2. Together: TOC and Lean (Oded Cohen)

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Oded Cohen

Oded Cohen is one of the most experienced and well known masters of TOC in the world. He has been developing and implementing TOC since 1978, over 30 years working directly with Dr. Goldratt.

Oded is a Co-Founder and Co-President of TOC Practitioners Alliance TOCPA,  International Director of TOC Strategic Solutions, and  a co-Founder of TOCICO and was TOCICO first President. Oded is an author of several fundamental books on TOC, as well as many articles and publications.

ABSTRACT

TOC has been around for over thirty years. Thousands of companies around the world have adopted it as their approach and system for managing production and operations. The application of TOC solution for production and operation has been proven to improve their performance to outstanding levels and to provide a solid base from which to support future growth in sales. Due to inadequate access to TOC material in some areas, managers who are relatively new to TOC may find themselves in a debate – shall they go TOC or shall they implement Lean?

In this article, I would like to replace the question of which one is better with two other questions:

1. How do TOC and Lean work together?

2. Which one should managers use first as a platform for converting their production, or operations for service companies, in order to provide outstanding service to their clients?

The objectives of TOC and Lean are identical: to provide a systematic way of managing the flow and continuously improving it. This is based on the confidence that providing the market with a high level of service is a key element in creating a competitive edge for securing the growth of the company.

This article covers the ways TOC and Lean interrelate and, some ideas of how to incorporate TOC in your plants, if Lean is already incorporated into the way you run the production area. If you haven’t decided yet which way to go, I hope my views will help you to make an informed choice.

Introduction

For at least 200 years the world of management and, especially, the management of production and operations has seen many approaches and philosophies. There is an ongoing debate on the subject of TOC versus other management approaches. The perceived merit of making such a comparison is to find which one is better and discover the magic winner that has all the answers to all managerial questions, and will secure everlasting prosperity and success to the companies that employ this winning approach.

The reality is less glamorous. Many of the companies that won awards and recognitions in the early 1980’s for implementing managerial approaches did not show growth in their bottom line and some even went out of business within 10 years of winning the awards. In the late 1980’s, many studies were conducted to distinguish TOC from TQM –Total Quality Management. Dr. Eli Goldratt then wrote an essay[1], challenging the concept of the “or” and suggesting the direction of the “and”. When the different managerial approaches have the same goal, why not adopt the mindset of amalgamation. Create a united approach that complements each other, while taking the strong points from every approach and covering the weak points. Many organizations adopted this attitude and incorporated TOC into their TQM approaches.

In the spirit of the “together” I was involved in writing “Deming & Goldratt”[2]  with Dr. Domenico Lepore. Together, we built a ten step approach we called the Decalogue that combined concepts and practicalities from Deming’s TPK, the Theory of profound knowledge, and Goldratt’s TOC. This book has provided a bridge for the Deming community and the TOC community to know about each other, and to enhance their own approaches by introducing ideas, concepts, methodologies and procedures from the other approach.

In a similar way, I would like to offer my support and views to bridge between the Lean community and TOC by using my deep understanding and knowledge of TOC concepts and of the TOC solutions.

For over ten years, we have been witnessing the continuous debate of TOC versus Six Sigma and/or TOC versus Lean manufacturing. Many companies, with the help of practitioners from both “camps” have succeeded in creating an amalgamated approach that has successfully worked for them. If you want to substantiate the above statement, you need only to search the web for TOC and Lean. In a recent search with Google, I found over 300,000 references. Many of them even use the name of the combined approach, TLS; TOC-Lean-Six sigma. These references describe not only how to combine these approaches but also, and most importantly, the value and the benefits of the combination.

One early example of TOC and Lean, released to the public domain, is the US Marine Corps maintenance depot[3] that can be found on TOC.tv. They presented outstanding improvements in reliability, level of output, reduction in lead times, and cost. In their case, TOC was the lead approach.

In this article, I am using my own experience in working together with the Lean team in a British company, two years after they successfully implemented Lean in their company. Like the Marine Corps, this company refurbished armed vehicles. The improvements in the first two years were remarkable, yet they felt they were stagnating and could not squeeze out more improvements. The plant manager read The Goal and asked us to visit them. Immediately thereafter, we started working together to incorporate TOC into their environment.

Both TOC and Lean promote continuous improvement.

TOC clearly states that the role of management is to ever improve the performance of the area under their responsibility. The performance of the production area is determined by the flow. Hence, the most important role of production management is to maintain the flow and to continuously improve it.

In his article “Standing on the shoulders of giants”[4] Dr. Eli Goldratt outlines four major concepts for managing flow:

  1. Improving flow (or equivalently lead time) is a primary objective of operations.
  2. This primary objective should be translated into a practical mechanism that guides the operation when not to produce (prevents overproduction).
  3. Local efficiencies must be abolished.
  4. A focusing process to balance flow must be in place.

We shall use these concepts for examining TOC and Lean and getting the most of both. For that we need to cover three areas:

  • The alignment between both approaches
  • The areas where TOC agrees with Lean
  • The areas where TOC ideas differ from Lean

Thereafter, we can discuss the practical ways of how to work TOC & Lean or Lean & TOC. Please note that I am referring in this article to production management. Yet, everything that I say here is relevant for managing any flow environment. The more general term for managing any flow is Operations management.

Concept no. 1 – Improving flow (or equivalently lead time) is a primary objective of operations

The alignment between TOC and Lean

There is a full alignment between the TOC and Lean on the first concept – improving the flow is the primary objective of production management. Production is the function that is responsible to convert, through flow, raw material and components into a sellable product. To ensure the contribution to the overall performance of the company, production has to complete every work order on time, according to the specifications (quality), and within the agreed cost.

The production lead time is a critical factor in generating value, as money is generated for the company only when its product has been delivered and the customer pays for it.

Production flow is comprised of several dependent activities.  Lean suggests mapping the key elements of the lead time though the recording of the Value Stream (VS). The value stream determines the overall lead time of production. By mapping the value stream, management signals that the flow is of utmost importance. The VS diagram is posted in key areas in the shop floor, and everybody is aware of the flow and their own role in the value stream. The VS is in line with step 2 of the Decalogue; seeing the system. To improve a system, we must know the system and see it as such; where it starts and how the major components are connected.

Value Stream is a solution promoted by Lean.  It is a powerful solution. So, what is the problem with it?

The problem is the disconnection between planning, execution and improvement. For production planning and control, a fixed, predetermined time is used. Usually it is called production lead time (PLT). Production starts at a given time and is expected to be completed within the agreed time. However, due to disturbances, disruptions, and statistical fluctuations of the processes, many times the order is not completed and shipped on time.  Traditionally, the solution for this problem was to increase the production lead time and start the flow even earlier. This solution only made the situation worse. The earlier that work orders are released to the shop floor, the more orders we have there.  This creates even more traffic congestions as the load on capacity constraint machines grows and the queue gets longer and longer. Increasing the production lead time may be a short term recovery action, but it cannot be a regular solution as it conflicts with the first concept of the flow that seeks to improve the lead time.

The VS was introduced to facilitate systematic improvement.  It helps to focus management and people on the flow by providing a flow map of the products throughout the shop floor.  It provides the platform for continuous improvement where other Lean tools and techniques may be employed. The activities of the VS are grouped to be performed in work centers. The Grouping is done in such a way that the timings to perform the grouped activities are of a similar length. Usually, the grouped activities are performed in one work station. The time to perform grouped activities is called Takt time. The overall expected production lead time is calculated by multiplying the Takt time by the number of grouped activities. The calculated production lead time is used for planning purposes, and for promising delivery times to the clients.

Likewise, TOC acknowledges the critical role of production lead time for flow management: planning, controlling the execution, and for continuous improvement.  However, TOC suggests a shortcut to get the system going and achieve immediate improvements in performance. This is done through the establishment of the Production Buffer (PB). PB is the total elapse time that is allocated for the production to complete the order. The term “buffer” is used by TOC to denote time including more than the average processing time on the machines (touch time). It also includes allowance for setting-up the machines for specific parts or products, queue time in front of occupied machines, wait time for missing parts in assembly, as well as unexpected problems known as “Murphy”. In most production environments, the touch time is a small fraction of the production lead time (1% or less).[5]

The SDBR (Simplified Drum-Buffer-Rope) is the TOC solution for MTO – Make to Order. MTO is a production environment that produces to customers’ orders. SDBR uses the production buffer (PB) for flow management. When the actual touch time is so small compared to the elapse time, there is no need for a detailed mapping of the value stream. Actually, for SDBR, we propose choosing an ambitious size for the PB which is challenging but achievable; shorter than the production lead time that was used by production at the outset of the TOC implementation.

Managing through the TOC production buffer provides the same managerial focus as the value stream. The advantage in using TOC is the ease and speed of implementing the solution, as well as integrating it in to the computerized systems. Sometimes management can use simple excel files for the purpose of flow management.

Another difference with TOC is the upfront and open commitment to the first concept – improving the flow. For the successful implementation of the TOC solution, management has to commit to adopting the mindset that flow is number one priority.  This is reflected though making on-time delivery of customer orders the prime measurement for production performance.  Thereafter, in a systematic way, the production buffers are adjusted to improve the lead time, and for the company to gain competitiveness in the market place.  The concept of production buffer is captured also in the name of the TOC solution SDBR. The B stands for Buffer.

The major difference between TOC and Lean in maintaining and controlling the flow is with the mechanics that are used.  Lean uses the value stream. Given that there is no economical justification for building dedicated production lines which are effective but relevant only for very high volume repetitive products (such as cars, electronic equipment etc.)  Lean tries to emulate lines through the concept of Takt. Takt is the mechanism that provides the rhythm to the value stream. Stations are organized in such a way that they have roughly the same process time. Thereafter, every Takt time, the Work Order (WO) moves from one station to the next one. As such, the flow is established and work stations have to keep up with the pace.

For example – the MRO company that I mentioned above had 10 work stations covering the entire value stream, with a Takt time of 2.5 days (two moves per week). That determined the total lead time of 50 days. This was a significant reduction from the 70 days that they started with. Stability had been improved and more vehicles were shipped on time.

However, there are several disadvantages to the Takt approach:

  1. It is not always easy to group the activities in one work station that will fit the Takt time.
  2. To compensate for fluctuations in performance, some slack time is built into the Takt time. Potential gains due to positive variation when a station completes its activities earlier than predicted are not past to the flow and are wasted in waiting.
  3. The Takt time should be equal for all products that are produced in the “line”. This reduces the flexibility and ability to run different products and product families using the same resources.

The TOC solution covers for these disadvantages. Once the WO is released for production it can move freely between the different work stations. Once work on the WO is finished on this station, the WO moves to the next station. The loading to the machines is done according to the priority determined by buffer management ensuring that higher priority is given to WOs that are close to their delivery dates. The TOC solution accommodates products and product families with different Production Lead times. Also, it can accommodate orders with short response time (for premium prices).

Concept no. 2 – Prevent overproduction

This primary objective should be translated into a practical mechanism that guides the operation when not to produce, thus preventing overproduction.

In the second concept there is also a full alignment between TOC and Lean while the mechanics differ.

Lean prevents overproduction by using two major methods:

  1. Controlling WIP and the start of new production WO, by the number of empty slots available. The number of holding positions, when a WO is parked and not worked on, is limited. Ideally, work on a new WO should start on the first station only after a WO has been completed and has departed from the last work station of the VS. It is the concept of one-out one-in. The number of WOs in the VS is fixed. After one WO departs from the VS, a new one enters.
  2. In points of assembly – using the 2 bin approach for the parts and components that are supplied from a feeder. The parts are stored in 2 bins available for assembly to use. Once one bin gets empty, a signal is given to the feeder to produce and deliver a replacement bin.

Both mechanisms prevent overproduction. They present the concept of fixed WIP. The first one fixes the number of WOs in WIP to be the number of work stations in the VS. The 2 bin mechanism limits the WIP to 2 bins only. As long as people adhere to the instructions, it is impossible to release more materials to the shop floor.

The mechanism of one-out one-in for the VS was significant in the MRO environment. Before the Lean implementation, the tendency was to disassemble the vehicles as soon as they appeared at the depot. This elongated the time that the vehicles spent in the depot while the army units were missing them. They wanted the decommission time to be as small as possible.

The VS prevents overproduction and provides stability. Thereby, it helps to improve the overall performance of the production area.

At the same time it is important to know its shortfalls:

  1. VS is applicable in a highly repetitive environment that has stability in demand for long periods (years).
  2. VS is applicable for products and product families that have the same structure and about the same production times.
  3. It is not planned to provide “fast track” service to some of the orders. All the WOs have to follow the same flow in the sequence they have entered into the VS.
  4. The VS does not address the issue of the feeders that are supposed to provide parts and subassemblies to the work stations of the VS.

The availability of parts and components for assembly in the MRO company that was mentioned above was the major reason that TOC was called in. It was impossible and impractical to create a value stream for all of the feeders. The VS suffered also from shortage of non-standard parts. In such cases, some of the vehicles finished their VS journey incomplete and were put in holding positions until the missing parts arrived. In some cases, vehicles were removed from the VS in order not to block the other vehicles that could move.

In summary, shortages of parts for the VS caused disruption to the flow and hurt on-time delivery to the customers.

SDBR has a simple mechanism to prevent over-production without having the shortfalls of the VS. It is called the “Rope”, meaning choking the release. WOs are not released to production before their calculated release date. This date is calculated as the promised shipping date minus the production buffer time. The rope reduces the amount of open orders. This reduces the overall load on the machines and resources. The open orders get the right priority and, due to better availability of machines, are completed on time. That is the reason why correct SDBR implementations bring significant improvement to production through increased Due Date Performance (DDP) and reduced WIP within a short time.

The Rope mechanism is used not only for the main stream but also is extended to the feeders. Once the delivery date is committed to the customer, the same production buffer is used to signal the feeders to start their activities to ensure that the parts will be available for assembly.

The above two mechanisms of the SDBR, buffer and the rope, provide a simple and practical solution to prevent overproduction without risking the delivery dates. The simplicity of the system is denoted also by the name SDBR – the “S” stands for Simplified Drum-Buffer-Rope.

Concept no. 3 – Local efficiencies must be abolished

This is an interesting point.

Conceptually, TOC and Lean should be completely aligned.

Efficiencies as performance measurements and, the use of cost based management accounting for decision making, should be stopped. The major problem with this type of decision making is that it contains a real risk that local decisions will be made that will have negative impact of the flow. The late Dr. Ohno of Toyota admitted that he was forced to fight cost accountants, and to chase them out of the factories in order to allow his system to work. By the way, the TPS, Toyota production system, is not pure Lean.  In fact, the Toyota people in Japan do not agree with the term Lean to describe their system.

In reality, the descriptions of Lean cover a lot of techniques and methodologies. They do not contain any message regarding local efficiencies. This presents a risk to the Lean implementation. Local management may understand that to allow Lean to work they should stop local efficiencies. That can bring them into a clash with their corporate headquarters, if they are a part of a larger group. On the other hand if the local management decides to abolish local efficiencies, and does not know with what to replace them, they may lose control as the managers reporting to them will not know how to make the right decisions.

Abolishing local efficiencies was high on the TOC agenda from as early as 1980’s. Besides the demand to stop using local efficiencies for measuring performance of departments, machines or manpower (“what to change?”), TOC has also provided clear, practical concepts and methods to replace them (“what to change to?”). Such as:

1. Making on-time delivery the prime measurement for production performance:

  • DDP – Due Date Performance – to denote the level of reliability of the shipping according to the promises to the customers. This is presented through the percentage of orders that are shipped on time (on the actual date that it was promised or before, but no later than the promised date).
  • TDD (Throughput Dollar Days) or TVD (Throughput Value Days in local currency) to denote the financial impact of the customers’ orders that are late, and the amount of days that they are late. This has a financial impact on the company as it hurts cash flow. This is the amount of money that could have been already in the company’s bank account multiplied by the number of days (that the money could have generated value for the company).

2. TOC (Throughput) Accounting – providing management with a set of operational measurements to bridge between the local decisions and actions to the global performance. The three operational measurements are:

  • Throughput (T) – the money generated by the system.
  • Investment (I) – the money invested in the system, including facilities, machinery and materials, and
  • Operating Expenses (OE) – all the money that is regularly spent on running the company and generating Throughput.

TOC emphasizes that production management should focus on flow.  If flow is number one, then all the rest, quality and cost, will fall into place and will be in control. In the SDBR Solution, “D” stands for Drum. This is the concept that customers’ orders drive the production system. The company’s commitment is the driver for the production system. The shipping plan (schedule) is the way the company builds market awareness and its acceptance as a reliable supplier.

There is no conflict between TOC and Lean on the third concept. It is just that it is not a part of Lean. We believe it is absolutely necessary for a company to establish its position in the market place. TOC can cover for this void.

Concept no. 4 – A focusing process to balance flow must be in place

This is the area where TOC and Lean are not only aligned but also can work together in full synchronization.

To balance the flow, there is a need to address and remove any obstacle and obstruction to the flow.  Once we do so, we allow production to flow better, and faster.  This is where all the tools and techniques of Lean can be utilized.  Disruption to the flow can happen due to lost capacity from machine breakdowns, quality problems, process instability, long set-ups, etc.  There are very powerful tools and ways in Lean to address such issues.

TOC is a managerial approach. It deals with managing the flow. TOC can help in highlighting the problematic areas in the flow that must be improved. But, TOC does not have any technical improvement techniques. TOC completely relies on Lean to provide improvements in the places where these improvements will contribute the most to the objective of improving the flow.

Whereas the TOC implementations incorporate Lean in the POOGI – process of on-going improvement, we have concerns about applying the Lean improvement in isolation from the global view of the flow.  The fact that Lean does not call to abolish local efficiencies, gives rise to the TOC concern. If local efficiencies are not abolished, then the prevailing decisions made by management are cost-based. That can lead to waste of the efforts that are put on improvements. For example: Setup reduction is a very powerful technique. It can help dramatically to improve the flow. If we have a machine that is lacking capacity, setup reduction will create additional capacity that can improve the flow. However, if a non-constraint machine, a machine from which the load demanded is less than 70% has a high setup time, a reduction in the setup time will not necessarily translate into a better flow or more throughputs. As the operator of the machine is on salary, the company is not going to realize any major benefit from the effort to reduce the setup.

TOC provides direction for management focus, as they know which resources are constraints and which are not. As the improvements are focused on improving the flow, the first priority should be assigned to deal with the CCRs, the resources that do not have the capacity to maintain the flow. The second priority should be assigned to the non-constraint resources that disrupt the constraints or cause major delays to the flow.

TOC has a strong focusing mechanism for POOGI. It is called Buffer Management. It is a part of the SDBR solution. While a work order is in progress its status is constantly monitored based on the consumption of time by this WO from its production buffer. At certain points in time (determined by the on-going managerial procedures of running under the SDBR solution), the system prompts sampling of the flow. While sampling, the system checks for the reasons for the delay. What is the WO waiting for? It may be waiting for a resource that is busy, for materials that were late to arrive, for documentation or drawings from engineering etc. The date is recorded and analyzed. Periodic meetings, ideally weekly, review the findings and decide on improvement initiatives to address the reasons for frequent and repeated disruptions to the flow.

The improvement initiatives employ Lean techniques, but not only Lean.  Some of the causes for disruptions to the flow may be connected to the human factor such as: lack of skills, knowledge, awareness, attitudes, authority etc. The analysis of the causes can be done by using TOC tools and Thinking Processes to deal with such problems. From time to time, a deeper analysis may demand the development of a more strategic solution using the TOC methodology for developing a solution.

We believe that TOC buffer management is a good focusing mechanism for all the improvement initiatives of the production area. Every problem solved and every disruption removed improves the flow, makes the production area more reliable, and provides a potential competitive edge for the company.

Conclusion

TOC and Lean work together!

The TOC community works together with Lean leaders and practitioners within companies that are using Lean. Such collaboration is a win for everybody.

If you haven’t implemented Lean yet, then my recommendation is for you to list your expectation from taking the initiative, TOC or Lean. Determine the criteria and check the suggested alternatives against these criteria. And then, make the decision according to what is more beneficial and preferable for your company.

[1] E M Goldratt – TOC Journals Volume 1 no 6

[2]  Deming and Goldratt, Domenico Lepore and Oded Cohen, North River Press, 1999

[3]  U.S. Marine Corp – Logistics Base – presentation – TOC.tv

[4]  E M Goldratt, “Standing on the shoulders of giants” – published also in this volume

[5]  Please note that environments with high touch time of over 10% of the current lead time need a special application of the TOC solution for production.

This article was first published in the Goldratt Schools book TOC for Production Management, 2010, published by TOC Strategic Solutions

 

All materials available on the TOCPA site are the intellectual property of their authors and cannot be reproduced in any other media and used for any purposes without the prior permission in writing of the authors.

1. Failures in the High Street (Martin Powell)

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Martin Powell

Martin Powell is Director of Goldratt Solutions Ltd. and The Goldratt Centre Ltd.

He is the Founding member of TOCPA.

Martin Powell has been implementing TOC, training clients and other consultants in all aspects of TOC for over 20 years. His implementations and assignments have covered Operations, Supply Chain, Distribution, Project Management, Sales and Marketing, TOC Accounting and Measures and have been spread over more than 20 countries.

m.powell@goldratt.co.uk

http://goldratt.co.uk/

This chapter was written in 2011.

In the middle of 2011 some major UK High Street brand names were brought to their knees, with the devastating effect of more losses of UK jobs. Remember how, in the 1990’s all those manufacturing jobs went because UK manufacturing was not competitive enough! Is the same happening in Retail?

These failures in Retail are usually caused by the businesses just running out of cash – in other words they have borrowed too much, their inventories are too high and when sales drop so does the cash flow. The banks lose confidence and pull the plug.

Let us explore where the real problem lies for retail.

In order to be an ever flourishing (as Dr Goldratt termed it) retail business, the management has to do a balancing act – both stability and growth are important. This means building their own competitive advantage without taking too many risks.

Traditionally, the approach is to try to gain an advantage from lower prices and physical presence. The price advantage they strive for comes from buying more and more from the far east and emerging countries where the wages and cost of production are lower. However, this approach has disadvantages mainly in the form of much longer lead times to get supplies to the UK, quality issues and very large minimum order quantities.

The physical presence advantage that they strive to get is by opening more and more stores in an already saturated market. This pushes up their operating costs, such that when a downturn happens they have to close many stores in order to survive.

The real way to gain the advantage without taking too many of the risks mentioned above is to satisfy significant consumer needs better than any significant competitor can. So the question we should then ask is – what is the consumer’s significant need? We can say price; we can say quality – however, if the products are not AVAILABLE then price and quality are secondary. The most important need for even standing a chance of making a sale is availability.

Expecting to find an SKU and being disappointed severely erodes the consumer’s impression of good availability. Shelf space is usually the shop’s constraint for better availability.  A significant amount of the constraint is captured by merchandise that was ordered according to an overly optimistic forecast. Offering many products that the market doesn’t want is not contributing to the impression of availability.  When the product’s market-life is not long, the slow reaction time of the supply chain causes the offering to be based more on educated guesses, rather than on actual market preferences.

Shortages are the main reason for a consumer’s disappointment.

The current mode of operation of most supply chains, a mode of operation that is based on forecast, causes the supply chain to have a long replenishment lead time.  A long replenishment time causes shortages and high inventories that block the shelf space and impair the ability to adjust the offering to the actual market preferences.

Shortages and high inventories do not only erode availability, but also (dramatically) reduce sales and increase investments.

So the pivotal change, the “What to change?”, is to stop operating according to forecast.

The direction for the solution, the “what to change to?”, is to start using TOC Pull-distribution – switching to a mode of operation which is based on actual consumption. Under this counter-intuitive approach, whatever is sold to the consumer is replenished to the stores from warehouses – let’s say Regional Distribution Centres – on a very frequent basis (e.g. daily). The shorter the frequency, the less quantity that the store needs to hold as inventory and hence with the same space, the greater the range of products is can hold and display. The RDCs are replenished – what was shipped to the stores – frequently (e.g. weekly) from a Central Distribution Centre. At both the RCD and the CDC we gain the advantage of aggregation – which means that the variability in demand is much narrower than at the store level.

For Retail this switch to frequent replenishment of actual demand, together with a proper incentives scheme to the suppliers (or better, to have suppliers which use the same consumption-based mode of operation), ensures very high availability coupled with surprisingly high inventory turns.

Of course there are many “yes I see the benefits of the direction but ……” reservations. What about new products? What about running full trucks? What about seasonal products? What about …..?”

All of these reservations can and have been dealt by companies that have implemented it, although the exact way each is handled depends very much on the specific case and the decisions of management. These reservations are dealt with under the heading of “how to cause the change?”.

First we have to ask ourselves –is pursuing this direction worth it. To answer this let us review briefly four recent public presentations of results (we do not have permission to disclose company names in this article). If you are the sort of person who looks at what others have done and usually says “yes I can accept that they got results but we are different……” then stop reading this article now. If you are more open to see the commonality then read on.

Case 1 – Liberty Shoes

This organisation, based in India, is in the top 5 footwear companies in the world with over $100m sales and producing 50,000 shoes per day. The company produces varieties of ranges covering virtually every age group and income category. The products are marketed across the globe through 150 distributors, 350 exclusive showrooms and over 6000 multi-brand outlets, and sold in thousands every day in more than 25 countries including France, Italy, and Germany. The outwards supply chain includes 120 Distributors / Wholesalers (who sell through 10,000 multi-brand stores) and their own retail chain of 30 stores and 400 franchise stores.

Prior to the TOC implementation the five production plants were supplied with components, raw materials and some finished product by the vendors. The plants then sent the products direct to the Distributors and their own and franchise stores. The plants were competing with each other to sell product and generally they operated on a “push” basis. The results of the way they were managing, for the company, were:

  • 130 days of stock
  • 70% availability
  • Flat sales for 3 years
  • Not making profits
  • More than 400,000 pairs of shoes as non-saleable stock

For its customers, Distributors and franchisees the results were:

  • 1.0 to 1.4 inventory turns
  • Barely making profits
  • Being supported by the company with huge discounts
  • Surplus stock older than 1.5 years

For their own retail stores the results were:

  • 1.5 inventory turns (8 months cover)
  • Huge stock outs and surpluses
  • Sales stagnant
  • 4 years of losses
  • Inventory investment was blocking expansion

Before the implementation started the whole of the company’s management were conducted through a consensus process covering “What to change – What to Change to – and How to Cause the Change” by the chosen TOC Consultants. This concluded with a full implementation roadmap which included the following main steps, which were implemented:

  • Central planning for all 5 plants
  • Central sales for all 5 plants
  • Established a Central Warehouse (aggregation point), to which all the plants supply. They do not supply to customers directly now.
  • Plants transformed from “Making to Stock” into “Making to Availability” (stock buffers) and Buffer management
  •  All Raw Materials and components on “Purchase to Availability”  and Buffer management
  • Implemented dynamic replenishment with suppliers
  • The shops send weekly orders to the Central Warehouse
  • Replenishment weekly
  • Order generation and dispatch of individual SKUs rather than All Size Packs
  • New introductions of smaller range, 8 times a year

The results after one year of implementation in the retail chain were:

  • Inventory – down from 8 months cover to 4 months (like for like stores)
  •  Availability up from 70% to 95%
  • Sales increased by 64%
  • New range introductions up from 2 per year to 8 per year
  • Inventory turns of distributors and franchise stores tripled

The biggest gain is risk free expansion. The stores were operating profitably on 5 inventory turns. This means that huge amounts of capital had been released for investment in new stores, which require less than half the starting inventory compared to before the implementation.

In summary the closer alignment of supply with actual demand has increased sales at the same time as reducing inventory. This enabled the released cash to be re-invested in store expansion driving up sales even further. Gaining more franchisees is now easier with a lower inventory investment needed for the same level of business.

Case 2 – Titan Jewellery

This organisation, based in India, has over $1bn of sales through 150 stores. This industry typically has very low inventory turns with severe peaks of demands leading up to “special days” – such as one would expect for Valentine’s Day.

The pre-implementation scenario was that the stores were collectively holding, on average, about $3.5 million of inventory. Each store held approximately 5000 SKUs with one piece of each.  The average daily sales for a store were 50 SKUs per store and inventory turns of 3.

Before the implementation started the whole of the company’s management were conducted through a consensus process covering “What to change – What to Change to – and How to Cause the Change” by the chosen TOC Consultants. This concluded with a full implementation roadmap which included the following main steps, which were implemented:

  • Improving the availability of “best sellers” – fast movers
    • Create a central buffer to support fast movers (about 3% of SKUs)
    • Auto replenishment of sales by the stores within 3 days
    • Dynamic Buffer Management
    • Regular review of “best sellers” by store and those not selling are returned to central buffer
    • Stores able to choose products they want to trial
  • Improving the supply and variety to the stores
    • Implement Pull Distribution and Buffer management – from stores through to central warehouse – through to Production and Vendors
    • Daily systematic process at stores, based on what is selling, to request product or closest variant from centre
    • Support seasonal peaks with central inventory with fast supply, rather than individual store forecasts
  • Refreshing slow movers
    • Match the slow movers in one store with a store where the SKUs are selling – recall the SKUs back to centre and redistribute
    • Replace recalled SKUs with others chosen by the store
  • More effective new product introduction
    • Stop the major bi-annual introduction of 10,000 new items
    • Introduce refreshers only in categories and price bands that need them
    • Proper testing in restricted store before becoming widely available
    • Use a rotation approach around the stores so that they are always having something new – meaning that particular store has not had it before

The results after 1.5 years of implementation in retail are:

  • Stock turns increased by 22%
  • Sales increased overall by 12%
  • For the main “special day” time period;
    • 58% increase in sales
    • 19% reduction in inventory

In summary the closer alignment of supply with actual demand has again increased sales at the same time as reducing inventory. In this sector the margins on gold are significant, so the sales increase with little increase in operating costs has a very significant impact on the profitability.

Case 3 – Big Frango – Chicken Products (Fresh/Frozen)

This organisation, based in Brazil, has over $350m of sales operating from 3 plants and through 6 distribution centres. Their sales are segmented 50% Retail, Wholesalers 20% and Export 30%.

This case started with the usual Data Collection by the chosen TOC Consultants. An Executive Worksop followed with the senior management of the company. The core conflict identified was:

A: The common objective was to increase return on investment

The two necessary conditions were:

B. Increase sales

C. Reduce inventory

The conflicting actions were:

D. In order to increase sales we must push inventory along the outwards supply chain

D’ In order to reduce inventory we must let inventory be pulled along the outwards supply chain

The paradigms in the supply chain that needed to be changed were identified as:

  • Local optimum – For one to win the other one link in the chain needs to lose
  • Economic Order Quantity “saves” costs
  • Suppliers are not reliable
  • Inventory must be closer to the consumption point
  • Better Truck utilization is highly important
  • Retail gets better prices for buying high quantities

It was agreed to conduct a pilot implementation in part of the supply chain, in order to determine not only the magnitude of results but also the challenges of a full implementation.

The approach had to create a new relationship based on “I want to make money with you, not from you ….!”

The constraint of supply was identified as the production capacity. The exploitation was therefore to focus on the most profitable products (Throughput Per Shelf) and move sales from Wholesalers to Retail. A major challenge was considered to be getting the retailers to provide their daily sales at an SKU level; however, this was part of the selling of the “inventory turns” offer to customers. So the obstacle was overcome with a value based selling process and education of the sales team.

Nine key strategies were implemented:

  1. Daily retail inventory and sales information (SKU level)
  2. Increase SKU replenishment frequency
  3. Sixty days prices agreements
  4. Inventory levels redefinition for each warehouse and store
  5. Inventory Aggregation
  6. Dynamic buffer management implementation (Big Frango and Retailers)
  7. TVD and IVD Implementation – Throughput-Value-Days to measure lost sales and Inventory-Value-Days to measure inventory
  8. Shelf space negotiation
  9. Sales team measured by actually satisfied sales and product mix rather than volume

During the 3 months pilot implementation (not all plants and distribution centres):

  • Sales growth was 82%
  • Out of stock risk was reduced by 65% – measure by TVD
  • Reduction in inventory was 57% – measured by IVD
  • Market drop in price 6% – their prices increased by 5%

Additional benefits were more fresh products on the shelf; higher customer loyalty; and less stress between parties.

In summary the closer alignment of supply with actual demand has produced significant impact through to the bottom line. The additional main feature of this case is the change in the relationships in the supply chain from “confrontational” to “collaborative” because everyone wins from the solution.

Case 4 – Cosmetics

This organisation has over $2.5bn of sales through 2,000 points of sale in Brazil and over 1,000 points of sale in 9 other countries. This industry is typified by severe peaks of demands, especially driven by promotions and around “special day” campaigns.

The company has one plant with one Distribution Centre (located 135 miles away from the plant). The DC sends products weekly to all 300+ stores as there are no Regional DCs. The environment is subject to high demand variability. There are about 600 active products with 200 launches of new products per year but the increase in demand can be as much as 1000% in one month for some SKUs. The organisation was also suffering from limited supply chain visibility – making decision making more difficult.

Their undesirable effects were – too many out of stock situation at the franchisees; inventory coverage was too high; difficulty planning around the large number of promotional campaigns.

The basic solution was to move to Replenishment and Make to Availability with Buffer Management. However, there was concern that the regular solution and algorithms would not react fast enough to the sudden rises in demand. There was also concern that the MTA Buffer method relies on historic data about consumption and that for the many new products, no such data was available. The designed solution was to have a hybrid system, where regular demand drives MTA (pull) and Special Events or Promotions were driven by Forecast (push).

The pilot implementation covered 2 large franchisees with collectively 150 points of sale. There was significant preparation work needed to build collaboration with the franchisees before launch. This took 3 months. The targets set for the following 3 months of the pilot implementation were:

  • Inventory turns to be increased by at least 20%
  • Stock-outs to be reduced by 30%

In order to make this two system approach (pull and push) effective it was needed to introduce a “Collaborative Demand Planning for Events” process and a weekly “Collaborative Replenishment” process.

Under the Events process, the company, particularly manufacturing (so they can support the plan), prepares a statistical forecast based on past data and events. This is sent to the franchisees for feedback and adjustment. Once agreed this forms the basis of a push of product from the centre to support the event.

Under the Replenishment process, weekly each store inventory is adjusted for consumption and as needed the buffers changed. The planned replenishment according to the buffers is sent to the franchisees for approval. This helps with the buy-in of the store managers to the new system such that by the end of the pilot several of the stores were running on automatic replenishment.

In summary, the pilot was extremely successful.

  • Sales increased by 60% with a reduction of inventory
  • Stock-outs were reduced by 38%

Conclusion

So these cases, which are just a sample, indicate that the TOC Pull Distribution solution brings huge benefits, in inventory reduction; sales increases; less stock outs; investment expansion; more collaboration and less stress. The cases show some of the variations needed to the standard solution.

If you would like to read more about how to approach retail, then we recommend the book (novel) “Isn’t It Obvious” By Dr Goldratt. The assumptions, challenges and actions needed are woven throughout this book but answers are not handed to you. As you read, along with the characters in the book, you work through the process together to discover and understand the solutions and how they are implemented.

 

 

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