TOC in Distribution · Lesson 6 of 8
Cutting replenishment time
Most of replenishment time is batching, not work. Hold stock at the source, order daily and dispatch often, and the time, and the stock, fall away.
What replenishment time is made of
From the moment a distributor sells a unit until a new one reaches its shelf, three things happen:
- Order lead time: waiting until an order is worth placing (batching), then processing it (admin).
- Production lead time: waiting for a production run of that product (batching), then making it (touch time).
- Delivery lead time: waiting for a full truck (batching), then transporting it.
In each part, the batching is usually far longer than the work. Switch on the changes below one at a time:
1. Hold most stock at the source
Introduce a central warehouse (CWH) between the plant and the regional network. It decouples the plant from the day-to-day swings of the market, and the market from the plant’s batches. For distributors, the production lead time drops out of their replenishment time altogether: they are served from stock.
“But we already have a central warehouse!” Many companies do. Look at what it is designed for, though:
| A typical central warehouse | A TOC central warehouse |
|---|---|
| Pushes stock to branches as fast as possible | Holds inventory according to its buffer size |
| Supplies branches according to the monthly plan, measured on monthly fill rate | Supplies branches only according to their consumption, and no more |
| Mostly breaks bulk from the plant: a transit warehouse | Exists to ensure availability for the branches |
So you may have a warehouse at every plant. But is it really a central warehouse?
Doesn’t holding stock at a central warehouse add inventory? Here is why it doesn’t:
The principle of aggregation. The demand at a supply point is the combined consumption of all the points it feeds. Ups at one distributor cancel downs at another, so the swings at the centre are much smaller. The stock needed at the central warehouse is roughly half the sum of the maximum consumption of the points it serves.
Now look at where most companies hold their stock. Distribution has traditionally been built on the wisdom of holding inventory close to the consumer. So most inventory sits at the end of the chain, where forecasts are least accurate, and very little sits at the source, where forecasts are best. No wonder supply chains struggle.
Pause and think: four distributors each need up to 100 units to cover their own swings. About how much does a central warehouse feeding all four need to cover theirs?
- 400 units
- 800 units
- About 200 units
- Nothing at all
Their peaks rarely happen together, so the combined swing is much smaller than the sum of the four. Roughly half the sum of the maxima is a good rule of thumb.
2. Order daily
Why don’t most supply chains order every day? They use min-max or reorder-point rules instead, for familiar reasons:
- Working out orders takes time and attention.
- Small orders seem to inflate transport costs.
- Bigger orders earn volume discounts.
- “What’s the point? The warehouse doesn’t have the full range anyway, and it supplies at month-end.”
Now look at what ordering frequency does to stock, with the same sales of 100 units a month:
With monthly orders, a whole month’s supply is always on the way, and up to a month’s worth sits on the shelf. With weekly orders, the same 100 is on the way in four lots, and only 25 sits on the shelf at its peak. With daily orders, the shelf barely needs more than a few days.
Ordering daily, by sending yesterday’s sales as today’s order, cuts the order lead time to a day. It does something just as valuable: it gives you the flexibility to decide when to react, because you see consumption every day instead of once a month.
Think of the fuel gauge in a car. If you could look at it only once a month, you’d either fill the tank to the brim every time out of fear, or run dry on the highway. Because you see it every time you drive, you fill up when it’s needed, and not before. Daily consumption data is the fuel gauge of a supply chain.
3. Replenish frequently
Delivery lead time includes the transport time and the frequency of dispatch. Because a central warehouse holds the whole assortment, it can send a mixed load of many products to a distributor often, instead of waiting for a full truck of one product. Transport time stays the same; the waiting disappears.
Together, these three changes turn a replenishment time of weeks into a few days, and the buffers shrink with it.
Check your understanding
Answer all five. Get four right to complete the lesson.
1. Most of a typical replenishment time is…
- Transport
- Batching: waiting for orders, production runs or full trucks
- Production touch time
- Paperwork
The work is small; the waiting is large.
2. Why does a central warehouse need less stock than the sum of the distributors’ buffers?
- It sells less
- It is bigger
- It is closer to the plant
- Swings at different distributors cancel out when aggregated
That’s the principle of aggregation.
3. Traditional distribution holds most stock…
- Close to the consumer, where forecasts are least accurate
- At the source, where forecasts are best
- Evenly everywhere
- In transit
Exactly backwards from what aggregation suggests.
4. A location sells 100 units a month and switches from monthly to weekly orders. Its peak stock on the shelf drops from about 100 to about…
- 75
- 50
- 25
- 100
Four lots of 25 instead of one of 100.
5. Besides cutting lead time, ordering daily…
- Raises transport costs a lot
- Gives you the flexibility to decide when to react, because you see consumption every day
- Removes the need for a buffer
- Requires a better forecast
Daily visibility is what makes quick reaction possible.