Theory of Constraints Handbook - James Cox Iii [202]
TOC takes a very different perspective, that of Throughput World thinking (a focus on making money now and in the future), in determining the direction and frequency of replenishment. It focuses on the additional T and return on inventory investment. There is a tradeoff between the additional cost one might invest in raising the frequency of shipments and the cost of having lower availability—by making the frequency of delivery higher, a better availability is created whereas the cost of shipments increases. By making the frequency lower, one will have to pay with either lower availability or with much higher inventory levels kept at the consumption points in order to cover for variations in demand. Note, in many cases the frequent transportation will not cost more than the current large-batch transportation. While transportation costs may go up, inventory investment decreases significantly. This frees up cash that can be used to purchase product variety from the same supplier. For example, instead of having large quantities of four products from one supplier, one can invest in having smaller quantities of 10 products from the same vendor. These different products each represent opportunities for sales. In the traditional approach, the shop has four opportunities to sell to a customer; in the TOC approach, the shop has 10 opportunities to sell to the same customer. In most cases, the additional revenue produced will dwarf the extra cost. Using Throughput Accounting (TA) (classifying accounting numbers into T, Inventory [I], and OEs) to get estimates of the impact of increasing replenishment frequency using mixed orders (replenishing all stock buffers with each order) is an easy calculation and a profitable exercise.
For example, a manufacturer owns a fleet of cars to distribute its goods. He currently makes weekly shipments to the end points. In this example, moving to a frequency of once per day instead of once per week will generate the following:
Increase in shipment costs—since he owns the cars, only the TVCs are added, meaning the cost of fuel and maybe hiring more drivers to fill the shifts.
Decrease in inventory costs—instead of having a weeks’ worth of inventory covering for extreme cases, he will move to keeping a daily amount of inventory. Inventory costs are effectively down by 80 percent, while the chance of running out of stock is decreased.
Manage the Flow of Inventories Using Buffers and Buffer Penetration
The TOC logic is to define the required safety and constantly monitor how the safety is being used. This safety is called a buffer. In a distribution environment, the quantity of an SKU we would like to keep at the stock locations (including the PWH/CWH and RWHs) is defined as stock buffer size. The buffer size or limit for this SKU depends on the three questions of what, where, and when to ensure high availability to support T and low inventory investment with low associated OE. For example, if the stock buffer size is 100 units for a given SKU and 40 units are currently on hand, then we expect that 60 units are on order or need to be placed on order to the supplying location. If those 60 units are not on order or on the way, a replenishment order of 60 units should be issued immediately. Note that each SKU represents an item at a location; therefore, each SKU stock buffer size may be and probably is different.
Buffer penetration is defined as the number of missing units