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SDCs present a problem in changing the buffer sizes. What would happen if DBM will continue to be used in an SDC? A possible problem is demonstrated in Fig. 11-9.

The dashed line in Fig. 11-9 (Inventory) represents the actual inventory at the site. The inventory is more or less stable until the season starts. After the season starts, since there is a huge surge in demand (Sharp Demand Increase in the figure), the on-hand inventory runs out completely. The DBM mechanism almost immediately suggests adjusting the buffer by 33 percent (from 9 to 13). The stock buffer inventory stays on zero for some time (any small replenishment orders that are already in processing are consumed immediately because the demand is so high), which triggers the stock buffer level to be increased by 33 percent (DBM first buffer increase in the figure). During this period, sales are potentially lost because demand is higher than supply. When the new replenishment quantity arrives, it is still not enough to support the new demand because the demand picked up by much more than 33 percent. That causes the same phenomenon to occur—the inventory runs to zero until the new replenishment quantity arrives at the site, representing another 33 percent increase—DBM second buffer increase (from 13 to 17 in the figure). By the time that quantity arrives, the demand has already gone down and the site is left with too much inventory to support the demand. The DBM mechanism identifies that condition but by that time, it can only reduce the buffer by 33 percent, leaving it much higher than it should be in order to properly support the demand. It will eventually reach the steady-state level again, but for some time you first experience stockouts followed by carrying excess inventories. Of course, this is an extreme case, but obviously must be dealt with.

FIGURE 11-9 The problem of using DBM with an SDC. (© 2007 Inherent Simplicity. All rights reserved.)

It is apparent that sometimes crude forecasting must be used in order to avoid those negative effects.30

Identifying When an SDC Is Meaningful

A simple rule can be used to determine whether an SKU is exposed to certain seasonality effects. Look back on last year’s consumption (and the year before, if possible). If one month’s sales are more than twice the monthly average of the total sales (greater than approximately 15 percent of the whole year, say the Christmas season, for example), then this SKU should be looked at carefully to see whether the SKU is an SDC item. While DBM reacts to reality quickly, using seasonality forecasting does not (the shop must adjust orders manually). Therefore, it is important to define an SKU as seasonal only if it creates a huge difference with which DBM cannot cope. Most changes, especially when the replenishment time is relatively short, can be easily dealt with by DBM. If the order frequency is over a day or two and the spike in demand is high and short, you should adjust the orders manually. If ordering daily with a short replenishment time, a change as high as a 50 percent increase in consumption in the course of one single replenishment time is something with which DBM can usually cope.

Handling of an SDC

For known SDCs, you need to forewarn the upstream links in enough lead time to respond. If the spike in demand timing is known (e.g., a home football game) and big (much larger than average demand), then you should give the upstream links notification to be able to respond and plan how the SDC should be handled. When an SDC is identified, it should be treated in the following manner,31 depending on the direction of the SDC.

For a known large SDC that marks an increase in demand (also defined as Sudden Demand Increase):

1. Stock buildup.

2. Disable the DBM (cooling period).

3. Back to normal (or sometimes even below normal).

For a known large SDC that marks a decrease in demand (also defined as Sudden Demand Decrease):

1. Stock builddown.