It's Not Luck - Eliyahu M. Goldratt [17]
“I see,” she says. “So how did you determine how much inventory you need to hold in each regional warehouse?”
“Ah-ha. That was the sixty-four-thousand-dollar question,” Bob beams. “Actually, it is quite simple. I just had to extrapolate from what we learned about buffering a physical constraint. Stacey, you’re probably as paranoid as I am about building inventory buffers before a bottleneck.”
“Yes, of course,” Stacey agrees.
“How do you decide on the size of a bottleneck’s buffer?”
“We figured that out together already in the Bearington plant,” she smiles. “The size of the buffer is determined by two factors: the expected consumption from it, and the expected replenishment time to it.”
“You got it,” Bob says, “and that is exactly what I’ve done with my distribution system. I treat the regional warehouses as buffers to the real physical constraint—the shops, the consumers. The size of each regional stock is determined, as you said, according to the consumption from it (by the shops it serves), and the replenishment time to it—which in this case is roughly one and a half times the larger of the shipping time from the plant, or the time interval between the shipments. You see, I use in distribution the rules we developed in production. Of course, with appropriate adjustments.”
“Carry on,” she says.
“Since I ship every three days, and for most regions the transportation time is about four days, I have to hold enough inventory in a regional warehouse to cover the next week’s actual sales. Bearing in mind that I really don’t know what exactly will be sold in the next four days, that the shops’ consumption is fluctuating all over the map, I have to be wary. Remember, the damage of not having the stock is bigger than the damage of holding more inventory. So, we decided to hold in each regional warehouse the equivalent of twenty days of average sales for the region.”
“I understand that you have to be a little paranoid, but it looks to me that inflating one week to three is not paranoia, it’s bordering on hysteria,” I say.
“You know me,” Bob laughs. “Nobody yet accused me of being hysterical.”
“So why so much? Why twenty days?”
“It’s because of the way the shops are ordering, in big bulk,” he answers. “I think that they got used to doing it because, in the past, we and our competitors were extremely unreliable. To guarantee that they don’t lose too many sales due to shortages, they don’t dare hold only what they need for the very near future. Some of them exaggerate to the extent that they order for the next six months. This, of course, causes spikes in the demand from our regional warehouses. Thank God that in each region there are so many shops that the weekly consumption is not totally erratic, otherwise even twenty days wouldn’t be sufficient.”
“If the shops would order according to what they actually sold, if they would just replenish,” Stacey thoughtfully says, “then your life would be much easier. Did you do anything to convince them to change?”
“Yes, of course,” Bob replies. “Our distribution managers sent them a letter, telling them we are willing to replenish to them even on a daily basis, but most are not taking advantage of this service. I guess that every change is slow, especially when we’re trying to change purchasing habits that have been in place for decades.”
“So how do you know if twenty days will be sufficient?” Stacey asks.
“This number is based not on experience, but on calculation,” Bob admits. “According to the current patterns of orders from the shops, twenty days will be sufficient to guarantee over ninety percent immediate response. Right now we are in transition. We already replenish the regional stock twice a week, ·but we haven’t yet totally drained the mountains of inventory that we still carry there. As a result, the current performance is too good; we can fulfill immediately over ninety-nine percent of the orders.
“There is no need to give such exceptional response. If in ninety percent