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items, the stockouts, are primarily the cheetahs! Hindsight being 20-20, if the retailer had known these items were cheetahs then he would have stocked a lot more. Therefore, lost sales he experiences is far more than the 10 to 15 percent that he might actually admit to! This is true especially in the fashion business. The retailers buy goods once at the beginning of the season for the whole season. Therefore, the fastest selling items (the cheetahs), which were impossible to predict a priori, once stocked out will be missing for the remainder of the season. For example, an item that sells so fast that all the inventory is consumed in two weeks in an eight-week season has lost sales of three times that which was initially purchased.

The elephant items represent the other side of the coin. These items are not sold as envisioned when the retailer bought them, otherwise he would have avoided them. The phenomenon that happens here is absurd—the retailer invests tremendous efforts to sell these elephant items and blocks his best display space with these items at the expense of the other items in the shop. This behavior, while expected from the psychological side, is counterintuitive in the business sense. Huge efforts that will be invested by the shopkeeper to sell the elephant items could have yielded much higher revenues from the cheetah items.

This phenomenon sometimes dwarfs the effect directed toward managing the shortages in the cheetah items!

Some industries have gone so far as adopting phrasings to hide the fact they are operating in a counterintuitive way in their desperation to solve these problems. They glorify the stockouts of cheetah items (according to TOC thinking, it is called lost sales) by calling them “sold out”! They then simply ignore the fact that the elephant items are bad for business by marking them “on sale” and investing huge efforts in selling them.

In a supply chain that is based on pull distribution, these negative phenomena are cut significantly. Recall that TOC BM is based on reacting to the actual market demand and adjusting the buffer sizes accordingly. If the market demand picks up (cheetah items), the stock buffer size will be increased, creating a mechanism that allows stockouts only for very limited time periods. That means lost sales due to stockouts of cheetah items are minimal. What of elephants? In the TOC distribution/replenishment solution, lower inventories of all items are kept, and the quantities are further decreased when consumption is low based on buffer penetration and dynamic buffering. Elephant items are much less of a problem as their quantities are initially low and are reduced further over time. Therefore, using pull distribution and DBM is very effective in eliminating lost sales and overstocking.

Some of the Finer Points in Managing the TOC Distribution/Replenishment Solution

This section details some of the finer points in the implementation. Usually, those finer points come at a later stage in the implementation, after replenishing frequently and activating the DBM mechanism, but nonetheless they should be mapped at the beginning of the implementation in order to understand better and construct the implementation correctly.

Managing Product Portfolios

To differentiate between cheetah items, regular running items, and elephant items, a simple criterion exists—the inventory turns.23 Our interest is the amount of sales of a specific item at a specific location (an SKU) relative to the inventory level of that SKU.

However, it is not enough to know the quantity in which items are sold, it is important to know their financial value as well. Just knowing from the items which are the cheetah items and which are the elephant items will not help much in driving any operational decision to improve profitability. It is important to know the magnitude in financial terms.

The goal of setting such criteria is obviously relevant when the shop owner needs to choose which items to stock. However, where a large number of items are available and the ability of each