Theory of Constraints Handbook - James Cox Iii [209]
Figure 11-8a lists 20 different items, each with its own selling price, TVC, volume, and the buffer size that had to be maintained in order to support the consumption. Assuming the buffer size was managed properly and replenishment was done properly, the calculation of the Inventory Turns and the ROI of each item appears in Fig. 11-8b. The elephants and cheetahs in the IT classification and the stars and black holes in the ROI classifications are marked. Notice that while Item02 is marked as positive in both classifications, none of the other items matches the same classification level in both cases. Especially note Item20 that achieves both a cheetah and a black hole classification, a contradiction that shows both classifications are different—ROI being the more logical one to use.
FIGURE 11-8 (a) The data for the calculation of item inventory turns, ROI, and their item classifications.
FIGURE 11-8 (b) The calculation of item inventory turns, ROI, and their inventory and ROI item classifications.
Rules for Setting up Initial Buffer Sizes
The first step in moving from push distribution to pull distribution is setting up the PWH and starting to build inventories to fill the initial stock buffers.
The decision of what size the initial stock buffer should be might seem to be a very complex decision as the amount of uncertainty is huge. Fear of making an error or the wrong decision and jeopardizing the whole initiative is natural.
The answer of how big the buffer size should be is quite simple. There are not enough words in the dictionary to emphasize the difference here between being precisely wrong and approximately right. It is not exceptional to find cases in which determining the initial buffer targets took more than three months! Starting with any initial guess and adjusting the buffer size according to DBM would have reached good enough buffer sizes much faster. Based on the parameters (demand rate and supply responsiveness), a generous stock buffer size can be determined (which is generally much lower than what is stocked now in the chain). Since the DBM mechanism will adjust the buffer sizes according to real consumption, the initial estimates are not that critical.
It is advisable to start with an initial guesstimate: taking the replenishment time from the source to the destination and multiplying it by the average daily consumption and by a factor (to cover statistical fluctuations). For the PWH/CWH, a fluctuation factor26 of 1.5 is appropriate. For the selling points, a factor of 2 is appropriate, as the fluctuations are larger there. The replenishment time to use should be:
For a production environment (PWH) taking the current quoted production lead time for this item (after implementing TOC in the manufacturing environment, the lead time will usually be cut in half). Use this lead time and remember that DBM will automatically suggest lowering or raising the stock buffer level over time.
For a distribution environment (CWH, regional warehouse, and consumption points), transportation time plus something to account for a low weekly frequency of delivery if needed.
One must also adjust for the frequency of delivery. As the frequency increases, the buffer size is smaller; as the frequency decreases, the buffer size is larger. For example, it is obvious the buffer would be much smaller if the SKU was delivered daily versus if it was delivered every week.