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CIRAS - TOC - Applications

Distribution/Supply Chain

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515-294-3420
ciras.info@iastate.edu


The constraint of a supply chain is usually that not enough customers buy the products or services. In order to exploit that constraint, it is necessary to have the right product or service available in the right place at the right time for an acceptable price.

The generic conflict for supply chains generally revolves around holding the right amount of inventory... in the right places... at the right time. Conventional solutions have not been able to resolve this successfully in most cases. The solution is usually some form of compromise where the decision is made to hold more inventory and live with the high holding costs and obsolescence, or to hold less inventory and live with lost sales.

Currently, most supply chains push products into the distribution network based on sophisticated forecasting algorithms and they attempt to stock as much inventory as possible as close to the point of purchase as they can. The result in most cases is a combination of pre-season discounts, slow-moving and dead inventory, and year-end “fire sales.” These are not the formula for optimizing financial performance.

The TOC distribution solution is based on moving the supply chain from a push system to a pull system. The concept begins with the fact that the variation in demand for individual products is greatest at the point of purchase. When individual demand is aggregated across many retail outlets and several distribution warehouses the variation is dramatically reduced. Therefore one basic tenet of the TOC distribution solution is to hold relatively small amounts of inventory at the point of purchase and larger amounts close to the point of production. Then develop an effective system to very quickly replenish the retail outlets with what they actually sell.

The replenishment approach cascades upstream as well as downstream through the supply chain. The production facilities replenish only what the distribution warehouses ship (which is only what end customers actually buy), and they in turn only order material from suppliers to replenish what they produce. The amount of inventory held in the entire supply chain is reduced dramatically while fill rate for the customer and the retailer are greatly improved.

For more information contact Mike Willett or Jeff Mohr or consult the following resources:

  • “It’s Not Luck” by Goldratt (The fictional company I Cosmetics implements the distribution solution.)
  • “Necessary but Not Sufficient” by Goldratt (Chapters 16 & 17 give a superb summary of the problems and the solution.)

 

Distribution/Supply Chain Diagram.