Theory of Constraints Handbook - James Cox Iii [196]
Mr. Schragenheim holds an MBA from Tel Aviv University, Israel, and a BSc in Mathematics and Physics from Hebrew University in Jerusalem. In-between his formal studies, he was a TV director for almost 10 years. He is a citizen of Israel. The author’s personal email is elyakim@netvision.net.il. Readers should feel free to write to Eli Schragenheim to discuss matters related to the chapters on MTO and MTA.
CHAPTER 11
Supply Chain Management1
Amir Schragenheim
Introduction: The Current Practice of Managing Supply Chains
It is Wednesday afternoon. I am entering the grocery store and want to purchase some green peppers. However, they don’t have any in stock. I can’t find any good looking tomatoes either. I’m continuing to the Office Depot store. I heard great reviews about a new mouse that Microsoft issued and I would like to get one. However, I come to an empty shelf with only the item description stating “out of stock.”
How many times have you gone to a shoe store to purchase a pair of wonderful shoes you wanted but they didn’t have any in your size?
Why don’t stores keep the right stocks to fulfill their demand? They seem to have a lot of stock. Why can’t they do this simple task right?
Supply chains in our modern age operate in a way that seems to make a lot of sense. Manufacturers have robotic machinery to automate processes; many manufacturers have already installed new state-of-the-art Enterprise Resources Planning (ERP) systems to help them manage their shop floors.
Distributors and manufacturers have very sophisticated forecasting software to predict exactly how many items will be sold of each product and even each stock keeping unit (SKU).2 Therefore, they should know how many units they would like to send the retail stores (consumption points) and when.3
How is it that organizations still experience problems in managing the supply chains? Is technology not enough?
Problems with the Current System
Typical problems4 of supply chains are low inventory turns, high inventory investment, stockouts causing lost sales at some locations and at the same time excess inventories of the same items at other locations, high inventory obsolescence, lack of responsiveness to customer needs, etc. Let us examine some potential causes of these problems.
The Natural Tendency for Push Behavior
The vast majority of supply chains today are push systems. A push system in the APICS Dictionary (Blackstone, 2008, 112) is defined as “. . . 3) In distribution, a system for replenishing field warehouse inventories where replenishment decision making is centralized, decisions are usually made at the manufacturing site or central supply facility.” (© APICS 2008, used by permission, all rights reserved.). Given this definition, the centralized position in the supply chain is the manufacturer that supplies his regional warehouse or consumers directly or a distributor that purchases items from several manufacturers and distributes them to his regional warehouses or directly to the customer.
What is the manufacturer/distributor5 (M/D) point of view when he is deciding on how much stock to keep at each location? He has two parameters in mind:
1. How much to keep upstream (closer to the manufacturer) in the supply chain.
2. How much to keep downstream (closer to the consumer) in the supply chain.
The natural tendency is to keep the stock as close to the consumers as possible. If a product is not at the consumption point, then there is a (much) smaller chance the item will be sold. Immediate consumption is the name of the game. Therefore, it is only logical that the M/D should keep most of the stock as close to the consumer as possible—as far downstream as he can manage—usually at the retail level. Figure 11-1 shows how the inventories are distributed across a typical traditional supply chain. Most of the stock is located at the end of the chain (the shops) and little at the hub (the plant/central warehouse [PWH/CWH]).
The