Focus and Leverage: Focus and Leverage Part 337

In this 5th of 6 postings on Part’s Replenishment Systems, I’m going to introduce a much more robust supply system with roots in the Theory of Constraints. Again, thanks to Bruce Nelson for writing this series of postings taken from our business novel, Epiphanized: Integrating Theory of Constraints, Lean and Six Sigma.

The Robust Supply System

One of the primary operating functions of the 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 minimum/maximum amounts. Instead, the necessary inventory should be based on the vendor lead times to replenish and maintain sufficient inventory to buffer the variations that exist in lead time. The TOC Distribution and Replenishment Model is a robust parts replenishment system that allows the user to be proactive in managing the supply-chain system. It’s also a system based on usage, either daily or weekly, but not the minimum amount. Some parts/inventory will require much more vigilance in day-to-day management. Table 3 defines the suggested criteria required to implement a TOC Distribution and Replenishment Model in a supply-chain system.

Table 3

Criteria needed for the TOC Distribution and Replenish Model

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 possibly daily actions, as required.

4. ALL parts/inventory needs to be available when needed.

5. Parts inventory held at a higher level, preferably at Central Supply locations or directly from the supplier /vendor.

6. Part buffer determined by usage rate and replenish supplier/vendor lead-time. Baseline buffer should be equal to1.5. 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 argues 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 model is based on the characteristics of a “V” plant distribution model. The “V” plant model assumes that distribution is fractal from a single location—in this case either a central supply location or a supplier/vendor location (the base of the “V”)—and (see Figure 1) distribution is made to different locations (the arms of the “V”). The “V” plant concept is not unlike any supply-chain distribution methodology. However, using a “V” plant method has some negative consequences, especially when working under the minimum/maximum rules (as shown in Figure 2.) If one is not careful to understand these consequences, the sys-tem can suffer dramatically. One of the major negative consequences of “V” distribution is distributing items too early and sending them down the wrong path to the wrong location. In other words, inventory is released too early and possibly to the wrong destination. This is especially likely to when the same type of inventory or part is used in several locations.

Has it ever happened that at one location you have a stock-out situation, and one of the rapid response criteria for finding the part is to check another production line within a company or call back to the distribution center? If this is the case, then parts/inventory distribution has taken place too early in the system. Sometimes, it’s not that the system does not have the right parts/inventory; it’s just that they are in the wrong location. Distribution from a higher level in the chain has been completed too quickly. The TOC Distribution and Replenishment Model also argues that the use of minimum/maximum amounts should be abolished. In-stead the inventory should be monitored based on daily or weekly us-age, 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. Instead of using the minimum amount to trigger the reorder process, it should be triggered by daily usage and vendor lead time to replenish. As an example, suppose we apply the TOC Distribution and Replenishment Model rules to exactly the same criteria discussed earlier. We will use the same part simulation, and the same period of time, with the same usage numbers. The difference will be in this simulation we will change the rules to fit the TOC Distribution and Replenishment Model—based on usage amount and vendor lead time rather than minimum and maximum amount.

Table 4

Simulated Data applied to TOC Distribution and Replenish Model

Week #	Current Inventory	Actual Items Used	Weeks end inventory	Items added (Replenish)
WK 1	90	10	80
WK 2	80	15	65
WK 3	65	15	50
WK 4	50	15	35	10
WK 5	45	5	40	15
WK 6	55	15	40	15
WK 7	55	15	40	15
WK 8	55	10	45	5
WK 9	50	10	40	15
WK 10	55	15	40	15
WK 11	55	15	40	10
WK 12	50	15	35	10
WK 13	45	8	37	15
WK 14	52	12	40	15
WK 15	55	10	45	15
WK 16	60	10	50	8
WK 16	58	5	53	12
WK 18	65	10	55	10
WK 19	65	10	55	10
WK 20	65	10	55	5
WK 21	60	15	45	10
WK 22	55	18	37	10
WK 23	47	15	32	10
WK 24	42	12	30	15
WK 25	45	10	35	18
WK 26	53	15	38	15

Maximum level is ninety items. (This is the start point for the current inventory.)

There is no minimum reorder point; instead reorder is based on usage and vendor lead time.

Lead time to replenish is still four weeks.

Average usage of the part is about ten per week.

The Table 4 data also assumes that no parts inventory is held at the next higher level and that the parts replenishment has to come from the vendor and consumes the allotted vendor lead time. However, if the parts/inventory were held at a higher level in the distribution chain (central supply or a distribution point), and replenish happened daily and/or weekly, then the total inventory required could go even lower than the data suggests. This could happen because distribution is completed weekly rather than waiting the full four weeks for delivery. The part usage rates are exactly the same as the previous run and the starting inventory is equal to ninety parts. This also assumes we have a weekly parts/inventory replenish after the initial four weeks of lead time has expired. In other words, every week we have delivered what was ordered four weeks ago. In the TOC scenario the reorder point is at the end of each week based on usage. The total number of parts used is the same number of parts that should be reordered.

Figure 4: Overall Effect of TOC Method

Figure 4 shows the effects of using the TOC Distribution and Replenishment Model. What is most notable is that total inventory required through time has decreased from ninety items to approximately forty-two items. In essence, the required inventory has been required through time has decreased from ninety items to approximately forty-two items. In essence, the required inventory has been cut in half. Also notable is the fact that there are no stock-out situations present.

When the TOC Distribution and Replenishment Model is used to manage the supply chain there is always sufficient parts inventory to continue production work. The total inventory is also much more stable, through time, without the large gaps and gyrations from zero inventories available to maximum inventory as noted on the first run (Figure 4) using the minimum/maximum system.

In my last posting in this 6-part series on Part's Replenishment Systems, we'll look at a very ingenious and relevant way that Bruce has chosen to present an example of how the TOC Parts Replenishment System is intended to work.

Bob Sproull

Focus and Leverage

Friday, April 11, 2014

Focus and Leverage Part 337

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