My blog is focused primarily on the Theory of Constraints and how to use it to maximize the profitability of any company. I also discuss why integrating TOC with Lean and Six Sigma is the most dynamic improvement methodology available today.
Before we dive into the TOC
Distribution and Replenishment solution for parts supply, I want to provide a
visual representation of your typical push system so that you can appreciate
more what TOC’s part’s replenishment method will do for your company.I’ve presented these visual images in an
earlier posting, but I think it will be helpful to see and review them again.
companies the supply chain/inventory system of choice is one often referred to
as the minimum/maximum or MIN/MAX system. In this type system, parts are evaluated
based on both need and usage and then minimum and maximum stock levels are
calculated for each part or SKU (Stock Keeping Unit). There are three basic
rules of the min/max system that are intended to both control and minimize the
amount of inventory within the system.
1st Rule: Determine the minimum and maximum levels
for each SKU.
2nd Rule: Never ever exceed the max level.
3rd Rule: Never reorder until you go below the min
level (i.e. the re-order point).
behind these rules are imbedded in the misguided cost-world thinking which
believes that the pathway to profitability is through saving money rather than making
money by increasing throughput.So in order
to maximize the amount of money you save on parts, traditional Cost Accountants
say that you must minimize the amount of money you spend parts. And in order to
reduce the amount of money you spend on parts, you must never (1)buy more than the maximum
amount and (2) never spend money until it is absolutely necessary (i.e. when your
supply reaches the minimum level).
behind the min/max concept is that parts or SKUs should be distributed and
stored at the lowest possible level of the user chain. This is the essence of a
push system, or one that pushes
parts through the system to the lowest possible level.In this type of system the parts are consumed
until the stock level reaches or falls below the min level and then an order is
placed for more parts or SKUs. The order goes back up the chain to either a
central supply center or placed directly to the vendor.When the order is received it is filled and pushed
back down the chain to the lowest point in the supply chain, hopefully before
the remaining stock runs out.
On the surface
it might appear as though the min/max system could work in terms of supplying
the needed parts to the end user, but experience tells us there are some
significant problems with this system. First, the system keeps the end user in a
reactive mode simply because when min levels are the reorder point, the
probability of an SKU stock-out approaches certainty.The reason for this is that many times the
lead time to replenish the SKU or part exceeds the minimum stock level. Figure 1 is graphical representation of this
stock-out effect with the curved red line demonstrating the SKU usage through
time and how likely you are to experience a stock-out situation.It’s not unusual when the min/max system is
used to have incorrect assumptions regarding supplier lead times.
Over time this same identical pattern
repeats itself with stock-outs occurring on a very frequent basis just like what
we see in Figure 2.
So how can we prevent stock-outs from happening on such a regular basis? In my next posting,
I will demonstrate the differences between the min/max system and TOC’s Dynamic