supply chain logistic review by lisa ferguson

TOC Workshop AgendaTOC Workshop AgendaTOC Workshop AgendaTime Topic

15h30 Introduction and Session Review

15h35 Operations the TOC Way

Using TOC to analyze Operations

16h05 Distribution the TOC Way

Using TOC to analyze Distribution

16h40 Insights and Questions

Copyright © TOCICO, 2012. All rights reserved

Supply Chain Logistics the TOC Way

A number of the slides in this presentation were used with permission:

Copyright © Goldratt Schools, 2005 slides were created by Alan Barnard and Lisa A. Ferguson

Emrys slides were created by Yohyon van Zantwijk

Vector Strategies slides were created by Danny Walsh

Copyright © Dr. Lisa A. Ferguson, 2005


Operations the TOC WayOperations the TOC Way

Objectives:

Demonstrate understanding of the TOC Operations solution. Demonstrate the ability to compare and contrast Drum-Buffer-Rope (DBR) and Buffer Management with Lean/Just-in-Time (JIT) and Material Requirements Planning.

• Can effectively compare and contrast conventional rules and practices (i.e. process layout, capacity, scheduling of work and control metrics) with those of DBR and Buffer Management, along with an explanation of the impact of each on the operational and financial measures of performance.

• Demonstrates ability to apply the solution in the four possible plant types (VATI).

• Understands when Critical Chain should be applied in a plant instead of DBR.


Learning Outcomes (cont’d)Learning Outcomes (cont’d)

• Understands how to apply DBR in make-to-stock (MTS), make-to-order (MTO) and combination environments (MTS and MTO).

• Create a schedule based on DBR principles. Establish buffer(s) required, their location(s) and size. Establish a raw material release schedule. Set and execute policies on batch sizes and on dealing with idle time on non-constraints.

• Explain the appropriate measures of performance.

• Able to effectively apply buffer management:• Know how and when to expedite, and• Understand buffer resizing, and • Explain how to use buffer management statistics to improve the

system.

• Explain how to effectively overcome the layers of resistance (to change) through application of the buy-in steps.


Operations the TOC WayOperations the TOC Way

The Goal Throughput:• On Time Delivery is constantly improving.• Operational systems are predictable and reliable.• Lead Time is significantly shorter than competitors.• Quality has increased.• Operational response times are constantly improving.

Operating Expense:• Cost of Production is constantly reducing.

Investment (formerly Inventory):

• WIP is reducing and controllable.

Current Level of Performance of most operations:We are perceived as an average supplier in our market space –nothing exceptional (no real competitive advantage).


What to ChangeWhat to ChangeOperational concerns, issues, problems• Lead Time vs. our competitors is the same at best – no advantage.• WIP is increasing.• Too many delayed orders.• We are constantly rescheduling operations.• RM is often unavailable when required.• FG yield rates are too low.

Impact on other FunctionsProcurement:• Procurement is in constant expedite mode.• Procurement costs are escalating – overnight express.

Distribution:• We are constantly suffering from high inventory levels and stockouts.• Offering a competitive lead time just causes us to expedite every product.

Marketing & Sales:• We are perceived as an unreliable supplier.• Missing due dates means customers assume we are overloaded.• Sales staff are fighting fires rather than negotiating new orders.


The Production Conflict

Manage well

Use local efficiencies as a prime measurement

Constantly fight to reduce waste

Constantly fight to increase flow

Not use local efficiencies as a prime Measurement

Conflict!

In order to:

We must:

In order to:

We must:

We must:

We must:In order to:

Because: A resource standing idle is a major waste?

Because: It is not possible to maximize throughput performance by achieving high local performance levels everywhere.

Increase Service

Reduce Cost


1090% = ?10

90%1090%

1090%

1090%

Local Efficiency versus Maximizing Flow

1475% = ?10

69%9

95%1679%

1287%


Lean & Mean Eliminate wasteBalance Capacity

Balance Flow

1475%

1069%

995%

1679%

1287%

1090%

1090%

1090%

1090%

1090%

Buffering against dependence.

Protective Capacity Protective Capacity

√ Correct

X Wrong approach

Informal pre-improvement


Lean versus Drum-Buffer-Rope (DBR)

RM foot path

RM foot path

The Boy Scout Analogy

“Expedite” Management Style – “Everyone sprint as fast as you can.”

“Control” Management Style (control everything) – Finite / Balanced Scheduling.

Compliments of Compliments of

The 5 Focusing Steps of TOCThe 5 Focusing Steps of TOC

1. Identify the system’s constraint(s).

2. Decide how to Exploit the system’s constraint(s).

3. Subordinate everything else to the above decision.

4. Elevate the system’s constraint(s).

5. If in the previous steps a constraint has been broken

GO BACK to step 1. Warning: Do not allow inertia to

cause a system’s constraint.


RM foot path

Classic TOC Scheduling: Drum-Buffer-Rope

Rope: The signal

Drum: The pace-setter

Buffer: Sum of times


“Free” Product or The Market is the Constraint

• Not all products use the constraint resource.

• Very often there is no internal constraint.

• In these cases, we use a Shipping Buffer.

RM foot pathCustomer Demand Sequence

Shipping Buffer


D’(But) We Also feel Pressure to

Not increase work-in-progress


Not increase work-in-progress

DWe Feel Pressure to

Increase work-in-process (WIP)


Increase work-in-process (WIP)

BWe must Protect

Throughput

BWe must Protect

Throughput

CWe must Control

costs

CWe must Control

costs

AManage well

AManage well

Conflict regarding WIP

Objective

Requirement / Strategy Prerequisite / Tactics

D-D’ Assumption: We can’t increase and decrease WIP at the same time.Solution: Decrease TOTAL WIP, while increasing WIP in strategic locations (buffers).

Copyright © Goldratt Schools, 2005


Reduce the batch size




Enlarge the batch size



BWe must Save set-up cost-per-unit

BWe must Save set-up cost-per-unit

CWe must Save

carrying cost-per-unit

CWe must Save

carrying cost-per-unit

ASave cost per

unit

ASave cost per

unit

Conflict regarding Batching

Objective



Assumption 1: Complete order shipment: 20 units

Assumption 2: Sufficient Setup Crew exists.

Min/Unit SU

1 hour

0

½ hour

2 hours

1 hour

8

15

12

5

10

Batch of 20 units versus Non-Batching 20 Units


Process Batch versus Transfer Batch

A: 10 minutes/unit B: 11 minutes/unit C: 10 minutes/unit

Transfer Batch of 10 units

Transfer Batch of 1 unit

Total 310 minutes

Total 130 minutes

Process Batch = Transfer Batch

Process Batch ≠ Transfer Batch










BWe must Not turn a

non-bottleneck into a bottleneck

BWe must Not turn a

non-bottleneck into a bottleneck

CWe must Reduce production lead

time

CWe must Reduce production lead

time

ARun production

effectively

ARun production

effectively

Conflict regarding Batching in T World

Objective


D-D’ Assumption: We can’t enlarge the batch size and reduce it at the same time.Solution: Enlarge the PROCESS batch size and reduce the TRANSFER batch size.


The Important Role of Protective CapacityThe Important Role of Protective Capacity

Balance Flow

To protect the chosen Constraint – the non-constraint resources need to provide protective “sprint” capacity. This immunizes the Constraint from normal upstream fluctuation.

Protective Capacity Protective Capacity

Normal daily disruption Normal daily disruption


Buffer SizingBuffer Sizing• Start with half of the current Lead Time.

• Buffer Includes: − Rope Length and the small level of Buffer inventory used for BM.

− Use the last part of the Buffer as an early warning system.

RMTouch Time

The RopeSchedule - signals raw material release“Pulls” in accordance with drum beat

90%+ of all orders should complete in this time Expedite

The Drum(Delivery schedule)

Sets the pace

1/3 1/3 1/3


What to Change ToWhat to Change ToBasic TOC Operational ConceptsBasic TOC Operational Concepts

The Impact of Dependency:

• It is NOT possible to utilize all resources to their full potential and still maintain acceptable system performance.

The Assumption an inherent Constraint:• Only very few resources, perhaps only one, can be utilized

to almost their full capability/capacity.

Local Efficiency is no indication of Global Performance:• Protective capacity at the non-constraints is essential for

the stability of the system.


σ

Step 1

Taming External Variance

Step 2

Scheduling the Internal System via DBR

Step 3

Monitor emerging overloading at non-constraints.

σ

Step 1

Taming External Variance

Taming Internal Variance

Sprint Capacity

Constraint Buffer

Sprint Capacity

Shipping Buffer

Basics of DBRBasics of DBR

FGManagement

RMManagement


VATI Plant Types

“V” Plant “A” Plant

Inputs Inputs

End Products End Products

One or few raw materials, many end products Many raw materials, one or few end products

Steel, metals Wood Products

Aircraft, ships Electronics

“Rope”Example: Repair Centers / Assembly PlantsExample: Steel Production


VATI Plant Types

“T” Plant

Inputs

End Products

Few Components

Exploding into many similar end products

Printed Circuit Assembly

Automobile Assembly

“Rope”

Primary Production for Assembly Customers


Assumption 1: Complete order shipment: 20 units

Assumption 2: Sufficient Setup Crew exists.

Min/Unit SU

1 hour

0

½ hour

2 hours

1 hour

8

15

12

5

10

Batch of 20 units versus Non-Batching 20 Units

“I” Plant

VATI Plant Types


Desired Inventory Levels

Higher Lower Maybe Eliminate

Fast SporadicFrequent In-Frequent

Fast Moving Inventory Aged Inventory

To-Stock To-Replenishment To-Order

Dead SKUs

Too-Bad

Number of SKUs

Managing InventoryManaging Inventory


• Identify the DRUM RESOURCE• Schedule the DRUM• Correctly size and install BM• Ensure protective SPRINT CAPACITY• Tie the ROPE• Choke and Release RM according

to DRUM schedule

How to Cause the ChangeHow to Cause the Change


Five Focusing Steps AppliedFive Focusing Steps Applied

1. Identify the System’s Constraint(s)

The constraint is the internal resource (person/department/machine) in operations that does not have enough capacity to meet demand or peak demand.

2. Decide How to Exploit the System’s Constraint(s)

Ensure the constraint’s time is not wasted and that its time is used to generate more “goal units”.

3. Subordinate Everything Else to the Above Decision

• The constraint only processes quality (non-defective) inputs.

• The constraint processes work that will generate throughput in the short term.

• Reduce total setup time at the constraint and non-constraints that are close to becoming a constraint.

• Ensure that it does not process work that could be completed by another resource.



3. Subordinate Everything Else to the Above Decision• Resources providing inputs to the constraint keep it adequately supplied

with work (supply and constraint buffers) ensuring that starvation does not occur

• Work processed by the constraint does not wait to be completed (assembly/integration buffers) to generate throughput

• A space buffer is placed after the constraint to allow it to produce (prevent blockage)

• Batch sizes at non-constraints to support supply of constraint, not to maximize their efficiency.

• These buffers listed, including the finished goods buffer, protect timely completion of the work.

4. Elevate the System’s Constraint(s) by further increasing the capacity of the constraint by hiring/buying more capacity.

5. If the Constraint is broken, go back to step 1.


Distribution the TOC WayDistribution the TOC Way

Objectives:

Demonstrate understanding of the TOC Distribution solution. Demonstrate the ability to compare and contrast the TOC Distribution Solution with other Supply Chain Solutions that are explained in the exam.

• Can compare and contrast conventional rules and practices for distribution/logistics with the TOC distribution solution, along with an explanation of the impact of each on the operational and financial measures of performance.

• Explain the appropriate measures of performance.• Demonstrate the understanding of and ability to apply the Distribution

solution in environments with and without aggregation of demand:• Determine the size and location of buffers, and• Explain the impact of the solution on inventories and lead time.

• Explain how to effectively overcome the layers of resistance (to change) through application of the buy-in steps.


Typical supply chain UDEsTypical supply chain UDEs

Lost or Low sales

High inventories

Unresponsiveness

What does the end user / customer often want?

The product within their tolerance time at a low price


Distribution/Supply Chain: Distribution/Supply Chain: Motivation for ChangeMotivation for Change

Why Change?Our frequent stockouts lead to lost sales and customer dissatisfaction. At the same time, we have too much inventory of other items, causing our costs to increase. Our lead times, when compared to customer tolerance time is too long, and compared to our competitors, is not an advantage. List of typical Undesirable Effects:

− Sometimes we do not have the inventory of what people want− We often try to “push” customers to buy what we have in stock− We have obsolete inventory− We sometimes lose sales− Raw materials (inputs) are not always available when needed− We have too much inventory of stock which is not in demand



Hold high inventory


Hold high inventory


Hold low inventory


Hold low inventoryB

We must Reduce costsB

We must Reduce costs

CWe must Protect Sales

CWe must Protect Sales

AHave a profitable

system

AHave a profitable

system

Distribution/Supply Chain Core Conflict

As long as …• (Not DD’) The reliable replenishment time is longer than the customer tolerance time• (Not D’B) There is no agreement on how to calculate the required time, stock buffers and capacity buffers (to

protect against peak consumption within the reliable replenishment time)• (Not DC) We are “forced” to order in large batches / long order intervals (requiring us to place orders a long

time in advance based on inaccurate forecasts)

As long as …• (Not DD’) The reliable replenishment time is longer than the customer tolerance time• (Not D’B) There is no agreement on how to calculate the required time, stock buffers and capacity buffers (to

protect against peak consumption within the reliable replenishment time)• (Not DC) We are “forced” to order in large batches / long order intervals (requiring us to place orders a long

time in advance based on inaccurate forecasts)

Objective


What Conditions “cause” the Conflict?


We typically hold more inventory. When sales are not as high as we expected, we are pressured to reduce inventory to increase inventory turns. Since the fast-moving inventory is the first to run out, we start losing sales as a result, which then triggers holding more inventory.

We typically hold more inventory. When sales are not as high as we expected, we are pressured to reduce inventory to increase inventory turns. Since the fast-moving inventory is the first to run out, we start losing sales as a result, which then triggers holding more inventory.

What is the current way of dealing with the conflict?



Realities of DistributionRealities of Distribution

What are the realities of Distribution?− It takes time to move the inventory between the links in the

supply chain

− Demand is not known with certainty

− Forecast accuracy is better at the aggregate level, not the store level

How do we manage Distribution?We push inventory out to the stores/retailers. Min-max replenishment rules are used to move the inventory – when we reach the minimum, we place an order to reach the maximum in order to fill the truck in order to reduce transportation costs.


RetailerRetailer

Typical undesirable effects (UDEs):− Low sales

− Supplies are not always received on time in full

− Excess inventories of some products

− High markdowns

− ROI is too low

− Inventory turns are low

− Cash flow problems

− High employee turnover

Typical physical constraint: shelf space



Purchase in large quantities


Purchase in large quantities


Purchase in small quantities


Purchase in small quantities

BWe must Protect our

cash flow

BWe must Protect our

cash flow

CWe must Protect our

profits

CWe must Protect our

profits

AManage Well

AManage Well

Retailer Conflict

As long as …• (Not D’B) We are not buying on consignment.• (Not DC) Costs increase due to the inability to obtain a volume discount.

As long as …• (Not D’B) We are not buying on consignment.• (Not DC) Costs increase due to the inability to obtain a volume discount.

Objective




When we have cash, we purchase in large quantities to obtain the discount on price per unit and/or shipping charges. Otherwise, we purchase in small quantities.

When we have cash, we purchase in large quantities to obtain the discount on price per unit and/or shipping charges. Otherwise, we purchase in small quantities.




Retailer’s Local PoliciesRetailer’s Local Policies

• Forced (late) returns

• Order batching

• Sales periods

• Postponing stock clean-ups

• Avoiding returns from stores to DC

Wholesaler/DistributorWholesaler/Distributor

Typical UDEs− Margin erosion

− High returns or conflicts over returns

− Inventory of some products are too high, while others are out-of-stock

− Late orders to the customers

Typical constraint: cash


D’(But) We Also feel Pressure toNot reduce inventory

levels

D’(But) We Also feel Pressure toNot reduce inventory

levels


Reduce inventory levels


Reduce inventory levelsB

We must Manage cash flow effectively

BWe must Manage cash

flow effectively

CWe must Satisfy our

customers

CWe must Satisfy our

customers

AManage Well

AManage Well

Wholesaler/Distributor Conflict

As long as …• (Not DD’) We do not distinguish between total inventory and inventory of particular items.• (Not D’B) The cash-to-cash cycle time is long.• (Not DC) The inventories reduced are for fast movers that are not currently overstocked.

As long as …• (Not DD’) We do not distinguish between total inventory and inventory of particular items.• (Not D’B) The cash-to-cash cycle time is long.• (Not DC) The inventories reduced are for fast movers that are not currently overstocked.

Objective




We reduce inventories and change the assortment to try to satisfy both needs.We reduce inventories and change the assortment to try to satisfy both needs.




Wholesaler/Distributor Local Wholesaler/Distributor Local PoliciesPolicies

• EOQ/MOQ

• Transportation batching

• Quantity discounts

• Any form of push

A distribution solutionA distribution solution

DynamicBuffer Management

EliminateOscillation

LeverageAggregation

ReduceLead Time

Integrated Measurements

3 building blocks

2 requirements

10 10 10 10 10

σ

Amplified “Batching “ effect of the Order-Entry process.

Amplification of Variance

Amplification of Variance

σ

Balance Manufacturing Capacity amplifying production delays

Man

ufac

turin

g

Dis

tribu

tion

Oscillation GraphOscillation Graph

AggregationAggregation

1

4

12

144

TOCICO 2005 Conference


Lead Time ReductionLead Time ReductionIncreasing degrees of freedom

Increasing Lead Time

Varia

bilit

y of

dem

and

How to cause the changeHow to cause the change

• Establish intermediate warehouse – (decouple Production from Distribution).

• Correctly size the inventory buffers. Both manufacturer and customer-site Buffer Management.

• Move to report daily consumption from the customer -replenish frequently to maintain buffer integrity.

• Monitor and regulate inventory levels and buffer sizing - in real time.

• Separate inventory into Make-to-Stock, Make-to-Replenishment, Make-to-Order only, and Dead Inventory.

• Introduce T$Day and I$Day measurements with feedback mechanism.


MeasurementsMeasurements

Throughput Dollar Days (TDD):− Summation (over all products not yet supplied) of the

throughput (of the final product) times the number of days from due date of the order to shipment.

− Target: 0 TDD− Focuses on achieving reliability and quality.

Inventory Dollar Days (IDD):− Summation (over all products in inventory) of the value of the

inventory (at its truly variable cost) times the number of days each stays in the link.

− Target: reduce IDD− Reduces inventory and speeds work flow


CustomersCustomers

DistributorsDistributors

22ndnd TierTierSuppiersSuppiers

EndEndCustomerCustomer

SuppliersSuppliers

SupplySupply ChainChain SynchonizationSynchonization

0102030405060

1 2 3 4 5 6 7 8 9 101112131415Physical InventoryGreen BufferRed BufferYellow Buffer

0102030405060


0102030405060


0102030405060


Throughput Dollar Day

Inventory Dollar Day

AssemblyManufacturing



1. Identify the System’s Constraint(s)Customers who come to buy

2. Decide How to Exploit the System’s Constraint(s)Have the right inventory in the right place at the right time

3. Subordinate Everything Else to the Above Decision• Each link in the supply chain holds inventory to cover

the maximum expected demand within the reliable replenishment time from the next link

• Hold aggregated inventory where the forecast is most reliable (plant level)



3. Subordinate Everything Else to the Above Decision• Buffer management is used to resize the buffers based

on long-term forecasts (i.e. expected increase/decrease in demand for the season or holiday) and usage (lack of or too much red zone penetration)

• Each link orders based on actual consumption together with buffer management (status of buffer)

4. Elevate the System’s Constraint(s)Elevate distribution capability to improve availability and extend the variety offered to existing clients and to new clients.

5. If the Constraint is broken, go back to step 1.


Sample case questionSample case question

ABC Furniture Company manufactures a variety of furniture (dining, living/family room and bedroom) that it sells through its own retail stores. ABC has three manufacturing plants, eight regional warehouses and 100 retail stores throughout the U.S. ABC is currently using a make-to-stock (MTS) strategy (produces for stock, not for customer order). The lead time for manufacturing is five weeks. ABC purchases raw materials from a number of suppliers. Efficiencies and balanced capacity policies are used to manage production. Their lead times, which are long, and due date performance, which is low, are similar to those of their competitors. They have lost some clients recently.



Case question (cont’d)Case question (cont’d)

Answer the following questions:1. Where is the constraint in the supply chain? Explain the

logic of why you think it is the constraint.2. Describe your solution for dealing with the constraint using

the five focusing steps (process of ongoing improvement).3. Recommend existing policies that should be changed.4. In order to improve due dates and lead time performance,

they are considering reducing product variety. Define their cloud.

5. The solution has doubled the available capacity. The company realizes that they have to sell more. If they can’t do it fast enough, they have to lay off in the near future. Create and trim the negative branch.

6. The ambitious target is to reduce the current finished goods inventory that is in the wrong places in supply chain. Raise five obstacles and overcome them.



About Lisa A. FergusonAbout Lisa A. Ferguson

• Lisa A. Ferguson, Ph.D. is an Associate Professor in the H. Wayne HuizengaSchool of Business and Entrepreneurship at Nova Southeastern University. She teaches in the doctoral and MBA program. Lisa is also a faculty member of Goldratt Schools and has worked with a number of Fortune 500 companies to improve using TOC.


supply chain logistic review by lisa ferguson

Business

toc wayusing toc

toc operations solution

toc wayobjectives

questionscopyright tocico

rights reservedlean

buffer management statistics

contrast drumbuffer

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