Theory of Constraints Handbook - James Cox Iii [200]
2. Supply responsiveness10—how quickly the consumed units can be replenished. The main factor here is the TOC replenishment (lead) time (RLT,), which is defined in the TOCICO Dictionary (Sullivan et al., 2007, 41) as “(t)he time it takes from when a product is sold until a replacement is available at the point of sale/use.” (© TOCICO 2007, used by permission, all rights reserved.).
A significant difference exists in the definitions of RLT in TOC and traditional push systems, and this difference and its impact should be noted before proceeding. In the APICS Dictionary (Blackstone, 2008, 117), the traditional definition of replenishment lead time (RLT) is “(t) he total period of time that elapses from the moment it is determined that a product should be reordered until the product is back on the shelf available for use.” © APICS 2008, used by permission, all rights reserved. TOC Defines this period to start from the moment the unit is consumed and not from the moment it is determined to be reordered. Looking closely at these two definitions, you notice that TOC replenishes when an item is sold or consumed versus traditional push replenishes when the quantity remaining in inventory is reduced to the reorder point (either the reorder point in the economic order quantity model or the minimum level in the min-max inventory system). This difference is significant!11
Similar to the traditional RLT, the TOC RLT is comprised of three components:
1. Order lead time—the time it takes from the moment a unit is consumed until an order is issued to replenish it.
2. Production lead time—the time it takes the manufacturer/supplier from the moment he issues the order until he finishes producing it and puts it in inventory or ships it.
3. Transportation lead time—the time it takes to actually ship the finished product from the supplying point to the stocking location.
For example, take a regular person in his private life managing his refrigerator content. Once a week (on Monday morning), he calls the grocery store to send him two bottles of milk and some vegetables. The grocery store takes two hours to prepare the order and then another hour to send it. The order lead time in this example is one week (a whole week can pass before consumption and replenishment). The production lead time is two hours, and the transportation lead time is one hour.
Figure 11-4 depicts the traditional saw tooth diagram. The APICS Dictionary (Blackstone, 2008, 122) defines this as “(a) quantity-versus-time graphic representation of the order point/order quantity inventory system showing inventory being received and then used up and reordered.” (© APICS 2008, used by permission, all rights reserved.) This diagram represents the reorder point/economic order quantity ROP/EOQ model and the similar min-max inventory model;12 these models are the standard inventory models taught in many schools for managing stock levels. Figure 11-4 also shows the replenishment lead time components (note that in the case of a distributor the production lead time is zero and therefore the PLT in the figure contains only the transportation lead time).
If the RLT can be reduced, then numerous desirable effects materialize:
The amount of stock to cover demand during lead time can also be reduced.
The amount of safety stock (to cover for uncertainty) associated with this shorter lead time is reduced.
The forecast for new products is for a shorter time interval; hence, it is more accurate.13
The responsiveness to actual demand is increased.
FIGURE 11-4 A typical sawtooth diagram of ROP/EOQ or min-max at the retailer or central warehouse.
These benefits (or desirable effects) make it worthwhile for you to study RLT. Try to apply these general guidelines for each component of lead time in your own supply chain.
Order lead time—if possible, cut the order lead time to zero. For example, if you replenish each consumption point daily based on the previous day’s consumption, then the maximum buffer size at the CWH for each SKU