The plant warehouse

Karan: “If we want goods immediately available to customers, we should hold them away from customers? You’ll have to explain that.”

Ruth: “Each point must hold its target: the maximum consumption within its replenishment time, factored by unreliability. Followed everywhere, that leads to too much inventory. My claim is that adding a plant warehouse reduces the total inventory enough to solve the problem.”

Karan: “I still don’t get it. You just added inventory at the plant. Where’s the saving?”

Ruth: “In every regional warehouse. Before, their replenishment time was production plus transport. Now the stock they need sits in the plant warehouse, so their replenishment time is only the transport time.”

Karan: “So you’ve split the inventory between the regions and the plant. Big deal. Where are the savings?”

Ruth: “Remember the ‘maximum’. The lower the variability, the smaller the maximum you need. At the plant warehouse, demand is the sum of all the regions, so its variability is far lower. The maximum the plant warehouse needs is much smaller than the sum of the maximums the regions needed. What we hold there is less than what we removed from the regions.”

Karan: “That’s how you use the better forecast at the supply point.”

Ruth: “That’s one part. Forecasts also deteriorate with the length of time forecast. The regions now forecast only over the transport time, so their maximums shrink too. And there’s much less chance of a shortage in one region while another sits on surplus of the same product.”

Ruth: “Most of the production lead time is the time an order waits in the queue. What fills the queue with urgent orders today?”

Karan: “Any shortage in any regional warehouse triggers an urgent production order.”

Ruth: “How often is an urgent order triggered because one warehouse is out of an item that the system has plenty of somewhere else?”

Karan: “For at least half the products, I’d say.”

Ruth: “With a plant warehouse, an urgent order is triggered only when the plant warehouse itself is out. That means far fewer urgent orders and a drastically shorter production lead time, which saves more inventory at the plant warehouse. And without all those emergencies, running the plant becomes much easier.”

Ruth: “The formula has one more part: unreliability of replenishment. For the regions, it is now only the unreliability of transport, usually much smaller than that of the supplier, so they need even less. And for the plant warehouse: what makes a supplier unreliable?”

Karan: “Mostly, other orders jumping the queue.”

Ruth: “And we just removed most of the urgent orders that jump it.”

Karan: “So you’ve met all three conditions: a more accurate forecast, shorter replenishment, more reliable re-supply.”

Ruth: “Without a new forecasting system, without paying for speed, and without replacing a single vendor.”