Tuesday, October 23, 2012

Focus and Leverage Part 152

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ü  Significant amounts of money lost through drug obsolescence or even being out-of-date.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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