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.
This posting is the final posting in this
series about replenishment systems comparing the Min/Max system to TOC’s
Dynamic Replenishment.I finished my
last blog posting by listing four criteria that
must be in place in order for TOC’s Dynamic Replenishment Model to work
effectively.The reality is that there
are actually six criteria 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, withpossibledaily actions, asrequired.
4.All SKUs/inventory must be available when
inventory is held at a higher level, preferably at central supply locations or
coming directly from the supplier/vendor.
buffer determined by usage rate and replenish supplier lead time. Baseline
buffer should be equal to 1.5.If
lead-time is 1 week, buffer is set at 1.5 weeks and then we can adjust the size
as required, based on historical data.
The TOC Distribution and
Replenishment Model tells us that we should hold most of the inventory at the
highest level in our supply chain and not at the lowest level like the min/max
system.Yes, we still want inventory at
our point of use, but not the majority of it.One of the major consequences of the min/max system is the distribution
of SKUs much too early especially when the same type of inventory or part is
used in several locations such as different hospital wards or units.It’s not uncommon to see, for the same SKU, an
excess in one ward and a stock-out in another all because the inventory was pushed down through the supply
chain.This does not happen in the
Dynamic Replenishment Model since stocks are pulled through the system based upon usage.
In Dynamic Replenishment we eliminate
using the minimum target as a trigger to reorder and replace it with a system
that monitors our safety buffer and usage on a daily or weekly basis and
replenish only what has been used for that time period.We also eliminate the min/max maximum order
quantity in that we only order what has been consumed rather than some maximum level.What we end up with by using Dynamic
Replenishment is much lower inventory levels, in the right location, at the
right time, with zero or minimal stock-outs.In fact, using Dynamic Replenishment we not only virtually eliminate
stock-outs, but we do so usually with 40-50% less inventory thus freeing up
huge amounts of cash.
To further make this point, I
want to use a very common example taken from Bruce Nelson and my book Epiphanized in Appendix 5.In this scenario, Bruce tells us to consider
a soda vending machine.When the supplier (the soda vendor) opens the door on a vending
machine, it is very easy to calculate the distribution of products sold, or
the point-of-use consumption. The soda person knows immediately which inventory
has to be replaced and to what level to replace it. The soda person is holding
the inventory at the next highest level, which in on the soda truck, so it’s
easy to make the required distribution when needed. He doesn’t leave six cases
of soda when only twenty cans are needed. If he were to do that, when he got to
the next vending machine he might have run out of the necessary soda because he
made distribution too early at the
After completing the required
daily distribution to the vending machines, the soda person returns to the
warehouse or distribution point to replenish the supply on the soda truck and
get ready for the next day’s distribution. When the warehouse makes
distribution to the soda truck, they move up one level in the chain and
replenish from their supplier. This type of system does require discipline to gain the most benefits. It
assumes that regular and needed checks are taking place at the inventory
locations to determine the replenishment needs. If these points are not checked
on a regular basis, it is possible for the system to experience stock-out
in back in Focus and Leverage Part 151 and how we demonstrated the effects of
the Min/Max replenishment method with what you see in Figure 1.What you see in Figure 1 are the results of a
simulation run by Bruce Nelson using the following criteria (For details and
actual data used please refer to Appendix 5 in Epiphanized):
1.The maximum level is 90 items.
2.The minimum reorder
point is 20 items.
3.The lead time to
replenish this SKU from the vendor averages 4 weeks. The average is based on
the fact that there are times when this SKU can be delivered faster (3 weeks)
and other times it delivers slower (5 weeks).
4.Usage of this SKU varies
by week, but on average is equal to about 10 items per week.
Remember, using the Min/Max replenishment
method we don’t reorder until we meet or exceed our minimum reorder quantity
(i.e. 20 items left in stock).In Figure 2 we are applying the Dynamic Replenishment Model
rules to exactly the same criteria we set for Figure 1. Bruce used the same SKU
simulation, and the same period of time, with the same usage numbers. The
difference will be in this simulation he changed the rules to fit the TOC
Distribution and Replenishment Model.That is, reorder is based on usage amount and vendor lead time rather than
minimum and maximum amount.
now look at this same scenario using Dynamic Replenishment to see what it might
In Figure 2 Bruce assumed the following:
1.Maximum level is 90
items. (This is the start point for the current inventory when Dynamic
Replenishment was initiated.)
2.There is no minimum reorder
point. Instead reorder is based on usage and vendor lead time.
3.Lead time to replenish
is still 4 weeks.
4.Average usage of the part is about 10 per week.
are several key points observed in Figure 2:
1.What is most notable is that total inventory required through
time has been virtually cut in half when compared to that of Figure 1.
2.There are no stock-out situations present.
3.The total inventory is maintained within a very stable range
over a long period of time.
Searching for SKUs and having to experience the negative impact
of stock-outs are a constant problem in many hospital supply-chain systems.
These problems aren’t caused by the logistics people, but are instead negative
consequences of the supply-chain system and the manner by which it is used. The concepts and methods associated with
Dynamic Replenishment can and will positively impact the flow and availability
of SKUs within a hospital setting.