Sunday, June 17, 2012

Focus and Leverage Part 124

In my last blog posting I laid out why one of the most common parts replenishment systems, min/max, results in parts/SKU’s stock-outs.  The min/max system is considered a push system simply because it pushes parts into the supply chain all the way to the point-of-use or the consumer.  In this posting, I’m going to discuss a pull system application for parts distribution based upon TOC.

The TOC Distribution/Replenishment System is characterized as a pull system simply because it replenishes based upon consumption at the end of the supply chain.  The objective is to correctly respond to the three important questions of what, where and when that I discussed a couple of posts ago.  Answering the questions of what part, where it’s needed and when it’s needed are critical to your success.  If these three questions are answered correctly, the net result will most surely be good availability at the point of consumption (a factory) or at the point of purchase ( a store).  So why does this TOC based pull system work so well?  Let’s find out.
Amir Schragenheim’s Chapter 11 entry in the TOC Handbook lays out quite nicely, the TOC distribution/replenishment solution, so if you haven’t read this, I highly recommend it.  Simply put, Amir explains that “the solution is based upon constant renewal of the consumed stocks from strategically placed stock buffers.” Amir further explains that the “solution” is comprised of six steps as follows:
1.    Aggregate stock at the highest level in the supply chain: The Plant Warehouse (PWH)/Central warehouse (CWH).
2.    Determine stock buffer sizes for all chain locations based upon demand, supply, and replenishment lead time.
3.    Increase the frequency of replenishment.
4.    Manage the flow of inventories using buffers and buffer penetration.
5.    Use Dynamic Buffer Management (DBM).
6.    Set manufacturing priorities according to urgency in the PWH stock buffers.
It is this constant/frequent replenishment of parts, based upon usage and lead time, that, to me, is the true differentiator of the TOC Distribution and Replenishment model compared to a typical min/max system.
One of the primary functions of a supply-chain system is to build and hold inventory at the lowest possible distribution level.  This assumption is both correct and incorrect.  The correct inventory should be held at the POU location, but not based on min/max amounts.  The necessary inventory should be based on both the vendor lead times to replenish and maintain sufficient inventory to buffer the variations that exist in lead time and usage rates.  The TOC Distribution and Replenishment Model is a system based on usage, either daily or weekly, but not the minimum amount like in a min/max system.

The following are what Bruce Nelson and I suggest in Epiphanized be used as important criteria required to implement this TOC Distribution and Replenishment Model in a supply-chain system:
1.    The system reorder amount needs to be based on daily or weekly usage and part lead time to replenish.
2.    The system needs to allow for multiple replenish orders, if required.
3.    Orders are triggered based on buffer requirements, with possible daily actions, as required.
4.    All parts/inventory must be available when needed.
5.    Parts inventory is held at a higher level, preferably at central supply locations or coming directly from the supplier  or vendor.
6.    Baseline part buffer, determined by usage rate and replenish supplier/vendor lead time, should be equal to 1.5.  If lead-time is 1 week, buffer is set at 1.5 weeks.  Adjust as required, based on historical data.

The TOC Distribution and Replenishment Model tells us that the majority of the inventory should be held at a higher level in the distribution system (supply chain) and not at the lowest level.  It is still important to keep what is needed at the lowest levels, but don’t try to hold the total inventory at that location.

The TOC Distribution and Replenishment Model also argues that the use of min/max amounts should be abolished and replaced with a system that monitors daily or weekly usage, with replenishment occurring at a minimum weekly and possibly daily for highly used items.  The end result of these actions will be sufficient inventory in the right location at the right time—with zero or minimal stock-outs—to support production activity.  In other words, iinstead of using some minimum amount to trigger the reorder process, daily or weekly usage should be the trigger.
Figure 1

Figure 1 shows the effects of using the TOC Distribution and Replenishment Model.  Most notably, the total inventory has been significantly reduced while its stability has improved dramatically.  But maybe the most important effect is that stock-outs seem to be avoided in most cases.  Compare this figure to the min/max figure in my last post and you’ll see a dramatic difference.

The true benefits of a TOC-based parts replenishment system are many, but the most significant impact is realized in two distinct areas.  As I stated above, the first benefit is the reduction of total required inventory (~30-40%).  This inventory reduction alone could lead to a significant dollar savings for your company depending upon the number of parts your system requires.  The second benefit is the virtual elimination of routine stock-out situations that typically exists in min/max systems.  Not having parts available is an expensive situation because it reduces your system throughput since your production line may sit idle waiting for parts to become available.  Stock-out situations also cause multi-tasking because you’re jumping from one job to another due to stock-outs.  Stock-outs also increase the level of frustration of the work force.  But even more damaging, you run the risk of orders being delivered late which can really destroy customer satisfaction, and when this happens, future business can be negatively impacted.

The TOC Distribution and Replenishment Model can positively impact your company’s ability to produce products on time and in the correct quantity.  So if you’re experiencing stock-outs, you just may want to consider a new way of doing business.

Bob Sproull


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