Theory of Constraints Handbook - James Cox Iii [180]
Determining the Appropriate Inventory
The idea of replenishing exactly what is sold, or more accurately what is consumed,4 has an interesting ramification: the inventory in the shop remains fixed. However, it is fixed through the whole shop floor, both at the finished-goods and work-in-process on the shop floor itself. Therefore, the set of parts and assemblies needed to complete the end product committed for availability may exist in various levels of completion on the shop floor. When fully fabricated, this inventory would equal the quantity needed for committed availability.
Of course, here and there the total inventory might be less than the regular fixed amount because Production is slow to release the next work orders, but the concept means trying to keep the total stock fixed.
There is a lot of sense in determining a fixed quantity per item to protect availability. Ideally, it’d be best to keep fixed stock in finished goods. However, this is quite impossible because once there is demand the stock goes down. Then what do you do? The only way to react to actual demand is to initiate replenishment. Thus, defining the “shipping buffer,”5 the protection mechanism that protects the availability, as the total amount of finished goods plus the work-in-progress (WIP) is the simple and straightforward way to institute the appropriate protection mechanism.
Let’s call the buffer, the fixed stock in the system, the target level for this item. How should the target level be determined? From the time one piece is sold until the time the replenishment piece arrives at the finished-goods warehouse, availability has to be maintained. Let’s describe the average time it takes to replenish a piece as the replenishment time6. Most certainly, the target level should include the average demand within the replenishment time, but this is definitely not enough, as there is a need to address what might be sold and also to address any case where the replenishment will take more than the average replenishment time.
There are two practical ways to handle the determination of the target levels. One way is to take the above average demand within replenishment time, which is information that is usually easy to get, and multiply it by a “paranoia factor” to include peaks of sales and certain blockages in production. In the area of the production floor, a minimum “paranoia factor” is an additional 50 percent (factor of 1.5 of the average). Using this number is recommended in situations where no sequence-dependent setups exist, thus managing the priorities on the floor (still to be discussed in this chapter) toward rapid work flow. In other cases where the demand fluctuations are especially high and blockages in the flow are frequent, a factor of 2 should be used.
Another approach looks at the recent 6 to 12 months of history for the actual maximum sales that have occurred within that window of time defined as the reliable replenishment time. The reliable replenishment time means that when you really need it you can safely get it within that time.7
Two important points to notice at all times:
1. If currently there is no stock, or very little, in finished goods (do not count stock that is already assigned to clients), then first build the finished-goods stock and only later move to the TOC MTA solution. More on that point later, but please take note!
2. The determination of target (maximum) level based on the appropriate criteria as discussed above is only to set the initial inventory levels. As we’ll see, future changes to the target levels (increase or decrease) are done based on a special algorithm that monitors the actual behavior of the finished-goods stock.
Buffer Management in MTA
Once the target level is operational, daily replenishment orders are initiated based on the previous day’s consumption. Every production order for replenishment is released