odds with the supply people. In this series of posts, I will be showing you how to virtually eliminate these stock-out events while, at the same time, reducing your parts inventory in the neighborhood of 40-50%. Think about that, no stock-outs with half of the inventory!

In many manufacturing facilities, and even MRO facilities, the system typically in use is referred to as a Min/Max replenishment system. If you're in the defense industry (i.e. DoD), then I'm sure this is the system being used. One thing that is certain about these type systems is that they will eventually stop working. And many times, the Purchasing Manager, is actually measured on the basis of how much money can be saved. That is, the more money saved, the bigger his or her incentive bonus. So when you combine both of these factors, it’s typically a recipe for disaster in terms of parts availability. Think about it, on the one hand you need the parts to produce whatever it is you produce, while on the other hand you have the group responsible for keeping an adequate parts supply working to minimize the parts inventory. These two factors seem to be in conflict with each other don’t they? So how do we resolve this conflict? Let’s take a look.

The Min/Max supply system has three basic rules that must be followed as follows:
Rule 1: Determine the minimum and maximum stock levels for each part.
Rule 2: Don’t exceed the maximum stock level for each part.
Rule 3: Don’t re-order until you reach or go below the minimum stock level for each part.

The driving force behind these min/max rules are deeply imbedded in the cost world belief that in order to save money, you must reduce the amount of money being spent on parts. To do this, you must never buy more than the maximum level and never order until you reach the minimum level. It’s the age-old conflict of saving money versus making money.

The theory behind this min/max concept assumes that parts are stored at the lowest possible level of the supply chain, usually at the point of use and usually in a parts bin. The parts are then used until the calculated minimum quantity is either met or exceeded. When the minimum quantity is met or exceeded, an order is placed to replenish the parts back to the maximum level. The parts order proceeds up the chain from the bin they’re kept in to the production supply room and then on to the central warehouse where they are ordered.

The above diagram is a visual flow of what I just described and as you can see, the distribution of parts is from the top down and the re-order is from the bottom up (see the red and green arrows). The parts come into the central warehouse from the suppliers and from there they are distributed to your plant stock room. The parts are distributed to the appropriate line stock bins until they are needed in your operations. Usually once a week the bins are checked to determine the inventory level in each of the bin boxes. If the bins are at, or below, the minimum defined level, then an order is placed for that part number.

Even though this type of system “appears” to control the supply needs of your plant, in reality there are negative effects that we see and feel with the min/max system. In my next blog posting, we will discuss these negative effects and then present part of the TOC alternative.

Bob Sproull

Sunday, June 12, 2011

Eli Goldratt

I just wanted to let everyone know that Eli Goldratt passed away yesterday after fighting lung cancer.  Dr. Goldratt had such a huge impact on not only my career, but many others and he will be sadly missed.  As you can tell from my postings, the Theory of Constraints is a part of me and that, more than anything, was Eli's gift to the world.  Please remember his family in your prayers as he will be missed by many.


Friday, June 10, 2011

Focus and Leverage Part 38

In my last posting I told you I would tie Goldratt’s 5 Focusing Steps into Critical Chain Project Management (CCPM) and also provide a summary of what I’ve written on this subject. Let me refresh your memories on Goldratt's focusing steps while simultaneously tying them into Critical Chain Project Management:

1. Identify the system’s constraints: For a single-project environment this simply means identifying the Critical Chain or the longest chain of longest path of dependent tasks within a project determines the actual duration of the project. The critical chain is therefore the constraint. In a multi-project scenario, there is a drum resource that limits the number of projects that an organization can manage and deliver. This resource, more than any other controls the flow of projects and is considered the constraint.

2. Decide how to exploit the constraint: For a single project scenario, this simply means focusing on the critical chain tasks to make sure that the required work is done so without unnecessary delays. In a multi-project situation, this means that projects should be prioritized and then staggered according to the drum resource’s capacity, making sure it is not overloaded.

3. Subordinate everything else to the above decision: As you might have concluded, this simply means that non-critical chain tasks cannot and must not interfere with or delay work on the critical chain. In order to avoid this scenario, we have strategically placed feeding buffers to prevent delays on the critical chain. In a multi-project situations, non-critical resources may have to wait in favor of the critical chain resources.

4. Elevate the system’s constraint: For single and multi-project environments, this typically means investing in additional resources or even increasing the capacity of resources that impact both the critical chain or project throughput. Many times this might mean spending money or using non-critical resources to critical chain tasks.

5. Return to step 1: When one project is completed, identify/insert the next one and proceed to step 2.

Summary of Key Points

• In a fairly recent survey (The Chaos Report) by the Standish Group, studying nearly 10,000 IT projects across America, it was reported that 52 % of projects ended up costing greater than 189 % of the original budget, 31 % were cancelled and only 16 % of the projects were completed on time and on budget. The fact is, there are many other reports from numerous industry types, from all over the world, that all conclude the same thing, project completion rates are abysmal!

• Ninety percent of the Project Managers around the world are using a project management method called Critical Path Method (CPM) and have been doing so for many years. CPM uses a “fudge factor” to protect projects from inevitable uncertainty. That is, when developing the project plan, durations for each individual task are estimated by the resources responsible for executing them and then a safety factor is added to each of the tasks by the resource responsible for completing them. In Critical Chain Project Management (CCPM), individual tasks durations are removed and replaced with a project buffer.

• In traditional project management (CPM) tracking is done so by calculating the percentage of individual tasks completed and then comparing that percentage against the due date. CCPM tracks progress on the critical chain against buffer consumption.

• There are behavioral issues associated with traditional project management (CPM). These issues are the Student Syndrome (or procrastinating start of the project because of the built-in safety buffers), Parkinson’s Law (Work expands to fill the available time), and Multi-tasking (moving back and forth between multiple projects thus extending the duration of all of the projects). CCPM eliminates these behavioral issues by eliminating individual task durations, using the relay runner scenario (i.e. passing on a task as soon as it is completed), and staggering or pipelining the projects (i.e. delaying project starts)

• Whereas CPM completion rates are clearly abysmal, completion rates using CCPM are excellent (i.e. typically >90%) and the completion times are usually 40-50% faster. In addition, when comparing scope and cost, surveys of companies using CCPM, CCPM is a far superior project management method.

I hope you have enjoyed this series on project management and that you have found it helpful. In my next series of postings, I will be discussing the Theory of Constraints parts replenishment model. In this series, I will show you how to virtually eliminate stock-outs while reducing your parts inventory in the neighborhood of 40-50%.

Bob Sproull