The TOC solution is based on constant renewal of the consumed stocks, and is comprised of several steps:

• Aggregating as much as possible at the source – the plant or central warehouse – setting a high inventory target there (called Stock Buffer Size)
• Determining inventory targets at all stock locations (Stock Buffer Sizes)
• Enabling the transfer of real consumption data from all stock locations
• Shortening the replenishment time as much as possible
• Replenishing as frequently as possible from the main (plant or central) warehouse to the consumption points – units are shipped only in order to replenish to real consumption (or to readjusting of buffer sizes)
• Monitoring the buffer sizes according to consumption and readjust them accordingly

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:

• Demand – this is the factor that affects the rate at which the stock is depleting from the different consumption points
• Supply – this is the factor that affects how quickly the consumed units can be replenished

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:

• Order Lead Time – this is the time it takes from the moment a unit is consumed until an order is issued to replenish it. In other words, this is the frequency of ordering of the same SKU

• Production Lead Time – this is the time it takes the manufacturer/supplier from the moment he decides to issue the order until he finishes producing it

• Transportation Lead Time – this is the time it takes to actually ship the finished product from the supplying point to the stock location

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 needed stock levels at the consumption points (and at the WHs) is lower – since it needs to cover for less demand days
• The fluctuations in supply time become smaller as the supply time decreases
• The needed forecast for new product’s sales is much more accurate – since the forecasting error becomes larger as we need to forecast more into the future (the trajectory becomes wider)
• The ability to respond much quicker to actual demand is apparent

The TOC principles direct us to find ways to trim the different elements of the RLT. These are the general guidelines:

• Order Lead Time – if possible, cut it to be 0 – usually meaning trying to replenish daily from each consumption point what was consumed that day. more considerations involved will be covered later in the article
• Production Lead Time –Simplified DBR (the TOC methodology for managing production shop floor) should be implemented and the priority of the manufactured parts should be tied to their stock level at the plant WH – this will be elaborated further later in the article
• Transportation Lead Time – try to see alternatives for transportation – for example daily trains or ships instead of weekly, or flying some parts by airplanes. Finding closer suppliers for RM or purchased parts is also a possibility in a lot of cases. Usually this is the part of the RLT that one can do the least about, so every possibility needs to be checked

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.