Theory of Constraints Handbook - James Cox Iii [199]
“(a) pull distribution method that involves setting stock buffer sizes and then monitoring and replenishing inventory within a supply chain based on the actual consumption of the end user, rather than a forecast. Each link in the supply chain holds the maximum expected demand within the average replenishment time, factored by the level of unreliability in replenishment time. Each link generally receives what was shipped or sold, though this amount is adjusted up or down when buffer management detects changes in the demand pattern.” (© TOCICO 2007, used by permission, all rights reserved.)
I will elaborate on this definition.
To respond to the three questions (what, where, when), the TOC distribution/replenishment solution is based on constant renewal of the consumed stocks from strategically placed stock buffers. The solution is comprised of six steps:
1. Aggregate stock at the highest level in the supply chain: the PWH/CWH.
2. Determine stock buffer sizes for all chain locations based on demand, supply, and replenishment lead time.
3. Increase the frequency of replenishment.
4. Manage the flow of inventories using buffers and buffer penetration.
5. Use Dynamic Buffer Management (DBM).
6. Set manufacturing priorities according to urgency in the PWH stock buffers.
Each step is discussed in the following sections.
Aggregate Stock at the Highest Level in the Supply Chain: The Plant/Central Warehouse (PWH/CWH)
The first step of the proposed TOC solution is to keep larger buffer stocks at the divergent point—where the stocks can be used to serve many different destinations—and use a pull replenishment mechanism triggered by sales at the end of the chain—the consumption point. This method guarantees we keep the lowest stock level possible to support the demand (what, when, where) of the various consumption points (the shops).
In order to have the product available at different locations, it is recommended to aggregate the inventory at the supplying source and, when necessary, build a PWH/CWH for that purpose. When the organization is a manufacturer, the entity is called plant warehouse (PWH) as this is the finished goods warehouse9 of the plant. When the organization is a distributor, the entity is called a central warehouse (CWH) and is the distribution hub.
We keep most of the stock (see Fig. 11-3) at the PWH/CWH by setting the buffer stock size high. According to the principles of statistics, this aggregation of inventory guarantees a more stable and responsive system than a system of keeping large inventories at the different consumption points (shops). In the TOC solution, the amount of stock (buffer stock size) at the consumption point is very low for each SKU. When a given consumption point sells a unit, the consumed unit will be replenished as soon as possible from the PWH/CWH.
When the transportation time from the PWH/CWH to the consumption points is relatively long, a regional warehouse (RWH) might be needed between the PWH/CWH and the consumption points to reduce lead times. This is the case in most global supply chains and large companies where customer responsiveness is crucial to sales. An RWH pulls inventory from the PWH/CWH and ships it to the consumption points it is serving. This is just an extension of the TOC solution and all other assumptions and considerations remain the same; the idea is still to pull from the PWH/CWH based only on consumption from the consumer.
FIGURE 11-3 The push versus pull distribution supply chain model.
Determine Stock Buffer Sizes for All Chain Locations Based on Demand, Supply, and Replenishment Lead Time
The stock buffer size is the maximum amount or quantity of inventory of an item held at a location in the supply chain to protect Throughput (T). The stock buffer size (limit) is dependent upon two different factors:
1. Demand rate—demand is the need for an item while the demand rate represents the amount demanded per time