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TOC in Distribution · Lesson 8 of 8

Adjusting to change

When demand itself moves, buffers must follow: raise them when they stay red, lower them when they stay green, and build them up ahead of known seasons. Then run the whole solution yourself.

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When the level of demand changes

So far we’ve dealt with demand swinging around a steady level. But sometimes the level itself moves: a product takes off, a region slows down. Or the supply lead time gets longer or shorter. With our limited ability to forecast at the level of one product in one region, how do we keep up?

The only way is to be in a position to adjust to reality, on an ongoing basis.

Here is how it works. Stock arrives every day, replacing what was sold one replenishment time ago. If demand jumps sharply, each delivery replaces yesterday’s lower sales while today’s sales are higher. The stock keeps falling, and stays in the red zone for too much of the replenishment time. That is the signal: the buffer is too small for the new level of demand.

Dynamic buffer management

  • If a buffer stays too long in red, about a full replenishment time, raise the target by one zone, a third, and order the extra right away. It arrives one replenishment time later.
  • Then keep watching for another replenishment time. If the stock still sinks too deep into red, demand is even higher: raise it again.
  • If a buffer stays too long in green, typically several replenishment times, demand has probably fallen: lower the target by one zone.
  • Be quick to raise and slow to lower. A lost sale hurts more than a few extra days of stock.

Constant tracking of consumption against replenishment time lets the norms follow real demand, product by product and location by location, without anyone forecasting anything.

Pause and think: why doesn’t dynamic buffer management work well for a festival season or a big promotion?

  • Because demand doesn’t change in a season
  • Because it raises buffers too much
  • Because it needs about two replenishment times to notice and react, and by then the season may be half over
  • Because seasons are unpredictable

DBM reacts to what has happened: one replenishment time to notice, another to react. For changes you already know are coming, you shouldn’t wait to notice them.

Known changes: seasons, promotions, holidays

Some changes are known in advance: a seasonal peak, a promotion, a holiday period when transport slows, opening or moving a warehouse. For these, don’t wait for DBM: plan the norm.

A seasonality setting takes four inputs: the season start date, the season end date, the target norm for the season, and a build-up duration. The norm is raised a little every day so the extra stock flows in smoothly, and it reaches the season level one replenishment time before the season starts, giving the supply chain time to deliver. At the end of the season it resets automatically. While the seasonal norm is in charge, DBM is switched off for that product so the two don’t fight.

Seasons come in a few shapes: a higher norm or a lower one during the season, with a known end date or an unknown one. DBM handles the surprises; seasonality handles what you already know.

The whole solution

A typical network then runs like this:

  • The plant replenishes the central warehouse every few days, based on its daily dispatches. The central warehouse holds about 15 days of buffer.
  • The central warehouse replenishes regional warehouses every few days, based on their daily sales; transport takes two to seven days, and regional buffers are 10 to 15 days.
  • Regional warehouses replenish distributors daily, based on daily sales, with a day or two of transport.
  • At every link, buffer management runs every day.

The five elements of the TOC replenishment solution:

  1. Hold most of the inventory closer to the source, at an aggregation point.
  2. Size buffers on “maximum” consumption within the replenishment time, factored by the unreliability of re-supply.
  3. Replenish only what is sold.
  4. Order daily, replenish frequently.
  5. Monitor the rate of consumption constantly and adjust the norms.

Getting better every month

There’s always a next step: the process of ongoing improvement. Whenever a product stays in black or red for a long time, note the reason: a supplier delay, a transport problem, a quality rejection, a buffer set too small. At the end of each month, make a Pareto of the reasons; the top one or two become the next improvement project. Fix them, fewer products go red, buffers can come down, and with them the inventory. The same report, kept by supplier, shows at a glance which suppliers keep your stock in red, and where to work first.

Play: Keep the Shelves Full

Before you play

The network. A central warehouse supplies four distributors, North, East, South and West, with three products: a fast seller, a steady seller and a slow seller. Trucks take 2 days. The plant refills the central warehouse in 10 days. Customers buy every day; anything not on the shelf is a lost sale.

The market moves. Each month, demand drifts up or down. Partway through, the steady seller suddenly takes off in the North, and the fast seller fades in the West.

What you control. How distributors are supplied:

  • Monthly push (the usual way): each month, ship a forecast based on last month’s sales, and push extra stock in the last week to meet the sales target.
  • Pull: keep the main stock at the central warehouse and replenish what each distributor sold, weekly or daily, reddest first.
  • Adjust buffers to demand: dynamic buffer management, on or off.

What to watch. Sales lost, shelf-days empty, days of stock at distributors and in the whole chain; the chart for the steady seller in the North; and the end-of-run map of stock at every distributor.

Your goal. Lose almost no sales while holding as little stock as possible. Start with the monthly push, then try weekly pull, daily pull, and daily pull with adjusting buffers. Every run uses the same customers.

Check your understanding

Answer all five. Get four right to complete the lesson.

1. A buffer has stayed in red for a full replenishment time. Dynamic buffer management…

  • Raises the target by one zone and orders the extra
  • Lowers the target
  • Waits for next month’s forecast
  • Removes the product

Persistent red means demand has risen. React quickly.

2. Why raise quickly but lower slowly?

  • Stock is free
  • Demand only rises
  • Software can’t lower targets
  • A lost sale costs more than a few extra days of stock

Be paranoid about shortages, but not hysterical about stock.

3. For a known festival season, the norm should reach its season level…

  • On the first day of the season
  • One replenishment time before the season starts
  • Halfway through the season
  • Whenever DBM notices

So the supply chain has time to deliver the stock.

4. Which is NOT one of the five elements of the replenishment solution?

  • Hold most inventory near the source
  • Order daily, replenish frequently
  • Ship each distributor its monthly forecast
  • Adjust norms to real consumption

Forecast-based shipments are what the solution replaces.

5. In the ongoing-improvement step, what decides the next improvement project?

  • A Pareto of the reasons products stayed in red or black
  • The biggest customer’s complaint
  • The forecast error
  • The warehouse manager’s opinion

Fix the top reasons, and buffers can come down.