Theory of Constraints Handbook - James Cox Iii [371]
There is another devastating effect to a supply chain that operates this way. By pushing most of their inventory to the retailers, the manufacturers and distributors have distanced themselves from changing trends in their markets. In many cases, with several months of inventory tied up at the retail and wholesale level, it takes manufacturers and distributors several months to see consumer demand changes reflected in orders to them. The lower the number of turns at each level in the supply chain, the longer it takes for manufacturers to understand and react to trends.
There is one other very negative effect. At the same time that excess inventory abounds in the supply chain, customers come to buy a product and often don’t find it. Yet many times, the very product that is short in one store is sitting in abundance on a shelf somewhere else in the supply chain! This happens because of the practice of pushing large quantities of each product toward the retailers in a manner that does not match end consumer demand.
In this world of local optima, manufacturers keep on producing and shipping goods to distributors, sometimes “threatening” the distributor with higher prices or loss of exclusivity if the distributor will not accept the goods. Distributors do the same with their retailers, until the supply chain is completely clogged with goods that consumers are no longer buying. By this time, significant damage has been done. There is too much inventory in the system, and the part of the supply chain that has the most inventory suffers the greatest consequences. Retailers go bankrupt. Distributors lose money. Manufacturers—well, just look at what has happened in the great recession of 2008–2009. The auto industry is just one example of a whole supply chain exploding with too much inventory of what consumers don’t want.
Distribution S&T
As discussed in the previous example of the 5FS, the biggest leverage point is typically “the customers who come to buy the product or service.” There are not enough clients who buy.
We see distribution channels going adrift in Step 2, Exploit. Before spending money to attract more clients, don’t waste the ones who already come to buy. It’s a complete waste when clients don’t buy because they cannot find a product in a given location, but the same product is on the shelf in another location. In order to avoid wasting a customer, we must dramatically increase the chance of matching the right inventory in the right place, at the right time to the end consumer demand. To achieve this, we must answer the following questions:
1. Where is the ideal place to have most of the inventory?
2. What are the correct logistics to replenish the inventory between manufacturers and distributors, and between distributors and retailers?
We will begin with the first question—where the inventory should be located. Consumer demand varies widely from one geographic location to another. In any one retail location, it shifts dramatically from day to day. There are time lags between changes in end consumer desires and the reactions of the supply chain. All of these factors make predicting demand for any product at the retail level a phenomenal challenge.
Manufacturers often try to react to the challenge by pouring millions of dollars into more sophisticated forecasting systems, only to find little, if anything, improved. After all, a forecasting system does not make the end consumer react more rationally or predictably. To exploit the constraint—the customer who wants to buy—we must move away from sophistication into a much simpler solution.
There are two steps necessary to solve service level, inventory, and obsolescence night mares permanently in a distribution environment:
1. Pool the inventory where there is the greatest predictability.
2. Implement a pull system to replenish individual items frequently based on what was sold during a short interval.
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