Theory of Constraints Handbook - James Cox Iii [373]
FIGURE 18-7 S&T for TOC Distribution Solution. (Used by permission of E. M. Goldratt 2009. Distribution S&T © E. M. Goldratt.)
As for transportation costs, in the real-life cases where this logistics solution was implemented, the configuration of each of the shipments was different, but the frequency and cost of shipping remained about the same. Instead of shipping 50 units (a 3-month supply) of 10 items, we are shipping 10 units (a 3-week supply) of 50 items. Of course, shipping more frequently in some industries may well be worth an additional cost (if there is any) with a disproportionate increase in sales and decrease in obsolescence.
For distribution chains that have changed logistics according to these principles, the statistics are astounding. Overall OEs (considering the combination of transportation costs, inter-warehouse transfers, inventory carrying costs, returns, and obsolescence costs) decrease dramatically while Throughput increases significantly.
Successful companies don’t stop at the exploit step. By focusing attention on Step 3, subordinate, you substantially reduce any risk of failure.
Subordinate means that everyone in every part of the distribution supply chain, including the manufacturers, adopts the attitude that “As long as the end consumer has not bought, we have not sold!” Existing measurements must change to encourage pull rather than push. This is especially important for the manufacturer, who will now be carrying a significant portion of the total finished goods for the entire supply chain in the plant warehouse. See the S&T for consumer goods for a full insight into this approach and for the assumptions made at all levels of the supply chain. Figure 18-7 provides an overview of the structure.
In the subordinate step, the company puts the pull system software and procedures in place. The minimum inventory necessary to cover fluctuations in consumer demand and transportation time during a short time period are stocked at the retail level (or level closest to the end consumer). The distributor carries the minimum inventory necessary to cover fluctuations in demand from their customers plus the transportation time from the manufacturer to replenish the inventory. The manufacturer carries a larger inventory to cover fluctuations in distributor demand plus the cycle time to manufacture sufficient quantity to replenish their plant finished goods inventory. Of course, you must factor these numbers based on the reliability of the transportation and the manufacturer into these calculations.
Some of the most successful companies in the world are using such systems today—from computer manufacturing to super retail stores to luggage companies. Just look at the inventory turns of highly profitable manufacturers and distributors, and the numbers speak for themselves. They have implemented a true pull system.
What about Step 4, elevate? Distributors might need to elevate, for example, if they want to open up new geographic areas. However, with the cash freed up from the first three focusing steps, it’s much easier to add new distribution locations. In addition, the cost of setting up each new distribution location is much smaller, due to the decreased inventory.
Six Ways That the Holistic Distribution System Increases Throughput
1. Having sufficient stock of each product at the right location in time to match demand increases the service level (the percentage of time the buyer finds the item in stock and therefore is able to complete a purchase).
2. With less inventory, and therefore less shelf space required per item, the distributor and retailer are able to stock a greater variety of items, thus increasing Throughput from the same physical space.
3. With less inventory per item, sales to get rid of excess inventory are required much less frequently. This means that both the margins and the sales revenue are increased. It also implies that sales of older products don’t spoil the market for new products.
4. With less inventory per item, there is less