Theory of Constraints Handbook - James Cox Iii [181]
The idea is that the priority of the orders depends on what lies downstream of the production order, in other words between the order and finished goods. The amount of stock not dedicated to any client, and therefore available to fill new customer orders relative to the buffer size (the target level), is the real indication to how urgent the production order is. We do not really expect to have 100 percent of the target level completed and in the finished-goods warehouse. This would be way too much as we expect the replenishment to arrive at the warehouse much faster than the time the whole target level is going to be consumed.
Let’s look at the situation shown in Table 10-1. It shows the full picture of a target level inventory buffer for a product P1. Suppose that a production order for 200 units for product P1 lies somewhere on the shop floor. Downstream from that order is the finished-goods stock, which contains 100 units. Suppose that the target level, the amount of inventory we believe would provide excellent availability, is 500 units. We know that the whole target level should be in the production system somewhere, either in finished goods, or at some level of completion within the shop floor. This means that right now only 20 percent of the target level actually resides at the finished-goods inventory. It looks like replenishing the finished-goods stock is urgent. Note also the fact that the size of Order 1 of 200 units is not required for the assessment of how urgent the order is. The question of urgency relates to how much is in finished stock downstream from Order 1. Like BM in MTO, we like to denote the priority of any order by a color code: green, yellow, or red. Color code definitions are defined more fully next in this section. They are shown in Table 10-1 to complete the picture in our example showing the relative priority of the orders. Order 1 is urgent and is in a red buffer status. Order 2 is upstream from Order 1. It has 300 units downstream from it, or 60 percent of the target inventory. It is in a yellow buffer status. Order 3 for another 100 units has 80 percent downstream in front of it, 80 percent of the target, and a buffer status of green.
TABLE 10-1 Availability Targets and Priority Status of Orders for a Buffer Target of 500
Defining Buffer Status
We define the state of the finished-goods buffer when containing two-thirds or more of the target level as green. In other words, one-third or less of the buffer is not in the finished-goods inventory, but somewhere on the way.
In a similar fashion, when the finished-goods inventory contains between one-third and two-thirds of the target level, as shown in Fig. 10-1, we call that state yellow.
When the on-hand stock, the inventory at the finished-goods warehouse, is less than one-third, meaning more than two-thirds are not at the warehouse, then the state is red.
FIGURE 10-1 The structure of the stock buffer.
At any given point in time, the stock buffer is divided into the part that exists as finished goods on-hand and available for immediate sale, and the stock that complements the previous part to the full target level. Assuming we keep the target level intact, then the latter part is in the form of all the product components required for the finished goods to be equal to the target level. The part of the buffer that is not in the finished goods is called “penetration into the buffer” because that stock has not yet completed manufacturing and therefore is not currently available for immediate shipment. The buffer status is defined as the percentage of the penetration into the buffer. Table 10-1 shows Order 1 with only 20 percent of the target inventory ahead of it in a status where 80 percent of the target is still on the shop floor. Therefore, its buffer penetration is 80 percent, which is greater than the 67 percent limit putting it in the red zone. When the