Chapter 5 Using TOC to improve Distribution System

Transcription

1 Chapter 5 Using TOC to improve Distribution System 1

2 Learning Objective To understand how to use TOC to improve Distribution system 2

3 Introduction Almost all functions in an organisation are impacted by Distribution If the distribution system chose by the manufacturer is not proper, the organisation is impacted by it 3

4 The Vicious Cycle Organisations prepare forecast at the beginning of the year Forecast is done for the existing markets as well as for new markets Sales people are given targets accordingly Despite sincere efforts the customers are dissatisfied with the products and availability 4

5 The Vicious Cycle On investigation it is learnt by the organisations that there is a need to Have more accurate forecast Significantly reduced replenishment time Increased reliability of re-supply The organisations thus must gain an in-depth understanding of the problem before the solution can be applied 5

6 Characteristics of a Distribution System Consumption locations are away from the production location Time take to make product available at the point of consumption is longer than the tolerance time of our customers Inventory is expressed in terms of money 6

7 Typical structure of a Distribution system One or more factories- there could be a combination of the two One or more regional distribution centres (RDCs) Periodically, either based on their orders or based on some plan, products are supplied to the RDCs from the factories / suppliers Have several retails stores Retail Stores buy products from the RDCs and sell them to end customers 7

8 Distribution system Distributors and Manufacturers have very sophisticated forecasting software to predict exactly how many items of each product will be sold It is logical that the manufacturer/distributor should keep most of the stock as close to the consumer as possible Forecast of a single product at a specific location is subject to the above mentioned impacts of fluctuations and uncertainty 8

9 The Problem There is a mismatch in satisfying the market demand TOC attempts to determine how much inventory we need to hold at the selling point There are number of Undesirable Effects (UDEs) 9

10 Undesirable Effects (UDEs) There is a shortage of fast moving items Slow moving items are piling up There is a high level of inventory everywhere Lost of cash is tied in inventory Customers are dissatisfied with product availability There are many emergency orders Enough space is not available for display and storage of items Product variety cannot be increased easily 10

11 Replenishment Time Replenishment Time is as important as the level of consumption. The longer the Replenishment Time, each selling point needs to hold more inventories. There are different elements that comprise the Replenishment Time Order Lead Time (OLT) Production Lead Time (PLT) Transportation Lead Time (TLT) Replenishment Time = OLT+PLT+TLT 11

12 Order Lead Time (OLT) 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 product It is the time until order is placed for replenishment or the time difference between two orders 12

13 Production Lead Time (PLT) This is the time it taken to process an order plus the time in queue for producing plus The time to produce the ordered product 13

14 Transportation Lead Time (PLT) This is the time it takes to transfer the products to the point of sell This is the time it takes to actually ship the finished product from the supplying point to the stock location 14

15 Maximum Forecasted Consumption Maximum forecasted consumption within the average replenishment time, factored by the level of unreliability of resupply Maximum forecasted consumption means you need to be paranoid to determine what could be the maximum sale within the average Replenishment Tome and then factor it to the extent of unreliability of the supply chain 15

16 The Conflict To make profits by selling more, we must hold high level of inventories. This is because replenishment time is along, demand cannot be accurately predicted and resupply is not entirely reliable However, on the other side there is also need to reduce cost and therefore we must hold fewer inventories because more inventories mean more investment, more limits on cash flow and more obsolescence 16

17 Assumptions which can be invalidated More inventories mean more investment More inventories mean more limits on cash flow More inventories mean more obsolescence Replenish time is long Demand cannot be predicted accurately Re-supply is not reliable 17

18 Batching and its Ramifications Batching at Retail Store level for the following reasons When organisation doesn t want to forecast every day because the organisation does not have any time Batching is done to save on transportation costs Suppliers offer a discount on quantity and Retails stores want to avail of it and hence they resort to accumulating and batching of orders so as to qualify for the discount 18

19 High inventory levels in the System Keeping relatively high level of inventories in the system means- High investment Limiting cash flow High obsolescence 19

20 High inventory levels in the System Organisations hold inventories because of - Replenish time is long Demand cannot be predicted accurately Vendors are unreliable 20

21 Category of inventory items in a store 1. Fast moving items items sold very fast 2. Slow moving items items the retailer just can t get rid off 3. Regular running items items that do not fit the above categories 21

22 Importance of Central Distribution center (CDC) Operate according to much more accurate forecast Operate with significantly reduced replenishment time Increase reliability of re-supply 22

23 Green, Yellow and Red levels of Buffer in inventory Green When the stock at the target is more than 2/3 rd of the target level, the buffer is considered to be Green. This means too much stock When the stock at the target is between 1/3 rd and 2/3 rd of the target level. The buffer is considered to be Yellow. This means we are OK When the stock at the target is less than 1/3 rd of the target level, the buffer is considered to be Red. This means we are NOT OK. There is a real risk of running out of stock 23

24 Buffer Management In the following situations there is need for changes in the buffer levels Changes in market demand Anticipate start or end of the season Changes in the Replenishment Time Introduction of new products Acquisition of new customers 24

25 ROI Measurement The ROI measurement enables differentiating between 3 different group of products Star items These items represent a very quick ROImeaning keeping them is very good for business Black hole items these items take a very long period in order to return the investment done in them Regular ROI Items These items are not in either category 25

26 ROI Measurement The ROI measurement enables differentiating between 3 different group of products Star items These items represent a very quick ROImeaning keeping them is very good for business Black hole items these items take a very long period in order to return the investment done in them Regular ROI Items These items are not in either category 26

27 Operational Measurements Reliability Reliability is measured by Throughput Dollar Days Effectiveness In measuring inventory two things are important value of excess inventory The time until the inventory is held 27

28 Advantages of TOC Distribution Solution Least dependency on forecast Superior product availability Faster new product introduction Ease of increasing product portfolio Improved feasibility to expand the sales channel Improved ability to react to demand within a peak Feasible to turn slow movers into make to order Reduction of near expiration product 28

29 Summary TOC Distribution solution aims at reversal of the vicious cycle Some of the following questions which will be helpful are What to change What to change to How to cause a change Identify and address the aspects which lead to high levels of inventory 29

30 Summary Expected Results for TOC in distribution system Inventory in the system decreases by about 50% Sales go up by about 20-30% Inventory turns increase more than double Fewer cross-shipments amongst RDCs Obsolescence drops substantially Operating expenses stay about the same Relationship with suppliers and clients improves significantly 30