THEORY OF CONSTRAINTS FOR SUSTAINABLE INVENTORY MANAGEMENT IN DOWNSTREAM SUPPLY CHAIN

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1 Journal of Management (JOM) Volume 4, Issue 2, July December 2017, pp. 1 10, Article ID: JOM_04_02_001 Available online at Journal Impact Factor (2016): (Calculated by GISI) ISSN Print: and ISSN Online: IAEME Publication THEORY OF CONSTRAINTS FOR SUSTAINABLE INVENTORY MANAGEMENT IN DOWNSTREAM SUPPLY CHAIN Kuldeep Singh Research Scholar, Jain University, Bangalore, India Dr. Sheelan Misra Department of Management Studies, New Horizon College of Engineering, Bangalore, India ABSTRACT Many firms have benefited from Theory of constraints implementation helping them in achieving ambitious goals. Theory of constraints uses inherent potential in supply to turnaround businesses. This paper uses case study approach to explore the existing implementation model of Theory of constraints especially in downstream supply chain and uncovers the associated challenges involved in the implementation. As a novel contribution to the already existing body of knowledge of Theory of constraints, a robust new model of implementation of Theory of constraints is presented, which can be of great help for supply chains of consumer products companies in performing sustainably. Key words: Sustainable Supply Chain Model, Theory of Constraints, Downstream Supply Chain Management, Uncertainty. Cite this Article: Kuldeep Singh and Sheelan Misra, Theory of Constraints For Sustainable Inventory Management In Downstream Supply Chain. Journal of Management, 4(2), 2017, pp INTRODUCTION Theory of constraints (TOC), a brainchild of Dr Goldratt, uses Thinking process tools and the five focusing mechanism of managing constraints in supply chain. A system constraint, according to (Cohen, 2010), can be either internal or external. It is through the management of constraints that makes it possible for a system to achieve infinite goal units. Sustainable inventory management is possible with application of Theory of constraints in supply chain. 2. LITERATURE REVIEW (Amir Schragenheim, 2010:) differentiated between upstream supply chain and downstream supply chain. Goods move supplier to the plants. Goods move from plants towards the customer in Downstream supply chain management involves supply chain activities that help in making supplies of finished goods 1 editor@iaeme.com

2 Sivasubramanian and Rupa downstream from company warehouses towards the end users. Goldratt had an idea of the quantum of damages (stock out of over one fifths) as a result of non-sustainable inventory management practices of firms. He consulted firms to use Inventory Dollar Days (IDD) and Throughput Dollar Days (TDD) for appraisal and improvement of supply chain delivery performance. He argued that it is possible to cut the system level inventory by over half, value addition in sales turnover by one-fifth, value addition in inventory turns by double, and control on unnecessary stock movements across supply chain and all of which was possible without significant addition in operational expenses. Several leading firms in India have implemented Theory of constraints for sustainable inventory management. Godrej Consumer Products Limited deployed buffer management system for controlling mismatches in its downstream supply chain. (Schragenheim, Eli; Kothekar, Kiran 2013), (Sangameshwaran, Prasad 2013), (Menon, Nikhil 2013), and (Kulraj, Puneet 2014) studied Theory of constraints for sustainable inventory management. A Mumbai based consulting firm has assisted Godrej group, Raymond group, Bajaj Electricals group, Kirloskar group, Pidilite Ltd, and Liberty Shoes Ltd for sustainable inventory management through Theory of constraints. A Delhi based consulting firm has assisted Apollo Paints Private Limited for sustainable inventory management through Theory of constraints. Godrej Agrovet reported significant reduction in inventory levels and improvement in throughput generated. Godrej Sara Lee reported improvements in product availability across the chain and quantum gain in monetary and non-monetary performance of supply chain links. (Sangameshwaran, Prasad 2013) reported improvement in availability, reduction in inventory level, and increase in the return on investment (ROI) of the distributors at Bajaj Electricals. (Kulraj, 2014) reported similar results for VIP Industries along with operational performance improvement and increase in market reach fir the company. (Menon, Nikhil 2013) reported that Godrej & Boyce s Locks division replaced forecasting with buffer management system for sustainable inventory management. Literature review reveals that non-sustainable inventory management practices such the push behavior has undesirable effects on investments, cash flow, and space utilisation. High level of inventory negatively impacts availability of certain items due to cash constraints, which cascades into sales opportunity losses. 3. METHODOLOGY 3.1. Materials and Procedures The present study uses cases study as the research strategy to study a particular phenomenon occurred within its real-life context. Three cases are true representative of the universe as these have been chosen through purposive sampling representing scale of operations diversity, time period of occurrence diversity and diversity in setting and circumstances surrounding them. The first company has been given a pseudonym as InsectiCo to maintain confidentiality and anonymity. Similarly, the second and the third company have been given pseudonym as ToolCo and PaintCo respectively. PaintCo was a key case in downstream supply chain especially in a small-scale consumer Goods Company in India. The purpose of the present research is to explore the applications of TOC in a particular setting, in a particular industry and in a particular country. The research approach is to improve a theory. It is a nested study about a phenomenon happened in the past. Thus the typology of the research is exploratory, theory-building, nested study, multiple cases, and retrospective study. The research questions are as below: Q1: How do FMCG Companies in India apply Theory of constraints in managing downstream supply chain? Q2: How do the FMCG Companies in India address challenges involved in application of Theory of constraints in downstream supply chain? The research design is given below in Figure editor@iaeme.com

3 Theory of Constraints For Sustainable Inventory Management In Downstream Supply Chain Figure 1 The Research Design As the case study research makes use of the key-informant approach, so in these three cases, the keyinformant approach deemed appropriate considering the way most of the information was available only with few key informants in consulting companies and the project organizations. The CEOs, consultants, functional heads, key distributors and retailers/dealers have also been chosen as the samples. The objective of taking samples from consulting companies and the client organizations is to explore similarities and diversity in human experience, beliefs, and conditions, which would give a bigger picture of the cases. The data collected is qualitative in nature. The content has been analysed using NVIVO. Input of data was done into the project in NVIVO, followed by processing through coding of themes in NVIVO, reviewing of coding process, refining the coding process through researcher s judgement and experience, and displaying the data by addressing the research questions Cross Case Analysis Cluster Analysis Cluster analysis based on Coefficient of similarity of Jaccard s coefficient is given in Table 1 Table 1 Coefficient of similarity of Jaccard s coefficient Coefficient of similarity of Jaccard Case InsectiCo ToolCo PaintCo InsectiCo ToolCo PaintCo 1 On the basis of Jaccard s coefficient, it can be concluded that the three cases share about 45% to 53% similarity. Cluster analysis based on Coefficient of similarity of Pearson correlation coefficient is given in Table editor@iaeme.com

4 Sivasubramanian and Rupa Table 2 Coefficient of similarity of Pearson correlation coefficient Coefficient of similarity of Pearson correlation Case InsectiCo ToolCo PaintCo InsectiCo ToolCo PaintCo 1 On the basis of Pearson correlation coefficient, it can be concluded that the three cases share 52% to 58% similarity. Cluster analysis based on Coefficient of similarity of Sorensen s coefficient is as in Table 3 Case Table 3 Coefficient of similarity of Sorensen s coefficient efficient of similarity of Sorensen sectico olco intco InsectiCo ToolCo PaintCo 1 On the basis of Sorensen s coefficient, it can be concluded that the three cases share 62% to 69% similarity. The three cases share higher level of similarity on Sorensen s coefficient compared to Jaccard s coefficient and Pearson correlation coefficient Group Query The result of a Group Query on similarity in the three cases is given in Figure 2 Figure 2 Result of a Group Query on similarity Coding The result of Coding by node for InsectiCo is given in Figure editor@iaeme.com

5 Theory of Constraints For Sustainable Inventory Management In Downstream Supply Chain Figure 3 Coding by node for InsectiCo The result of Coding by node for ToolCo is given in Figure 4 Figure 4 Coding by node for ToolCo The result of Coding by node for PaintCo is given in Figure 5 4. RESULTS AND DISCUSSION Figure 5 Coding by node for PaintCo 4.1. Findings It is evident that certain FMCG firms in India have implemented the TOC solution in the downstream supply chain. Three such FMCG firms have been studied in the present study. It can be generalized that a coexistence of stock outs and excess inventory at item level prompts FMCG firm to engage TOC a consultant to improve inventory turns. TOC consultant conducts a preliminary investigation by collecting 5 editor@iaeme.com

6 Sivasubramanian and Rupa quantitative and qualitative data. The consultant uses a Viable Vision process to scope out the viability of achieving the Viable Vision. The Viable Vision is an ambitious goal of achieving net profit equal to the current net sales in less than four years. The consultant prepares a list of Undesirable Effects of the system. He uses TOC Thinking Process Tools for preparing Current Reality Tree, Conflict Resolution Diagram, Win-Win solutions, Future Reality Tree and Prerequisite Tree. The consultant finalizes a Strategy & Tactics (S&T) tree, which serves as an implementation guide. The consultant conducts the 4x4 workshops to present the S&T tree and convince the Chief Executive Officer to implement Theory of constraints solutions in the downstream supply chain. Variable fees get higher weight than fixed fees in determining consulting fee structure, which is a win-win for both the parties as the financial risk of the FMCG firm for engaging the consultant is greatly reduced. A consultancy agreement between the two parties is signed to document terms & conditions, fee structure, roles & responsibilities and the project goal. CEO finalizes project implementation schedule. The company sets a project organization structure. CEO serves as the project chairman. Functional managers report project chairman for project implementation. The whole process in the existing implementation is shown in Table 4 LEVEL Table 4 Existing Process of Implementation Existing Process of Implementation 1 Set-up Plant Warehouse 1.1 Go & See a warehouse 1.11 Task: Decide the correct size of warehouses 1.2 Build/Outsource the Warehouse 1.3 Establish Transportation Management to the depot and to the distributors/dealers 1.31 Task: New delivery Regulations 1.32 Task: Feedback to delivery system 1.4 Establish IT system 1.41 Task: verify the adequacy of data from ERP 1.42 Task: Integrate ERP with DBM 1.43 Task: Verify smooth dataflow from ERP& Dynamic Buffer Management System 2 Initial Target Inventory 2.1 Working on Plant Warehouse Inventory 2.11 Task: Determine rough-cut inventory (use inventory profile) 2.12 Divide the target inventory into 3 equal zones 2.13 Build inventory the first 10 days (no transport to dealers) 2.2 Class A Dealers (at SKU level) 2.21 Estimate the Target inventory Estimate Replenishment time (from Plant warehouse) Estimate Consumption of each SKU Account for Unreliability of Replenishment time Evaluate the Average stock to be stored Discuss with the dealers to refine the target 2.22 Divide the target inventory into 3 equal zones 2.23 Order Stocks to bring to Target levels 2.24 Decide SKUs to be taken back to Plant warehouse 2.25 Move chosen SKUs back 2.3 Roll-out to other Dealers 2.31 Estimate the Target inventory Estimate Replenishment time (from Plant warehouse) Estimate Consumption of each SKU Account for Unreliability of Replenishment time Evaluate the Average stock to be stored Discuss with the dealers to refine the target 6 editor@iaeme.com

7 Theory of Constraints For Sustainable Inventory Management In Downstream Supply Chain LEVEL Existing Process of Implementation 2.32 Order Stocks to bring to Target levels 2.34 Decide SKUs to be taken back to Plant warehouse 2.35 Move chosen SKUs back 3 Order Daily 3.1 Categorization of dealers in the chosen Region into A class dealers (pilot group covering 80% of sales and 20% of dealers) Communicate to them the concept Continue to service dealers not covered above in the current way 3.2 Setup a checklist with our sales people Dealers, SKU s stocked by them & initial target stock levels Update checklist to include new products launch, new dealers 3.3 Allocate dealers to sales people, region wise Alter the measurement system for sales people 3.4 Sales people contact daily the dealers and get the sales for SKU s as per the checklist Sales people collect orders & expected demand for SKUs not in stock Update the checklist in 1.2 above 3.5 Incase sales person is absent the dealer is instructed to contact the sales office and give the necessary information (contingency) 3.6 Sales office consolidates dealer sales and sends information to the responsible plant warehouse on daily basis 4 Replenish Periodically 4.1 Generate routings for trucks and decide the replenishment frequency for each Identify dealers on each route Decide the frequency for the routes Aggregate demand for routes & choose appropriate truck size & no s 4.2 In case of unscheduled shipments, dealers will be intimated 5 Decide how to react to increase or decrease in demand 5.1 Set Review period to monitor red or green zone i.e. how consistently it is in red zone / green zone? 5.2 Decide the Policy for Review and Change of Targets 6 Set system for analysis of the penetrations - Setting POOGI 6.1 Record reasons for Buffer Penetration (for a long time in Red or Green) 7 Organization structure / Roles & Responsibilities for New model 7.1 Implementation of Sub-project 7.2 Define Measurement Procedure Educate other people in the supply chain Get Agreement on the new measurement system Determine applicability of Throughput Dollar Days (TDD) and Inventory Dollar Days (IDD) at various supply chain nodes Finalize on the formula for TDD and IDD Modify existing Policies and Measurements (Incentives, penalties etc.) Establish Service Level Agreements (including TDD and IDD) at various nodes Modify appraisal policies 3.2. The Existing Implementation model of Theory of Constraints in Downstream Supply Chain in FMCG Sector in India The Existing Implementation model of Theory of Constraints in Downstream Supply Chain in FMCG Sector in India is show in Figure editor@iaeme.com

8 Sivasubramanian and Rupa Figure 6 The Existing Implementation model of Theory of Constraints in Downstream Supply Chain in FMCG Sector in India The Revised Implementation model of Theory of Constraints in Downstream Supply Chain in FMCG Sector in India is show in Figure 7 Figure 7 The Revised Implementation model of Theory of Constraints in Downstream Supply Chain in FMCG Sector in India 8 editor@iaeme.com

9 Theory of Constraints For Sustainable Inventory Management In Downstream Supply Chain The Audit Process for the Revised Implementation model of Theory of Constraints in Downstream Supply Chain in FMCG Sector in India is show in Figure 8 Figure 8 The Audit Process for the Revised Implementation model of Theory of Constraints in Downstream Supply Chain in FMCG Sector in India 5. CONCLUSIONS A typical FMCG firm relies on demand forecasts to manage the supply chain, which results in two simultaneously occurring Undesirable Effects: Stock outs and excess inventory at the item level in the downstream supply chain. On one side, stockouts lead to customer dissatisfaction and loss of sales, which reduces inventory turns. On the other side, excess inventory directly leads to the reduction in inventory turns. The revised implementation model is designed to address various challenges involved in implementation. The Audit process for the Revised Implementation model can help implementation succeed by proving timely feedback. ACKNOWLEDGMENTS This study acknowledges support and cooperation of Theory of constraints project consultants of the case companies, the CEOs, the Functional heads, the distributors, the retailers and the sales force of InsectiCo, ToolCo, and PaintCo. 9 editor@iaeme.com

10 Sivasubramanian and Rupa REFERENCES [1] Amir Schragenheim. Supply Chain Management, in Cox and Schleier (ed). Theory of Constraints Handbook. USA. McGraw-Hill, 2010 [2] Cohen. Ever Improve A Guide to Managing Production the TOC Way. UK: Toc Strategic Solutions, 2010 [3] Kulraj, Puneet, VIP Industries Teams with Vector Consulting Group to Revamp Its Supply Chain. Nov 15, 2013, URL: accessed online on 19 April [4] Menon, Nikhil. Don't know what's holding your company back? Theory of Constraints might give you the answer. Corporate Dossier. The Economic Times (Online). Dec 17, Accessed online on Pro Quest, URL: [5] Sangameshwaran, Prasad. Cashing in on constraints, Businessline. Dec 13, retrieved online on 19 September [6] S. A. Puviyarasu, A Review of Green Supply Chain Management. International Journal of Mechanical Engineering and Technology, 7(5), 2016, pp [7] K. Narsimlu, Dr. Ardhendu G. Pathak, Prof. Avinash G. Mulky and Chandrashekhar Yavarna, A Market Analysis On The Impact of Additive Layer Manufacturing Technologies On Aerospace and Defense Supply Chain. International Journal of Management, 8(2), 2017, pp [8] Schragenheim, Eli, Implementing the process of high level decision making-a case study. Unpublished Conference presentation made in 11th TOCICO International Conference in Germany, editor@iaeme.com