TOCICO 2014 Conference

Demand Driven Performance -

Using Smart Metrics

Presented By: Debra A. Smith, CPA, EMBA, Partner

Constraints Management Group
Date: June 11, 2014 © 2014 TOCICO. All rights reserved. 1
 Our Journey of Exploration
TOCICO 2014 Conference

1995 1997 2010 2011 2013

1998 2001 -2003 2004-2009 2011 -2014

The Power of Decoupling: The Power of Vertical Integration: Analyze Deep and Broad The Prioritized Share Equation
• $35M inventory decrease • $30M inventory decrease Product & Project Structures: & Hybrid Distribution:
• Lead time 90 to 14 days • ROI from 4 to 18% • ROI from 5 to 22% • 45% decrease finished goods
• Lead time 3 weeks to 3 days • Lead time 24 to 10 weeks • 18% decrease raw and pack
• 6 X revenue .8 inventory • 99.7% service levels
2 increase
© 2014 TOCICO. All rights reserved.
Becoming Demand Driven
TOCICO 2014 Conference

Step 1 Accept The New Normal – Variability, Volatility and

Complexity are here to stay.
Step 2 Embrace Flow and its implications for ROI.
Step 3 Design an operational model for flow.
Step 4 Bring the Demand Driven model to the organization –
Implement.
Step 5 Use smart metrics to operate, sustain and drive
improvement.

3
© 2014 TOCICO. All rights reserved.
The New Normal Principles
TOCICO 2014 Conference

Principle One – Flow is the first Law:

• The current focus of people and systems on unit cost minimization has
little to no connection to driving Return on Investment (ROI).
• The way to drive ROI has everything to do with protecting, driving and
increasing the flow of relevant materials and information

Principle Two – Supply chain complexity & Volatility:

• Supply chain complexity has changed dramatically in the past three
decades .
• Today’s supply chains are complex adaptive systems, CAS.
• CAS rules and math models are different and many are the opposite of
the linear and additive assumptions embedded in today’s ERP
information, costing and reporting systems.

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© 2014 TOCICO. All rights reserved.
The Game Has Changed
TOCICO 2014 Conference

Principle 1 combined with Principle 2 have

completely changed the game for supply chains.
Protecting and maintaining flow requires:
− Understanding Complex Adaptive System - CAS rules to
manage variability and speed flow.
− New thinking and new rules to build the right tools.
− The right rules and tools are a prerequisite to Smart
Metrics.

5
© 2014 TOCICO. All rights reserved.
CAS Rules Are Very Different
TOCICO 2014 Conference

System Traits Linear Nonlinear Complex

Linear systems can be understood by  Nonlinear systems can only be 
The Method to Understand the System  studying the individual part; the  understood by mapping the 
whole is the sum of its parts dependencies and interconnections

Linear system “state” is stable and  Nonlinear system “state” is dynamic 
System Predictability predictable and no predictions remain valid “too” 
long 

The output of a linear system is  The output of nonlinear system is 
System Output Behavior proportional to its inputs governed by a few critical points – the 
“lever point phenomena” 

6
© 2014 TOCICO. All rights reserved.
CAS Are Very Different
TOCICO 2014 Conference

System Traits Linear Nonlinear Complex

Gaussian statistical models (normal  Paretian statistical models – The tails of 
Mathematical Models of the System bell shaped distribution curve) ‐ The  the distribution identify the few critical 
sum of the averages are a predictable  points that define the relevant 
model of the system and the tails of  information predict and manage 
the statistical distribution are ignored  nonlinear complex systems.  They 
as anomalies . contain the “lever point phenomena”.

A linear system can be optimized.  A nonlinear system cannot be 
System Output Maximization optimized but it can continually learn 
and improve.  It can emerge to a 
higher order.

7
© 2014 TOCICO. All rights reserved.
CAS and The Power of Pareto
TOCICO 2014 Conference

The ratio rule of Paretian distribution models explain

the large effects of the very few relevant system
factors:
• 80/20 rule applies to linear systems;
• 99.9+/.1- applies to nonlinear systems;

These few points/factors determine system

coherence and ultimately its success!

8
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© 2014 TOCICO. All rights reserved.
An Operational Model For Flow
TOCICO 2014 Conference

Position and Pull requires getting the positioning

“right”:
• Decoupling Points – to break variation accumulation.
• Control Points – to simplify managing a complex system.
• Consider how best to protect them from the effects of
variation.

9
© 2014 TOCICO. All rights reserved.
 A System Without Decoupling Points
TOCICO 2014 Conference

Coupled System Lead time = 8 weeks

Outsource plate
operation

shear
weld

Raw 
saw assembly paint configure Customer
stocks

machining

laser
purchased 
heat  component 
treat stocks

10
© 2014 TOCICO. All rights reserved.
The Bull-whip Effect & Bi-modal Inventory Swings
TOCICO 2014 Conference

Poll Question: Are you

Experiencing the Bi-modal Effect?

Oscillation
Effect

Three Effects:
1. Persistent Unacceptable
Inventory Performance
2. Service Challenges
3. High Expedite and Waste
Related Expenses
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© 2014 TOCICO. All rights reserved.
Benefits of Decoupling Lead Times
TOCICO 2014 Conference

1. The customer experiences a tremendously

shorter and reliable lead time.
2. Decoupling implications for planning:
− The planning lead time shrinks.
− The forecast error over the planning lead time also
shrinks.
Remember CAS are dynamic – the shorter the lead
time the more predictable and stable the system is:
− Predictable = planning delivers a demand driven schedule
− Stable = execution delivers more reliable performance/service
12
© 2014 TOCICO. All rights reserved.
Decoupling Point Selection Factors
TOCICO 2014 Conference

Demand Driven Material Requirements Planning

Visible and
Strategic Inventory Buffer Profiles and Dynamic Demand Driven
Collaborative
Positioning Levels Adjustments Planning
Execution

Decoupling Point Positioning Factors

The amount of time potential customers are willing to wait for the delivery of a
Customer Tolerance Time good or a service.
The lead time that will allow an increase of price or the capture of additional
Market Potential Lead Time business either through existing or new customer channels.
The potential for swings and spikes in demand that could overwhelm
Demand Variability resources (capacity, stock, cash, etc.).
The potential for and severity of disruptions in sources of supply and/or
Supply Variability specific suppliers. This can also be referred to as supply continuity
variability.
Inventory Leverage & The places in the integrated BOM structure (the Matrix BOM) or the
distribution network that leave a company with the most available options as
Flexibility well as the best lead time compression to meet the business needs.
The minimization of disruption passed to control points, pace-setters or
Critical Operation Protection drums.

The third edition of Orlicky’s Material Requirements Planning by Carol Ptak and Chad Smith, McGraw‐Hill Professional, 2011, p. 392)

13
© 2014 TOCICO. All rights reserved.
 A Decoupled System
TOCICO 2014 Conference

Lead time =
Decoupled System With 1 week Market Lead Time
4 week Lead time = 3 weeks Market lead time = 1 week

Outsource = Strategic Decoupling points
plate
operation

shear
weld

Raw 
saw assembly paint configure Customer
stocks

machining

laser
purchased 
heat  component 
treat stocks

14
© 2014 TOCICO. All rights reserved.
 DDMRP Strategically Decoupled
MRP Everything Dependent
TOCICO 2014 Conference

MRP Everything Dependent DDMRP Strategically Decoupled

You can learn more and obtain free white papers, videos, and podcasts on DDMRP at www.demanddrivenmrp.com.

15
© 2014 TOCICO. All rights reserved.
 Parts Assigned a Lead Time Buffer Profile
TOCICO 2014 Conference

Demand Driven Material Requirements Planning

Visible and
Strategic Inventory Buffer Profiles and Dynamic Demand Driven
Collaborative
Positioning Levels Adjustments Planning
Execution

The green zone sets the upper limit

Buffer zones & and the heart of the supply order
generation process. It determines
sizes are a Green average order frequency and typical
function of both order size: MOQ or an order cycle
in days
the part lead
time profile
The yellow zone is the heart of the
coverage and shock absorption:
Yellow
100% of average daily usage over
the full lead time

Red Safety The red zone is the risk mitigation

Individual Part embedded in the buffer and has two
Attributes Red Base
calculations. First is a % of the yellow
zone and establishes the base. Second
is safety based on the variability

16
© 2014 TOCICO. All rights reserved.
Buffer Zone Sizing Calculations
TOCICO 2014 Conference

Part r457 Part r672 Part r654

Minimum Order Quantity 120 ADU X 14 DAYS 10 (MOQ)
or 30 (MOQ) 360
(Average Daily Usage x order cycle
days)
18(ADU) X 2 DAYS 3 ADU X 31 DAYS
120 ADU X 14 DAYS
36 93
Average Daily Usage x Lead 1680
time
(usage over full lead time) 25% X 41 =
10 50% x 1008 = 90% x 33 = 30
504
Safety % x Red Base 18 ADU X 2 DAYS
X 90% = 120 ADU X 14 DAYS 3 ADU X 31 DAYS
Average Daily Usage x Lead time 41 X 60% = X 35 % =
x base red % 1008 33

17
© 2014 TOCICO. All rights reserved.
Demand Driven Planning
TOCICO 2014 Conference

Demand Driven Material Requirements Planning

Visible and
Strategic Inventory Buffer Profiles and Dynamic Demand Driven
Collaborative
Positioning Levels Adjustments Planning
Execution

Available Stock = on-hand + open supply – qualified demand

Part Open On- Demand Available Recommended Action

Supply hand Stock Supply Qty
r457 5453 4012 1200 8265 0 No Action
f576 3358 4054 540 6872 3128 Place New Order
h654 530 3721 213 4038 2162 Place New Order
r672 2743 1732 623 3852 0 Expedite Open
Supply (Execution)

Qualified demand = Current and past

due plus qualified near term spikes
Part lead time
18
© 2014 TOCICO. All rights reserved.
DDMRP Replenishment Basics
TOCICO 2014 Conference

DDMRP uses buffered “Decoupling Points”

to establish independent planned and
scheduled horizons.

DDMRP creates resupply signals based on the

“available stock” status of each buffer. This
provides a prioritized sequence based on
actual need.

19
© 2014 TOCICO. All rights reserved.
Demand Driven Execution
TOCICO 2014 Conference

Demand Driven Material Requirements Planning

Visible and
Strategic Inventory Buffer Profiles and Dynamic Demand Driven
Collaborative
Positioning Levels Adjustments Planning
Execution

On-the-floor priority is then determined by

the real time buffer status of the
decoupling points that the open orders
are feeding.

20
© 2014 TOCICO. All rights reserved.
Introducing Control Points
TOCICO 2014 Conference

C
• Places to transfer, impose, and amplify control
through a system.
• SOME control points are called a “Drum” in TOC or
a Pacesetter in Lean.
• Control points are the heart of execution metrics.

21
© 2014 TOCICO. All rights reserved.
Placing Control Points
TOCICO 2014 Conference

Placed between decoupling points with the objective of

better controlling the lead-time zones between those
points. A shorter and less variable lead time results in less
stock required at the decoupling point (a working capital
reduction).

C
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© 2014 TOCICO. All rights reserved.
4 Factors When Choosing Control Points
TOCICO 2014 Conference

1. Points of Scarce Capacity determine the total system output potential.

2. Exit and Entry Points are the boundaries of your effective control.
3. Common Points are points where one place controls many things.
4. Points that Have Notorious Process Instability can be planned for and
controlled better when visibility and focus is placed on the resource
and its variability.

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© 2014 TOCICO. All rights reserved.
Placing Control Points
TOCICO 2014 Conference

Control points are placed between decoupling points and a

customer when decoupling the end item is not possible
or in a mixed mode operation (MTS & MTO).

Customer

C
Customer

Make/Configure to Order
Customer
24
© 2014 TOCICO. All rights reserved.
A Mixed-Mode Example
TOCICO 2014 Conference

In this case better scheduling and execution is required to synchronize and

prioritize the make to stock and make to order business.

Better lead time and less variability within the plant will reduce the end item
buffer.

Supplier 10 5 10 5

30 10 20 Customer

Supplier 5 10 15 10

Purchased Components

Suppliers

25
© 2014 TOCICO. All rights reserved.
Placing a Control Point
TOCICO 2014 Conference

In this case we have a resource that is

both the slowest pace resource as well a
major integration point in the routings

Supplier → 10 5 10 5

C
30 10 20 → Customer

Supplier → 5 10 15 10

→
Purchased Components

Suppliers

26
© 2014 TOCICO. All rights reserved.
 A Decoupled System With Control Points
TOCICO 2014 Conference

Lead time =
4 week Lead time = 3 weeks Lead time = 1 week

Outsource plate = Strategic Decoupling points

operation
C = Control point

C
shear
C
C weld

Raw 
saw assembly paint configure C Customer
stocks
C machining

laser
purchased 
heat  component 
treat stocks

27
© 2014 TOCICO. All rights reserved.
Protecting Decoupling & Control Points
TOCICO 2014 Conference

Stock

Time
Early Green Time
Yellow Red Late

80%
20%
Capacity

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© 2014 TOCICO. All rights reserved.
Protecting With Stock Buffers
TOCICO 2014 Conference

Too Much

Green

Yellow

• Shock absorption
Red
• Lead-time compression
Stock Out
• Supply order generation

29
© 2014 TOCICO. All rights reserved.
Protecting With Time Buffers
TOCICO 2014 Conference

• Shock absorption
Scheduled Entry to Scheduled Start at • Visual Status of Flow
Buffer Control Point
▼ ▼ • Execution focus
• Smart Metric focus

Upstream
WO 1595

WO 1781
C
WO 1626
Processes

→
WO 1601

WO 3279

WO 2001

Early Green Yellow

BUFFER Red Late

Example: 9 hour buffer

30
© 2014 TOCICO. All rights reserved.
Protecting With Capacity Buffers
TOCICO 2014 Conference

Over Capacity
• Capacity buffers protect control and decoupling points
R • The ability to sprint and recover determines the sizing
Capacity Buffer

of both time and stock buffers (variation factor in the

Y red safety zone)
G
Total Capacity

The “Unit Cost Myth” misuses spare capacity =

Responsiveness
Lead times
Inventory levels
1 2 3 4 5 6 7 8 9 10 11

ROI
31
© 2014 TOCICO. All rights reserved.
 Demand Driven Design Model
TOCICO 2014 Conference

= Stock buffer = Time buffer

Lead time = 3 weeks C = Control point = Capacity buffer

Lead time = Outsource plate

4 week operation Lead time = 1 week

C
shear
C
C weld

Raw 
saw assembly paint configure C Customer
stocks
C machining

laser
purchased 
heat  component 
treat stocks

32
© 2014 TOCICO. All rights reserved.
Scheduling a Control Point
TOCICO 2014 Conference

Sales Order Demand

Capacity
The control point is finitely
scheduled with both MTS and Loading is important to see
for lead time quotation
MTO orders
1 2 3 4 5 6 7 8 9 10 11 12

Replenishment
orders

Supplier → 10 5 10 5

C
30 10 20 → Customer

Supplier → 5 10 15 10

→
Sales orders

Purchased Components

Suppliers

33
© 2014 TOCICO. All rights reserved.
Synchronizing Material Release
TOCICO 2014 Conference

Schedule material release to the control point schedule

Late release will jeopardize the control point schedule
Early release raises WIP levels unnecessarily
Work orders

Supplier → 10 5 10 5

C
30 10 20 → Customer

Supplier → 5 10 15 10 Work orders

→
Work orders
Purchased Components

Suppliers

34
© 2014 TOCICO. All rights reserved.
Control Point Schedules
TOCICO 2014 Conference

We now have five schedules – all synchronized around a resource

Control Point schedule (Drum)

Supplier →

DRUM C
30 → Customer

Supplier →

→
Purchased Components

Suppliers

35
© 2014 TOCICO. All rights reserved.
Protecting the Schedule
TOCICO 2014 Conference

We must insulate the schedules against the accumulated

variability that occurs in the sequences preceding the schedule –
delays are passed on, gains are not

How can we make sure that the schedules are maintained (not
rescheduled)?

Supplier → 10 5 10 5

C
30 10 20 → Customer

Supplier → 5 10 15 10

→
Note: the purchased part stock buffers protect Purchased Components
the material release schedules against
supplier variability

Suppliers

36
© 2014 TOCICO. All rights reserved.
Time Buffers Inserted
TOCICO 2014 Conference

Time buffers are inserted into each part’s routing and all
queue and move time removed.
We track and measure buffer penetration at each control
point buffer NOT one buffer for the whole routing.

Supplier → 10 5 10 5

C
30 10 20 → Customer

Supplier → 5 10 15 10

→
Purchased Components

Suppliers
37
© 2014 TOCICO. All rights reserved.
The 10 Zone Buffer Board –
Pareto Power
TOCICO 2014 Conference

Scheduled Entry to Scheduled Start at

Buffer Control Point
▼ ▼
Green OK

Yellow Investigate
WO 1626
Red ACT
Yet to be Received

Early Green Yellow

BUFFER Red Late

WO 1626

Received

Early Green Yellow

BUFFER Red Late

Example: 9 hour buffer

38
© 2014 TOCICO. All rights reserved.
 Stock Outsource C Control point
operation plate
Capacity Capacity
TOCICO 2014 Conference
purchased 
component 
stocks

► shear
C
weld

Market
Raw 
stocks ► saw assembly paint configure ►

Cmachining
► laser

Each of these building blocks require real

time visibility and reporting tools to
heat  monitor system flow status and variation
treat Lead time = 1 week
Lead time = 3 weeks

39
© 2014 TOCICO. All rights reserved.
CAS Coherence = System Efficiency
TOCICO 2014 Conference

Maintain flow and system coherence:

• Aligns operations tactics to market pull and that eliminates
forecast error and its bullwhip effect;
• Creates a finite, realistic and executable schedule;
• Dampens or negates variation and protects control point stability
and schedule execution;
• Provides a framework to deliver both relevant information and
materials to plan, schedule and execute a flow centric strategy;
• Eliminates the cost/flow conflict and its contribution to the
bullwhip effect.

40
© 2014 TOCICO. All rights reserved.
The Right Rules & Tools
TOCICO 2014 Conference

The Organization:
− Operating model is designed for system flow. Complex
Adaptive System - CAS rules are used to both protect and
speed flow.
− Systems thinking and the new rules were used to build tools
with visibility to the status of flow.
− Implementation is complete with real time buffer status of
flow to and through the decoupling and control points.
The Organization is ready for Step 5 and smart metrics.

41
© 2014 TOCICO. All rights reserved.
Metrics For Short Run Tactics
TOCICO 2014 Conference

Strategic or Plan Time Schedule of Execute Metrics - Metric Focus

Tactical Period Resources schedule Financial &
Nonfinancial
Strategic Annually Capacity plan Financial & Non ROI
Tactical Quarterly Capacity plan Financial & Non ROI
Tactical Monthly Capacity plan Financial & Non ROI & Flow
Tactical Weekly schedule Weekly Non-financial Flow
Tactical Daily schedule Daily Non-financial Flow
Tactical Hourly Hourly Non-financial Flow

Managers can vary “some” fixed costs inside their annual plan and a few
inside their quarter.
What overhead costs can be varied inside a month, a week, a day?

42
© 2014 TOCICO. All rights reserved.
 The Gap Formula Between Flow and
Cost Centric Strategies
TOCICO 2014 Conference

∆Visibility → ∆Variability → ∆Flow → ∆Cash Velocity → ∆ ( Investment )

Net Profit
→ ∆ROI

Core Conflict Area Plossl’s First Law of Manufacturing

• Visibility is defined as relevant information for decision making.

• Variability is defined as the summation of the differences between what we plan
to have happen and what happens.
• Flow is the rate at which a system converts material to product required by a
customer.
• Cash velocity is the rate of net cash generation; sales dollars minus truly
variable costs (also known as throughput dollars or contribution margin) minus
period operating expense.
• Net profit/investment is, of course, the equation for ROI

43
© 2014 TOCICO. All rights reserved.
A Demand Driven Design & Smart
Metrics Solve the Core Conflict Area
TOCICO 2014 Conference

∆Visibility → ∆Variability 
Core Conflict Area

Visibility to the relevant information of materials across the

supply chain ensures system coherence and speeds flow:
− Aligns priorities and schedules
− Speeds conflict resolution
− Defines when and where to act
− People will self organize to solve/act
You can’t measure what you can’t see!
44
© 2014 TOCICO. All rights reserved.
 Demand Driven Model Objectives
TOCICO 2014 Conference

Demand Driven Model Operating the Demand Driven Model

∆Visibility → ∆Variability → ∆Flow → ∆Cash Velocity → ∆ ( Investment )

Net Profit
→ ∆ROI

Core Conflict Area Plossl’s First Law of Manufacturing

Demand Driven Flow map of connections 
and interconnections

Create Short, independent planning 
horizons

Strategic control points govern and leverage 
the system output

All buffers use Paretian models to identify 
lever point phenomena events to signal 
action, priority and opportunity.

Visible buffer and control point status use a 
Paretian view to create a learning feedback 
loop to drive improvement.   45
© 2014 TOCICO. All rights reserved.
Understand the System
TOCICO 2014 Conference

Nonlinear systems can only be 
Demand Driven Flow map of connections 
understood by mapping the  and interconnections
dependencies and interconnections

46
© 2014 TOCICO. All rights reserved.
 System Predictability
TOCICO 2014 Conference

Nonlinear system “state” is dynamic and no 
predictions remain valid “too” long  Create Short, independent planning 
horizons

Lead time = 3 weeks

= Stock buffer
Lead time =
4 week Lead time = 1 week

47
© 2014 TOCICO. All rights reserved.
System Output Behavior
TOCICO 2014 Conference

The output of nonlinear system is 
governed by a few critical points – the  Strategic control points govern and 
leverage the system output
“leverage point phenomena” 

C = Control point

C
C
C
C
C

48
© 2014 TOCICO. All rights reserved.
Protect the System Output
TOCICO 2014 Conference

The output of nonlinear system is  Protect the strategic control 
governed by a few critical points – the  points protects and leverages 
“leverage point phenomena”  the system output

= Stock buffer

C = Control point

= Time buffer
C
= Capacity buffer
C
C
C
C

49
© 2014 TOCICO. All rights reserved.
Making the Model Adaptive
TOCICO 2014 Conference

Paretian statistical models – The tails of the 
distribution contain the “lever point  All buffers use Paretian models 
phenomena”.  The lost opportunity for positive  to identify lever point 
phenomena events to signal 
gains and early warning to future disasters! action, priority and opportunity.

A nonlinear system cannot be  Visible buffer and control point 
optimized but it can continually learn  status use a Paretian view to 
and improve.  It can emerge to a  create a learning feedback loop 
higher order.   to drive improvement.  

The buffer tails delineate the “Edge of Chaos”. A safe haven

where learning and innovation can occur - EXPLORATION
50
© 2014 TOCICO. All rights reserved.
 The Place of Smart Metrics
TOCICO 2014 Conference

Demand Driven Model Operating the Demand Driven Model (Tactical Time Frame)

∆Visibility → ∆Variability → ∆Flow → ∆Cash Velocity → ∆ ( Investment )

Net Profit
→ ∆ROI

Core Conflict Area Plossl’s First Law of Manufacturing

All buffers use Paretian models to identify 
lever point phenomena events to signal 
action, priority and opportunity.

Strategic control points govern and leverage 
the system output

Demand Driven Flow map of connections 
and interconnections
Smart Metrics – The bridge to
Visible buffer and control point status use a 
the status of flow and ROI
Paretian view to create a learning feedback 
loop to drive improvement.   focuses on 6 Metric Objectives
Create Short, independent planning 
horizons 51
© 2014 TOCICO. All rights reserved.
The Three Tactical Metric Objectives
TOCICO 2014 Conference

Metric Objectives The Message

System Reliability Execute to the plan/schedule/market expectation;
Operations
Day to Day

Control

System Stability Pass on as little variation as possible;

System Speed/Velocity Pass the right work on as fast as possible;

System Improvement & Waste (Opportunity Point out and prioritize lost ROI opportunities.
$)
Decisions
Strategic

Local Operating Expense Spend minimization to capture the market opportunity

Strategic Contribution Maximize throughput dollar rate and throughput volume

according to relevant factors

52
© 2014 TOCICO. All rights reserved.
 System Reliability
TOCICO 2014 Conference

Execute to the plan/schedule/market expectation

Outsource plate
operation

C
shear
C
C weld

Raw 
saw assembly paint configure C Customer
stocks
C machining

laser
purchased 
heat  component 
treat stocks

53
© 2014 TOCICO. All rights reserved.
System Reliability
TOCICO 2014 Conference

Measure execution to the plan/schedule/market expectation

Monitor on-hand and available

stock statuses at decoupling
points

C Monitor , release, sequence and

on-time status of work at control
points
Dispatch List - Resource C1
Start Full Duration End Sales Order Work Order Status Sales Order Qty Work Order Qty Part
2/13/2014 17:57 11:05 2/14/2014 5:02 356010 356010-5 Released, awaiting start 0 22 2003
2/14/2014 5:02 8:35 2/14/2014 13:37 356009 356009-2 Released, awaiting start 0 17 2003
2/14/2014 13:37 9:05 2/14/2014 22:42 356009 356009-1 Released, awaiting start 0 18 2003
2/14/2014 22:42 9:05 2/15/2014 7:47 356010 356010-8 Released, awaiting start 0 18 2003
2/15/2014 13:08 3:10 2/15/2014 16:18 505001 505001-1 Released, awaiting start 0 15 5001
2/18/2014 13:14 2:12 2/18/2014 15:26 505001 505001-1 Released, awaiting start 0 15 5001

54
© 2014 TOCICO. All rights reserved.
 System Stability
TOCICO 2014 Conference

Pass on as little variation as possible

Outsource plate
operation

C
shear
C
C weld

Raw 
saw assembly paint configure C Customer
stocks
C machining

laser
purchased 
heat  component 
treat stocks

55
© 2014 TOCICO. All rights reserved.
System Stability
TOCICO 2014 Conference

Measure the extent, where and when variation is occurring

Work Order Load

Measure:
Capacity
Create a stable schedule. Monitor
capacity buffers in non-control point
resources looking for and resolving
potential schedule overloads.

Monitor penetrations to time buffers

focusing on red and preventing late
zone penetration.

Monitor on-hand, available stock and

projected on-hand at decoupling
points. Expedite priorities are
determined by % penetration.

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© 2014 TOCICO. All rights reserved.
 System Speed Velocity
TOCICO 2014 Conference

Pass the right work on as fast as possible

Outsource plate
operation

C
shear
C
C weld

Raw 
saw assembly paint configure C Customer
stocks
C machining

laser
purchased 
heat  component 
treat stocks

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© 2014 TOCICO. All rights reserved.
System Speed Velocity
TOCICO 2014 Conference

Measure status and speed of the planned work to the execution

Measure:

Monitor Over the Top of Green (OTOG)

Monitor backlog status and dispatch list sequence of control points

Dispatch List - Resource C1
Start Full Duration End Sales Order Work Order Status Sales Order Qty Work Order Qty Part

C
2/13/2014 17:57 11:05 2/14/2014 5:02 356010 356010-5 Arrived, LATE to Start 0 22 2003
2/14/2014 5:02 8:35 2/14/2014 13:37 356009 356009-2 Arrived, LATE to Start 0 17 2003
2/14/2014 13:37 9:05 2/14/2014 22:42 356009 356009-1 Released, awaiting start 0 18 2003
2/14/2014 22:42 9:05 2/15/2014 7:47 356010 356010-8 Released, awaiting start 0 18 2003
2/15/2014 13:08 3:10 2/15/2014 16:18 505001 505001-1 Released, awaiting start 0 15 5001
2/18/2014 13:14 2:12 2/18/2014 15:26 505001 505001-1 Released, awaiting start 0 15 5001

Monitor early buffer entry

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© 2014 TOCICO. All rights reserved.
The Fourth Strategic Metric Objectives
TOCICO 2014 Conference

Metric Objectives The Message

System Reliability Execute to the plan/schedule/market expectation;
Operations
Day to Day

Control

System Stability Pass on as little variation as possible;

System Speed/Velocity Pass the right work on as fast as possible;

System Improvement & Waste (Opportunity Point out and prioritize lost ROI opportunities.
$)
Decisions
Strategic

Local Operating Expense Spend minimization to capture the market opportunity

Strategic Contribution Maximize throughput dollar rate and throughput volume

according to relevant factors

The ability of a CAS to innovate is more a

mechanism of exploration than exploitation.
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© 2014 TOCICO. All rights reserved.
Mathematical Models of The System
TOCICO 2014 Conference

Paretian statistical models – The tails of the distribution  All buffers use Paretian models 

identify the few critical points that define the relevant  to identify lever point 
information to predict and manage nonlinear complex  phenomena events to signal 
systems.  They contain the “lever point phenomena”. action, priority and opportunity.

Point out and prioritize lost ROI opportunities

Opportunities to Opportunities to reduce

reduce plan variation execution variation

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© 2014 TOCICO. All rights reserved.
System Improvement
TOCICO 2014 Conference

Point out and prioritize lost ROI opportunities

Quantity

Light Blue
Real time view

Too Much
Trend reporting focuses on parts with the
greatest opportunity for a working capital
Stock buffer limit
reduction.
Green

OK
Yellow

Rebuild

Target on-hand
Expedite

Trend reporting focuses on parts with the

Red

greatest opportunity for a reduction in

expedite related waste.
0
Scarlett Red

OUT

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Part r643 © 2014 TOCICO. All rights reserved.
 System Improvement
TOCICO 2014 Conference

Point out and prioritize lost ROI opportunities

Trend Green and Over Top Of Green (OTOG) zones – Parts with
unacceptable flow performance over the past 180 days

C290
C283
C287
Green Zone
H274
H270 OTOG ADU Days <15
R973 OTOG ADU Days> 15
R871

0 20 40 60 80 100 120

ADU = Average Daily Usage

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© 2014 TOCICO. All rights reserved.
System Improvement
TOCICO 2014 Conference

Point out and prioritize lost ROI opportunities

Trend critical red, stock out and stock out with demand – Parts with unacceptable
service performance over the past 35 days

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© 2014 TOCICO. All rights reserved.
Quantify Cash Flow
Opportunity/Investment
TOCICO 2014 Conference

• How much = the variable cost per part × (target

on-hand – actual on-hand)

• How long = (target on-hand - actual on-hand)

average daily usage

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© 2014 TOCICO. All rights reserved.
System Improvement
TOCICO 2014 Conference

Point out and prioritize lost ROI opportunities

Reporting:

Trend the reason codes of work order

penetrations into the red and late zones

Trend the reason codes for work

orders for early buffer entry

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© 2014 TOCICO. All rights reserved.
Pareto of Reason Codes Target
Variation TOCICO 2014 Conference

Zone Receipt # of Occurrences Reason Recommended Action

Set-up delay at CNC-Lathe 7 Set-up Reduction at CNC-Lathe 7

LATE 23
CNC-Mill 18 down Preventative Maintenance at Mill 18
RED 27
Released on time – beat standard Clean up standards on named routings – evaluate
EARLY 52 changes on ropes and buffers
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© 2014 TOCICO. All rights reserved.
 Variability Reduction Improvement =
Stock Buffer Remodel TOCICO 2014 Conference

BEFORE Improvement AFTER

Red zone safety ↓

Max
Min

Red safety ↓ 25%

Zones are sized as a function: Zones are sized as a function:
• MOQ = 60 • MOQ = 60
• ADU = 10 • ADU = 10
• lead time = 18 • lead time = 18
• Red base factor %= 37% • Red base factor %= 37%
• Red safety factor %= 50% • Red safety factor %= 25%

Green Zone = 60 Green Zone = 60

Yellow zone = 180 Yellow zone= 180
Red base = 67 Red base = 67
Red safety = 33 Red safety = 15
Average on-hand inventory target = 130 Average on-hand inventory target = 112

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© 2014 TOCICO. All rights reserved.
 Lead Time Reduction =
Stock Buffer Remodel
TOCICO 2014 Conference

BEFORE Improvement AFTER

↓ 4 = new lead time 14 days

Lead Time 18 days

lead time↓ 4 days

Zones are sized as a function: Zones are sized as a function:

• MOQ = 60 • MOQ = 60
• ADU = 10 • ADU = 10
• lead time = 18 • lead time = 14
• Red base factor %= 37% • Red base factor %= 37%
• Red safety factor %= 50% • Red safety factor %= 50%

Green Zone = 60 Green Zone = 60

Yellow zone = 180 Yellow zone = 140
Red base = 67 Red base = 52
Red safety= 33 Red safety = 26
Average on-hand inventory target =130 Average on-hand inventory target = 108

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© 2014 TOCICO. All rights reserved.
Minimum Order Quantity Reduction =
Stock Buffer Remodel
TOCICO 2014 Conference

BEFORE Improvement AFTER

Note: Green Zone set to MOQ
MOQ reduction

MOQ
MOQ

Zones are sized as a function: Zones are sized as a function:

• MOQ = 60 • MOQ = 40
• ADU = 10 • ADU = 10
• lead time = 18 • lead time = 18
• Red base factor %= 37% • Red base factor %= 37%
• Red safety factor %= 50% • Red safety factor %= 50%

Green Zone = 60 Green zone = 40

Yellow zone = 180 Yellow zone = 180
Red base = 67 Red base = 67
Red safety = 33 Red safety = 33
Average on-hand inventory target =130 Average on-hand inventory target = 120

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© 2014 TOCICO. All rights reserved.
 Total of Reduction Improvements =
Stock Buffer Remodel
TOCICO 2014 Conference

BEFORE AFTER

Green Zone = 60 Green Zone = 40

Yellow zone = 180 Yellow zone = 140
Red base = 67 Red base = 52
Red safety = 33 Red safety= 13
Average on-hand inventory target = 130 Average on-hand inventory target = 85

Variability ↓ 25%
Lead Time ↓4 days 32% reduction in
MOQ ↓ 20 units inventory and better
Total average inventory↓ 45 units market lead time

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© 2014 TOCICO. All rights reserved.
Flow Index Summary & Batching
TOCICO 2014 Conference

Flow Index Summary ‐ Buffered Components
Flow Index Range (Days)
% of Parts 
by Flow 
Flow Index Rating From To Index

Poor = 1                 25 > 25 Days 11%

Slow = 2                 16              25 33%
Moderate = 3                   9              15 22%
Good = 4                   4                8 0%
Excellent = 5                ‐                4 33%
100%

Flow index = the minimum order quantity (MOQ) / Average Daily Usage (ADU)

The higher the days of coverage the lower the flow rating.
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© 2014 TOCICO. All rights reserved.
Flow Index Rating
TOCICO 2014 Conference

Flow Index for Buffered Components
 Current   Ideal   Current 
Part  Flow  Coverage   Batch  Batch  Average 
Number Index Days  Quantity  Quantity  Daily Usage
B897              5                2            124             60 31 Ideal batch quantity = 
C150              5                3              35             30 9 ADU X 4 days coverage
R871              2              16              10             40 3
On average B897 will
H210              3                9                9             20 2 generate an order every
C290              1              27                7             45 2 two days and C150 every
C283              3              12              10             30 3 three days!
C287              2              23                9             50 2
H275              5                4              15             15 4
H270              2              19                4             20 1
Current coverage days = Current batch quantity / ADU
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© 2014 TOCICO. All rights reserved.
 Part Flow Does Not Equal System Flow
TOCICO 2014 Conference

Both B897 and C150 also

have unacceptable
service levels and are a
major source of expedite
variation.

Both B897 and C150

have MOQs less than
the ideal flow
Days

Component Parts 
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© 2014 TOCICO. All rights reserved.
 Part & System Flow Opportunity
TOCICO 2014 Conference

Both R871 and H270 also

have unacceptable flow
levels and are a source of
materials and capacity
opportunity. Days

Both R871 and H270 have

MOQs or batch sizes 4X
the ideal flow.
Component Parts 

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© 2014 TOCICO. All rights reserved.
Smart Metrics Drive Model Improvements
TOCICO 2014 Conference

• Production control • Planning/purchasing

• Model manager • Buffer managers
• Modeling team • Operations managers
• Application owner • Sales

Schedule with Execute model plan

new/improved model
(Plan) (Do)

POOGI
Improve and Adjust Collect Information
model Trend/Analyze Variation
(Take Action ) (Pareto Focus)

• Process improvement
• Model analyst
• Model team
• Model manager
• Managers

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© 2014 TOCICO. All rights reserved.
Cases, Presentations & Downloads
TOCICO 2014 Conference

Presentation Downloads in pdf Format

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© 2014 TOCICO. All rights reserved.
Questions?
TOCICO 2014 Conference

Debra A. Smith, CPA, TOCICO, EMBA

and Founding Partner
Constraints Management Group, LLC
[email protected]

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© 2014 TOCICO. All rights reserved.
 TOCICO 2014 Conference

The green zone sets the upper limit and

the heart of the supply order generation
Green process. It determines average order
frequency and typical order size: MOQ
or an order cycle in days

The yellow zone is the heart of the

Yellow coverage and shock absorption:
100% of average daily usage over
the full lead time

Red Safety The red zone is the risk mitigation

embedded in the buffer and has two
calculations. First is a % of the yellow
Red Base zone and establishes the base. Second
is safety based on the variability

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© 2014 TOCICO. All rights reserved.
 TOCICO 2014 Conference

Minimum Order Quantity

or
Green (Average Daily Usage x order cycle days)

Average Daily Usage x Lead time

Yellow
(usage over full lead time)

Red Safety Safety % x Red Base

Red Base Average Daily Usage x Lead time

x base red %

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© 2014 TOCICO. All rights reserved.
 TOCICO 2014 Conference

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© 2014 TOCICO. All rights reserved.
 TOCICO 2014 Conference

1. Why Change?

2. What to Change? 5. How to create POOGI?

3. What to Change to? 4. How to cause the change?

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© 2014 TOCICO. All rights reserved.