Distribution & Supply Chain, as Taught by Eli Goldratt · Lesson 5 of 7
Order daily, replenish frequently
Why don't regional warehouses simply order every day what they sold that day? Karan raises every objection; Ruth answers them. Then the mechanism that replaces the forecast: inventory targets watched through red, yellow and green zones, raised and lowered by a full zone at a time.
Why not order what was sold?
The next leap is to react faster to actual consumption. Two key questions: why do most regional warehouses reorder by “min-max” or re-order point? And why don’t they order, every day, what was sold that day?
Ruth: “Why don’t the regional warehouses order every day what they sold that day?”
Karan: “Objection one: we lose the discount for large orders.”
Ruth: “Discounts for large orders are given between different businesses. Your central warehouse and your regional warehouses belong to the same company.”
Karan: “True. It matters for shops, but we agreed to discuss shops later. Objection two: deciding and submitting orders takes time and attention, so it’s natural to batch them.”
Ruth: “With today’s computers, nothing is easier than ordering every day what was sold that day. Do you have a better reason?”
Karan: “Yes. For each product, a day’s sales are small. Ordering such small quantities will send transport costs through the roof.”
Ruth: “Per product, yes. But the total that a region sells, of all the products it gets from the same central warehouse, isn’t small at all. And I know of no rule against putting many products on one truck.”
Karan: “No need to be sarcastic. Are you sure a day’s sales fill a truck?”
Ruth: “Suppose you send a truck to a region every three days. Its stock isn’t climbing forever, so it sells about a truckload every three days. Let the region report its sales daily, and ship whenever a truck is full. Every product is replenished within about three days, with no extra transport cost.”
Karan: “Actually, for most of our regions we send a truck every day. Your way, order lead time drops to one day.”
Ruth: “Something still bothering you?”
Karan: “It’s so obvious it makes me uncomfortable. Almost no regional warehouse does this. There must be a reason.”
Ruth: “There was. Regions were supplied straight from the plant, and before the plant warehouse existed, the only products available were those made in the last few days. When the supply point doesn’t hold all the products, ordering by daily sales is pointless.”
Karan: “So the plant warehouse gives us another benefit: it makes daily ordering possible.”
From push to pull
The workable procedure: replenish according to actual demand. Once there is enough inventory of the whole range at the plant or central warehouse:
- The point of consumption orders daily, according to what it actually consumed. (If its stock is above target, no order is issued.)
- The supply point replenishes frequently, according to that consumption.
Benefit 1: much shorter order lead time. The main reason for long order lead times was the belief that the supply point couldn’t respond quickly. Now it can, so inventory falls without hurting service.
Benefit 2: the ability to adapt to changes in consumption. Changes in demand are among the biggest killers of distribution systems: surpluses of what nobody wants and shortages of what everyone wants, because the change was impossible to forecast and the system couldn’t shift stock or production fast enough. Quick replenishment lets us use something better than a forecast: information about the adequacy of the inventory we actually hold.
Managing targets without a forecast
Plot the inventory of one product at one warehouse. It falls with consumption and rises with each replenishment. Divide the target into three zones, each one third unless there’s a reason otherwise:
- Red: low inventory.
- Yellow: adequate.
- Green: high.
Reacting to an increase in demand. If, during one replenishment time, the inventory penetrated too much into red (how much is “too much” depends on the service level), increase the target by one full zone, and immediately order the amount of the increase. Then wait: the extra stock arrives only after one replenishment time, and a decision before that has no information to go on. Watch for another replenishment time before changing the target again.
Demand for a product doubles within one week. Replenishment time is 3 days; deliveries are daily. What happens with the zone method?
- A stock-out lasting weeks
- Stock dips into red; the target rises a zone, and again if needed, until it matches demand
- Nothing changes: the target is fixed, and the extra demand is met from the safety stock
Each day’s delivery replaces what was consumed three days earlier, so a jump in demand shows up quickly as red. In Goldratt’s example, the first increase wasn’t enough and a second followed. The same mechanism works with long replenishment times; the initial target is just higher.
Reacting to a decrease. If, during one replenishment time, the inventory stayed in green the whole time, decrease the target by a zone. Stock will now be above target, so nothing is replenished until it is consumed back down. Wait until it is back within green before decreasing again; otherwise you may cut the target to almost zero.
Check your understanding
Answer all five. Get four right to complete the lesson.
1. The large-order discount objection doesn’t hold between…
- A shop and its supplier with a long relationship
- Two competitors
- A central and a regional warehouse of the same company
- A plant and a vendor
Discounts are given between different businesses.
2. Daily ordering doesn’t raise transport cost because…
- All products from the same source share a truck
- Trucks are free
- Orders are bigger
- Shops collect their own orders from the warehouse
The region sells about a truckload per shipping interval anyway.
3. Why didn’t warehouses order by daily sales before?
- No computers
- Union rules
- Habit only
- The supply point didn’t hold the full range
The plant warehouse makes it possible.
4. When stock penetrates too far into red during a replenishment time…
- Cut the target
- Raise the target by one full zone and order the increase at once
- Do nothing
- Double the target, to be safe
Then wait one replenishment time before judging again.
5. After cutting a target, you should wait until…
- A week passes
- The month ends
- Stock is consumed back into the green zone
- The forecast is updated for the next month
Otherwise you can cut the target almost to zero.