In my last blog posting I laid
out the typical problems we see using the very popular Min/Max replenishment
system in healthcare. Today I want to
discuss a different approach to replenishing SKUs that my company, NOVACES,
refers to as the Dynamic Replenishment
Model (DRM). Just to refresh, I told
you the classics symptoms of the Min/Max system were:
ü
Having the wrong medicines or drugs in stock
or having too much of one and too little of another.
ü
Significant amounts of cash tied up in
excessive inventory.
ü
Significant amounts of money lost through
drug obsolescence or even being out-of-date.
ü
Hoarding of SKUs by nurses and other medical
personnel so that they have their own personal storage. They all mean well because they have the best
interests of the patient in mind.
So whatever system I am proposing here, it
must overcome these negatives in a significant way. Before I explain how Dynamic Replenishment
works, let’s look at some of the basic differences between it and the Min/Max
System..
First of all, the TOC’s Dynamic Replenishment
Model is a robust SKU replenishment system that allows the user to be proactive
in managing the supply-chain system. And
unlike the Min/Max System which pushes
material down the supply chain based upon a minimum re-order inventory target, the
DRM model is a pull-based system
whereby material is replenished based upon actual usage. This is, in my mind, the key differentiator
between the two replenishment methods.
The TOC Dynamic Replenishment model argues
that the majority of the inventory should be held at a highest level in the distribution system (supply chain) and not at
the lowest level as mandated by the
Min/Max model. This is an important
difference because many times materials get distributed too early to users
resulting in stock-outs in one part of the supply chain and potentially excess
inventory in another.
Unlike the Min/Max system, instead of using
the minimum amount in inventory to trigger the reorder process, the DRM is
triggered by daily usage and supplier lead times to replenish. This quality, plus the location of the
inventory stock, virtually eliminates the aforementioned stock-outs in parts of
the supply chain. The DRM eliminates the
maximum reorder amount as well and replaces it with an increase in the order
frequency, again based upon usage. This
change in order frequency based upon usage, effectively reduces the volume of
on-hand inventory, typically on the order of 30-50%!
Ok, so now that we have seen some of the key
differences between the Min/Max system and the DRM system, let’s now focus on
how Dynamic Replenishment overcomes the negative symptoms of the Min/Max system
that I started with in today’s blog.
As stated earlier, in Dynamic Replenishment stock
is positioned at the highest level in the distribution system so that all available inventory can be used to satisfy
demand at the downstream multiple points of use. Since the location of the stock is positioned
in this way, this allows more frequent ordering to be completed. The central warehouse or stock room sums the
demand usage of the various usage points so that larger order quantities can be
accumulated at the central stock location sooner than at each separate location.
In the DRM buffers are
positioned at points of potential high demand variation and stocked and
restocked at levels determined by stock on hand, demand rate and replenishment
lead time. Order frequency is increased
and order quantity is decreased to maintain buffers at optimum levels and, as a
result, stock-out conditions which cause interruption to the flow of patients
is usually completely avoided.
Rather than relying on some minimum stock
level to trigger a reorder of SKUs, ordering is determined by the depletion of
the buffer stock. So effectively, how
much to order and where to distribute the available stock is determined by the
status of the buffer for that SKU. The data
for depletion of buffer provides signals to determine when and how much to
modify buffer size.
Order urgency is based upon the depletion of
the buffer and is therefore used to set ordering priorities. The DRM order method accounts for buffer depletion and local demand
information so the right mix of SKUs is ordered and SKUs are distributed to the
priority locations. This is one of the
major differences between the two replenishment methods.
There are key criteria that must be in place
in order for TOC’s Dynamic Replenishment Model to work effectively as follows:
1. The
system reorder amount needs to be based
on daily or weekly usage and SKU 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
SKUs/inventory must be available when needed.
In my next posting, I’ll demonstrate why the
Dynamic Replenishment works so well and show you just how good your results can
be.
Bob Sproull
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