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