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By Root 2548 0

you were the logistics manager of a large shoe manufacturer, what is the ideal way to distribute the inventory of size 8 brown shoes across the supply chain? In one week, you could not say that anyone will buy even one pair of those specific shoes in any given store. However, you would have much more confidence about the national numbers. The more macro the level you are forecasting, the greater the predictability. Predictability decreases as you move from national to regional and from regional to city and city to individual location.

Based on the characteristic of predictability listed previously, the logical thing to do would be to have more of the inventory at the manufacturing plant, less at the distributors, and even less at the retail level (see Fig. 18-6). Logically, you would also replenish with much shorter lead time. In this way, there will be less chance of stockouts at any given location and trends will show up much more quickly, with less waste.

For example, assume that a retail shoe store today is currently holding 3 months of inventory of each SKU. This inventory requirement is calculated based on the total replenishment lead time. The replenishment lead time is made up of:

Transportation lead time

Production lead time—the time it takes the manufacturer to produce the product

Order lead time—the time between when the retailer sold the first item and the time they reorder

While the supplier controls transportation and production lead time, the retailer controls order lead time. As it turns out, order lead time usually provides the biggest opportunity for improvement. In the old approach, retailers reorder when they hit a minimum quantity in stock (commonly called the min in a min/max system or reorder point in a reorder point/economic order quantity system because they will order sufficient quantity to bring their stock back to a maximum level). Under the exploit step, TOC implements a pull system that has the retailer order, every period (e.g., one week), exactly what they sold in the previous period.10

FIGURE 18-6 Inventory impact of TOC Distribution Solution. (Used by permission of E. M. Goldratt 2009. Distribution S&T © E. M. Goldratt.)

In our new system, assume transportation lead time stays the same. With finished goods inventory now being held by the manufacturer at the plant warehouse, production lead time is 0—the product should be in stock in the plant warehouse. The biggest difference is usually in the order lead time. Instead of waiting 2 to 2.5 months for the stock level of each item to hit a minimum, and ordering a 2 to 3 month supply of that item, the new pull system has the retailer order only the SKUs that moved the previous week, in the exact quantities sold the previous week. The order lead time has now been reduced from months to a matter of days.

This means that the amount of inventory of each item that the retailer or distributor needs to carry to cover their replenishment lead time is much less. It also means that their chance of running out of an unexpectedly popular item for weeks at a time is almost nil. Service levels, under this new system, move much higher, while total inventory in the supply chain typically drops by two-thirds! The system reacts much more quickly to the variability and uncertainty of consumer demand. It also greatly simplifies both the distributor’s and the retailer’s lives. Instead of worrying about ordering a 3-month supply and debating how much and which products the consumers might demand over that long a time period, the order items and quantities are automatically determined based on sales.

Wearing our marketing hat, with the additional space freed up in the store by reducing the overstocks, we would have the retailer carry a greater variety of our goods. More variety means more sales (see Fig. 18-7). The left side of the S&T focuses on TOC replenishment throughout the supply chain, from manufacturing through distribution and retail. The right side of the tree focuses on Throughput per square foot or meter of shelf space (abbreviated