Distribution & Supply Chain, as Taught by Eli Goldratt · Lesson 1 of 7
The distribution challenge
Why does distribution exist at all, what limits its throughput, and why does every company end up with too much stock and too many shortages at the same time? Goldratt's opening: the constraint is the customer who walks in, and the conflict is protect sales versus hold less.
Sunrise Appliances makes mixers, fans and water heaters in one plant and sells them through regional warehouses to thousands of shops.
Karan Mehta, head of distribution, sits late in his office with the monthly forecast. He looks up at the ceiling.
Karan: “Oh great spirit of forecasting: tell me where and when each product will be needed.”
The spirit, as usual, says nothing.
The challenge, in one sentence
How do you manage the distribution system so that the right inventory is at the right place at the right time?
Every distribution manager knows this question. Goldratt started by asking why distribution exists at all.
What is distribution?
Two conditions define it:
- The points of consumption are far from the point of production.
- The buyer’s tolerance time is much shorter than the time it takes to make the product available at the point of consumption.
Without the second condition, you have transportation, not distribution. Note that this is broader than the usual definition: it also covers one plant feeding other, remote plants, so everything in this course applies to the upstream links of a supply chain too.
Customer at Mrs. Fernandes’s shop: “I want to buy a water heater!”
Mrs. Fernandes: “I can order one. It will take a month to arrive.”
Customer: “But I need it now. I’ll buy it somewhere else.”
There’s the business opportunity: hold inventory of goods close to the customer. That is distribution.
The five steps, applied to distribution
Step 1: identify the constraint. The constraint governs the throughput of the system. What governs the throughput of a distribution system? The customers who come to buy. The more customers come to buy, the more throughput. Every shopkeeper wishes more customers would walk in.
Step 2: exploit the constraint. Failing to satisfy a customer who came to buy is the opposite of exploiting. “Do you have it in a smaller size?” “No.” So exploiting the constraint means having the right inventory in the right place at the right time. There is the challenge again, and to meet it, Goldratt said, we need a deep understanding of the cause and effect that governs it. Take a deep breath.
The conflict
Every distribution system lives in the same conflict.
The arrow from “protect sales” to “hold high inventory” rests on three assumptions:
- Replenishment time is too long.
- Vendors are not always reliable.
- Forecasts are inaccurate.
So Goldratt framed the challenge precisely. How can we:
- operate according to a much more accurate forecast,
- operate with significantly shorter replenishment times,
- and increase the reliability of re-supply,
without trying to build an accurate forecasting system, without paying more or investing more in re-supply, and without replacing or educating vendors?
Pause and think: that list rules out every usual answer. What’s left?
- Nothing: it’s impossible
- More inventory everywhere, held as safety against every forecast error
- Changing how the distribution system itself is structured and run
If we can’t change the forecast, the vendors or the price of speed, the only lever left is the way inventory is positioned and replenished. To find it, we first need to understand the problem in depth, starting with how much inventory a point really needs.
Check your understanding
Answer all five. Get four right to complete the lesson.
1. Distribution, in Goldratt’s sense, exists when…
- Goods are transported by truck from the plant to warehouses and then to shops
- Consumption is remote, and buyers won’t wait as long as supply takes
- There are many products
- A company has warehouses
Otherwise it is just transportation.
2. The constraint of a distribution system is…
- The plant
- The trucks
- The warehouse space
- The customers who come to buy
They govern its throughput.
3. Exploiting that constraint means…
- Having the right inventory at the right place at the right time
- Advertising more
- Lowering prices
- Holding as much stock as possible at every point of sale
Never turning away a customer who came to buy.
4. The distribution conflict is between…
- Sales and marketing
- Plant and warehouse, over who holds the stock and who pays for it
- High stock to protect sales, against less stock to cut cost
- Price and quality
Every level is a compromise.
5. Which is NOT one of the three assumptions under “protect sales → hold high inventory”?
- Replenishment time is too long
- Customers always wait
- Vendors are not always reliable
- Forecasts are inaccurate
Customers who can’t find the product leave.