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.