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.
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.
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.
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.
must be available when needed.
5.Parts inventory is held at a higher level, preferably at central
supply locations or coming directly from the supplieror 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
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
monitorsdaily 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 usageshould be the trigger.
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 savingsfor your companydepending
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
can really destroy customer satisfaction, and when this happens, future
business can be negatively impacted.
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.