|The TOC way – pull distribution|
The TOC solution is based on constant renewal of the consumed stocks, and is comprised of several steps:
Aggregation: Building a Plant/Central Warehouse
The important part of the proposed model for managing a supply chain is to keep the stocks at the divergent point – where the stocks can be used to serve many different destinations, and using a pull mechanism from the destination to replenish. This method guarantees we keep the lowest stock possible to support the demand of the various consumption points.
In order to have the product available at different locations – it is recommended to aggregate the stocks at the source and build a plant or central warehouse (PWH/CWH). If the organization is a manufacturer, the entity is called a Plant warehouse (PWH) as this is the finished goods warehouse of the plant. If the organization is a distributor, the entity is called a central warehouse (CWH).
In this warehouse we keep most of the stock. According to the principles of statistics, this aggregation guarantees a more stable system than keeping it at the different consumption points. At the consumption point the amount of stock is very limited. Once a certain consumption point sells a unit – the consumed unit will be replenished as soon as possible from the PWH/CWH.
When the transportation time from the PWH/CWH to the consumption points is very long – a regional warehouse (RWH) might be needed between the PWH/CWH and the consumption points. A regional warehouse will behave as a consumption point to the PWH/CWH and as a central warehouse to the consumption points which it is serving. This is just an extension of the TOC model and all of the assumptions and considerations remain the same – the idea is still to pull from the PWH/CWH only based on consumption from the RWH.
The Replenishment Lead Time and how it can be managed
The size of the needed stocks at the different locations is dependant upon two totally different factors:
Amazingly enough, the supply factor is usually ignored in tactical and strategic decision making. Most efforts for improvement are directed at the demand side – especially trying to come up with more sophisticated forecast algorithms.
The replenishment lead time (RLT) is defined as: The time it takes from the moment a unit is consumed until it is replenished from the previous link in the supply chain. The RLT is comprised of 3 different parts:
TOC suggests challenging all of these 3 elements in order to cut the Replenishment LT to a bare minimum. By cutting the RLT, the supply side factor is becoming less dominant, and the following is achieved:
The TOC principles direct us to find ways to trim the different elements of the RLT. These are the general guidelines:
Frequency of replenishment versus shipment costs
When applying the TOC solution for managing distribution in the supply chain, some factors are relevant when considering how high the frequency of delivery should be.
The current practice of managing a supply chain is to ship in large bulks. The main reasons are:
<!--[if !supportLists]-->1) <!--[endif]-->Usually a discount is offered to large quantities of each item ordered. This discount might be negotiated to be offered for large quantities ordered over a period of time – this way one can order frequently and still enjoy the discount, but it is not always possible (although becoming quite standard nowadays)
<!--[if !supportLists]-->2) <!--[endif]-->There is a certain effort in listing all available inventories and issuing orders even for a small quantity
<!--[if !supportLists]-->3) <!--[endif]-->Some items can only be shipped in bulks because of transportation issues – fragile items sometimes can be better protected if shipped in a whole container
There is a tradeoff between the additional cost one might invest in raising the frequency of shipments and the cost of having lower availability – by making the frequency of delivery higher – a better availability is created whereas the cost of shipments is increasing. By making the frequency lower – one will have to pay with either lower availability than possible or with higher inventory levels kept at the consumption points. In most cases the extra cost will be dwarfed by the additional revenue produced.