The Theory of Constraints
Fundamental Exam Review
Applications: Replenishment Segment
James R. Holt, Ph.D., PE
Professor
[email protected]Engineering & Technology http://www.engrmgt.wsu.edu/
Management © Washington State University-2010 1
TOCICO Segmented Fundamentals Exam
Fundamentals Certificate
Multiple Choice Exam
(Identify, Exploit, Subordinate, Elevate, Go to Step 1)
Fundamentals Fundamentals Fundamentals Fundamentals
Certificate of Certificate of Certificate of Certificate of
TOC Philosophy TOC Thinking TOC Applications TOC Finance &
Processes Measures
•Inherent Potential •Conflict •T, I, OE
•Inherent Cloud •DBR
Simplicity •PQ Type
•Inherent Win-Win •Negative •Project Problem
•Five Focusing Branch Management
Steps
•Three Questions •Ambitious •Replenishment
Target
© Washington State University-2010 2
TOC Replenishment
Distribution System
• Unlike a Factory, there is no single person
managing
• Retail Systems include time delay between demand
cycles
• Production occurs to forecast
• Delivery Systems focus on efficiency--Transfer in
large batches (long time between shipments)
• Errors in forecast are magnified ten fold
• Too much of the wrong inventory, too little of the
right
• Magnitude of Missed Sales is not Known 3
© Washington State University-2010
Forecast Accuracy
Point where the world
changes
100%
Accuracy of
Forecast
Effective Death
Response Response
Zone Zone
Now ---> Future
© Washington State University-2010 4
Traditional Pushing Inventory to
the Retail Store
BEFORE
Manufacturing
Warehouse
Distribution
Stores
© Washington State University-2010 5
Locate Inventory Where it Provides Best
Protection
After-Fast Production-Fast Delivery
Aggregated Variability
Manufacturing
Warehouse
Distribution
Stores
© Washington State University-2010 6
Supply Chain Processes
• Supply Chain is made up of many independent
links (Businesses or Business Units)
• Individual links do not provide a completed
product
• There is significant interface problems
Timing, Quality, Price, Value
• Links are in competition with each other / Leverage
each other
© Washington State University-2010 7
Typical Supply Chain
Raw Refine /
Produce Transport
Materials Prepare
Distribute Retail Customer
© Washington State University-2010 8
Long and Short Duration Supply Chains
Dairy
Creamery Deliver Retail Customer
Cows
Farmer Cannery Wholesale Retail Customer
© Washington State University-2010 9
Complex Combinations
Brakes Car
Lot
Tires
Bumpers Manuf. Car
Car Lot
Upholstery
Engine Car
Lot
Transmission
© Washington State University-2010 10
Dedicated Chains
Rolling Steel
Mine Smelter Product
Mill Sales
Independent Independent Independent
Business Business Business
Unit Unit Unit
Single Firm - Totally Owned Industry - Sole Source
Transfer Prices Fixed by Policy
© Washington State University-2010 11
Competitive Chains
Oil Chemical Cloth Dress
Refinery Customer
Well Plant Mill Factory
Oil Chemical Cloth Dress
Refinery Customer
Well Plant Mill Factory
Oil Chemical Cloth Dress
Refinery Customer
Well Plant Mill Factory
Transfer Prices at Market Prices
© Washington State University-2010 12
Supply Chain Issues
• In the future, competition will no longer be between
competitors, it will be between competitive supply
chains.
• Successful supply chains must respond quickly to
the changing tastes of the final customer.
• The stumbling block to FAST is the Information
System
• Current Business to Business software offers near
instant transfer of data
• But, is data what we need?
© Washington State University-2010 13
TOC Supply Chain Measures
• TOC Supply Chain Model
Example: Dairy Farmers Cooperative
• The farmers own the Coop
• Individuals own the cows
• Individuals sell milk to the Coop
• The Coop runs the Creamery
• The Coop sells the milk, cheese, ice cream to the
customers
• The Coop keeps 5% profit
• The other profit goes to the farmers
• Everyone has some ownership in the success of the
chain.
© Washington State University-2010 14
Shared Risk and Profit
• Measures to Promote Shared Risk/Shared Profit
• Current Measures:
What did we do that we should have done?
What didn’t we do that we shouldn’t have done?
Should Have Shouldn’t Have
Did 95% 2%
Didn’t 5% 98%
© Washington State University-2010 15
More Sensitivity
• While we hate negatives, Its better to focus on
them (six sigma?)
Should Have Shouldn’t Have
Did 95%->96% 2%->1%
1% gain 50% gain
Didn’t 5%->4% 98%->99%
20% gain 1% gain
© Washington State University-2010 16
What don’t we do ?
• What Don’t We Do that we should?
Deliver on time!
(Quality problems are really delivery problems)
• What Do we Do that we shouldn’t have done?
Sloppy, in-effective, poor use of resources
Cost over runs
© Washington State University-2010 17
Missed Delivery
• Consider:
We missed 1% of parts
• ( 10 bolts count the same as 10 engines)
$1000 in parts late
• Late by one day? No problem.
• Late by 40 days? Destroyed our operations
We need Value (Throughput Threatened Value)
We need Time (Days later than expected)
Periodic Dollar-Days:
Sum of (T threatened) * (Days late) for all late
items over the period.
© Washington State University-2010 18
Use of Throughput Dollar-Days
• Have multiple Vendors for each purchased part.
• Give Best Vendor (fewest dollar days) 60% of
orders
• Gives next best Vendor 35%
• Share last 5% between poor vendors.
© Washington State University-2010 19
But, We are supposed to Share!
• We can easily rate our vendors on Throughput
Dollar days.
• We can rate the bolt vendor the same as the engine
vendor. Either can jeopardize the loss of T.
• But, If we ask the vendor to wait for our payment
until the project is sold at the final sale, how long
should they wait?
• Longer is worse. (Bolt vs. Engine?)
• But what about volume? If you take more of my
product is that worse or better? High volumes are
high investment / risk for the vendor.
© Washington State University-2010 20
Inventory Dollar Days
• If vendor and producer are in this together, the vendor
must decide on which producer is the best to work
with (the same as the producer deciding which vendor
to use).
• Consider producer A sells ten items per day. But is
holding $10,000 of vendor’s Truly Variable Costs parts.
And the producers supply chain pays on the average
of 10 days after receipt of the vendor’s parts:
(10*10,000=100,000 Inventory Dollar Days)
• Producer B also sells ten items per day. But only
holds $5,000 in our Truly Variable Cost parts and pays
on the average of 6 days: Who would you rather
(6*5,000=30,000 Inventory Dollar Days) do business with?
© Washington State University-2010 21
Goal then is to …
• Reduce Throughput Dollar Days
Sum of (all missed parts times days late) for the
period. (valued at the Throughput Rate of the final product )
Drives up reliability and quality
Fair for all vendors
• Reduce Inventory Dollar Days
Average Inventory Times Average Days held
(valued at the Truly Variable Cost rate)
Drives down inventory
Speeds work flow
Fair for all purchasers
© Washington State University-2010 22
Trust is only gained when
• We can trust each other and PROVE IT!
IDD
TDD
© Washington State University-2010 23
Measures are Additive
• Throughput Dollar Days for item of $1000 in T
Customer Total Supply Chain Effectiveness
Measures
6000 TDD
effectiveness
3 days late = 3000 TDD of the chain
Link
doing
1 day late = 1000 TDD
VMI
Measures
2 days late = 2000 TDD effectiveness
of the links
© Washington State University-2010 24
Measures are Additive
• Inventory Dollar Days
Customer Total Chain 3400 IDD on $500 TVC
Measures effectiveness of the chain
$400 * 5 days = 2000 IDD and adds 100 TVC
Link RM Floor = $ 400 of truly variable costs (TVC)
doing
$200 * 4 days = 800 IDD and adds 200 TVC
VMI
RM = $ 200 of truly variable costs (TVC)
$100 * 6 days = 600 IDD and adds 100 TVC
RM Floor = $ 100 of truly variable costs (TVC)
© Washington State University-2010 25
Supply Chain Valuation of
Possible Routes
IDD=150
All links can carry public
TDD & IDD Rating.
IDD=40
TDD=2000
IDD=90 IDD=280
IDD=730
TDD=1000 TDD=810
TDD=10 TDD=600 IDD=310
IDD=120
IDD=50
IDD=80 IDD=190 TDD=100
TDD=2500
IDD=110 IDD=740
TDD=100 TDD= 1100
TDD=200 TDD=650
TDD=50
© Washington State University-2010 26
TDD and IDD
• Everyone in the Supply Chain should know the
TDD and IDD of all other members.
• Each link has the freedom to choose who they will
do business with.
• TDD reflects Reliability or Dependability
(cumulative for the period)
• IDD reflects Investment or Flow time.
(a snap shot view or average over period)
© Washington State University-2010 27
With TDD and IDD
• Trust begins
• Speed begins
• When there is a sale, payments occur the same day.
• Everyone in the supply chain is paid their negotiated
percentage (or floor if higher).
• Every one tries to improve the offering to the final
customer
Product quality/value/taste/function
Speed and Reliability builds
Minimize lost sales where everyone loses their
Truly Variable Costs
© Washington State University-2010 28
If You Can Do It, You Win!
• Members of the Supply Chain experience:
Increased Market (better customer support)
Reduced Inventories
Less investment
Higher Profits
Less Risk
Sooner payment (total flow time is less than
previous “balance due in 90-120 days”.
Integration can come with individual links or with
groups.
Non-TOC links can play too!
© Washington State University-2010 29
Simple Measures Drive Behavior
• These two measures drive the behavior we want
in the Distribution (and production) line:
TDD Says, “Don’t miss a delivery (avoid failure).
And, if you do, fix it fast!”
IDD Says, “Don’t let Inventory sit around idle in
places where it does no good. Quickly move it
to where it protects TDD and then reduce it both
in quantity and in time held.”
• TDD and IDD become a Drill Sargent Mentality:
MOVE IT! MOVE IT! MOVE IT!
© Washington State University-2010 30
TDD and IDD Help Track Down
Problems
If A caused the problem, it shows in
A’s measures
Process A B C D E
RM FG
Capability 7 9 5 8 6 parts/day
If B caused the problem, it shows in B’s
measures.
But, what if A and B were grouped? And
they were measured at a Team, would
there be even better performance?
© Washington State University-2010 31
And What About D and E?
Then, what is the logical measure for D and E?
Process A B C D E
RM FG
Capability 7 9 5 8 6 parts/day
D and E team to deliver to the customer. A
missed customer delivery is TDDs.
The IDD (Inventory held * time held) tells
how effective the D and E Team is!
© Washington State University-2010 32
What if the Customer is the Constraint?
We still use strategic We protect our
placement of protective distribution with Market
inventory internally Finished Goods wants 4
parts per
Process A B C D E day
RM FG
Capability 7 9 5 8 6 parts/day
We really could treat (measure) the effectiveness
of the whole line as one big team.
TDD=Effectiveness in Delivery
IDD =Effective use of resources
(and tracking improvements)
© Washington State University-2010 33
Play the Replenishment Game
• Factory: Average Capacity 7 per Day
• Store: Average Sales 3.5 per Day
• Delivery Truck: Infinite Capacity, Delivery 6 Days.
Store
Factory Truck
Converts Transports Sells FG
RM to FG from to
Factory to Customer
Store
© Washington State University-2010 34
First, Set-up the Traditional
Replenishment Method
• At Initial Set-up, the Factory just shipped last week’s order from the
Store (shipped 21 items)
• The Factory has 10 items left in the Factory and carries the Inventory
on the Truck on its books. • At Initial Set-up, the
• Store Places order to factory for shipment to arrive in two weeks. (Do Store just received i
that now).
t’s order from two
weeks ago and has
21 items to sell this
week.
Store
Factory Truck
Load FG
RM FG 21 Items 21 Items
Infinite 10
Loaded
Day 0
© Washington State University-2010 35
Initial Profit Statements on Day 0
• Factory sold 21 to store (put on truck)
• Factory Calculates Sales at $1 per item sold ($21).
• Factory Subtracts Costs at $0.50 per FG item in Inventory (10 at Factory and 21 on Truck = $15.50).
• Factory had No Missed Shipments.
• Factory Profits = $21-15.50=$5.50.
Store
Factory Truck
• Store sold 21 last week at $1 per item for $21.
• Store has 21 items in stock. Subtracting $0.50 per FG items in
Inventory gives initial profit to Store of $11.50.
• There were was 1 stock-out in the week with a penalty of $10 per
unavailable item. Total Store profit = $11.50-10=$1.50. 36
© Washington State University-2010
Traditional Replenishment Method
From Day 1=>6
• Factory: Rolls two Dice for Production
• Store: Rolls One Die for Sales
• Factory moves RM to FG according to dots on Dice in Production.
• Sales moves FG to Customer according to dots on Die for Sales.
Store
Factory Truck
• Truck moves closer and closer to Store each day. Delivery of truck
occurs after the end of Day 6 and before Day 7
© Washington State University-2010 37
Traditional Replenishment Method
Calculate Profits after Day 6
• Store Receives Truck Goods (adds to Inventory)
• Store Calculates Sales at $1 per item sold.
• Store Subtracts Costs at $0.50 per item in Inventory.
• Store Orders Items for next week.
Store
Factory Truck
• Factory Receives Order and loads Truck.
• Factory Records Order as Sales at $1 per item.
• Factory Subtracts Costs at $0.50 per Item in Inventory.
© Washington State University-2010 38
Traditional Replenishment Game
Continue Day 6=>12
• Store Rolls single die for sales.
• Factory Rolls Two Die for Production.
Store
Factory Truck
• If…
• Store doesn’t have Item to sell-Penalty $10 per item.
• Factory doesn’t have Item to ship-Penalty $1 per item.
© Washington State University-2010 39
Traditional Replenishment Method
Calculate Profits after Day 12
• Store Receives Truck Goods (adds to Inventory)
• Store Calculates Sales at $1 per item sold.
• Store Subtracts Costs at $0.50 per item in Inventory.
• Store Orders Items for next week.
Continue the six day weeks until
everyone understands how the
traditional system works.
Store
Factory Truck
• Factory Receives Order and loads Truck.
• Factory Records Order as Sales at $1 per item.
• Factory Subtracts Costs at $0.50 per Item in Inventory.
© Washington State University-2010 40
TOC Replenishment Method
Initial Set-up
• Factory holds FG inventory of 12.
• Store Holds FG Inventory of 12.
• Store Orders Daily Number Sold each day
• Factory puts the order on a truck and ships it to the store the next day.
Store
Factory
Truck
Truck Truck
Truck Truck
Truck Truck
Truck Truck
Truck Truck
Truck
• It still takes six days to get from the Factory to the Store. There are six
trucks on route (one leaves the factory each day, an earlier truck arrives
at the store each day).
• Assume the sales for the previous week were 3 items per day.
• Each truck on its way this week has three times in it.
41
© Washington State University-2010
TOC Method
Initial Profit Statements on Day 0
• Factory sold 18 to store the previous week (put on truck) for $18.
• Factory Costs of Inventory @$0.50(12 at Factory and 18 on Truck) = $15.
• Store pays Factory $3 per week for Daily Delivery
• No Missed Shipments. Factory Profits = $18-15+3=$6.
Store
Factory
Truck
Truck Truck
Truck Truck
Truck Truck
Truck Truck
Truck Truck
Truck
• Store sold 18 last week at $1 per item for $18.
• Store has 12 items in stock at $0.50 for $6 in Inventory.
• There were was 0 stock-out in the week. Store paid Factory $3 for daily
delivery. Total Store profit = $18-6-3=$9.0.
© Washington State University-2010 42
TOC Replenishment Method
From Day 1=>6
• Factory: Rolls two Dice for Production but only replenishes to 12.
• Store: Rolls One Die for Sales
• Factory moves RM to FG according to dots on Dice in Production.
• Sales moves FG to Customer according to dots on Die for Sales.
Continue the six day weeks until
everyone understands how the TOC
Replenishment Method works.
Store
Factory
Truck
Truck Truck
Truck Truck
Truck Truck
Truck Truck
Truck Truck
Truck
• Each day, the closest truck to the Store delivers its load.
• At the end of Day 6, count total sales for Factory and Store. Reduce
Sales by Inventory Costs. Transfer $3 from Store to Factory for Daily
Delivery
© Washington State University-2010 43
Replenishment S&T
• Consumer Goods S&T
• http://www.wsu.edu/~engrmgmt/holt/em534/SandTConsumerGoodsLevel4.ppt
© Washington State University-2010 44
Supply Chain Type Processes
The Goal: Delivery of product to the Final Customer
The Measure: Sales, On-Time Delivery, Missed Sales.
The Constraint: The Time to Replenish
Applies where time to produce is
greater than Patience of Customer
© Washington State University-2010 45
Supply Type Processes
The Conflict Cloud:
The Paradigm Shift: Maximize
(short-time) Inventory at Store,
Hold most Inventory at the Factory,
Report Daily Sales, Deliver
Frequently, S-DBR at Plant.
B. Have the D. Hold Inventory
product Close to Customer
A. Meet Available
Customer
Demand
C. Be very D’. Hold Inventory
Reliable Away from Customer
© Washington State University-2010 46
The Behavior/Results
Max Inventory at Store Exploits the
Constraint (never miss).
Plant Warehouse, Daily Order,
Frequent Delivery Subordinate (de-
couple) the System Processes.
Buffer Management measures Buffer Penetration
TDD and IDD Accelerate Improvement. What do we learn
Customer Focus typically results 30% more here to apply to
Sales and 20% less costs. Daily Lives?
Simplified Buffer Management manages the factory. Allows
response to special orders. Better adjustment to seasons and
fads. Continual Improvement changes the culture and
increases cash and inventory turns.
© Washington State University-2010 47
Replenishment Lessons
Learned
• Hold Stock Close (Home and Family)
• Never Miss a Sale (Opportunity for Good)
Respond to the Market Demand
Create (Discover) Excess Capacity
• Money, Time, Knowledge, Talent, Emotional Strength
Be fast at delivering (Measure TDD, IDD)
• Be Ready for (Take Advantage of) Special Orders
• Integrate Membership in the Chain-Cooperation and
Trust
• Respond on demand (when asked).
Don’t force the Issue
Don’t be Co-Dependent
© Washington State University-2010 48
Next Topics
• TOC Thinking Processes
• TOC Applications
Operations
Project Management
Replenishment
• TOC Finances and Measures
• Some TOC Philosophy will be blended into these
additional topics.
© Washington State University-2010 49
