Dynamic Buffer Management (DBM) for Inventory and the Supply Chain

• Large production batches
• Long lead-times
• Large orders
• Large shipments
• Large inventories, especially near the point of consumption

Our agenda

• The present state of inventory and supply chain management today (focus on SMEs)
• What's holding SMEs back?
• Traditional (APICS) view of inventory quantities
• "Buffers" and how they work
• Key performance metrics applied
• Getting started with DBM

Recommended reading

How to...

• Goldratt, E.M. 2009. The Choice. Great Barrington, MA: North River Press.
• Schragenheim, E., Dettmer, H.W., and Patterson, J.W. 2009. Supply Chain Management at Warp Speed. Boca Raton, FL: CRC Press.
• Schragenheim, A. 2010. "Supply Chain Management". In J.F. Cox III and J.G. Schleier Jr., Theory of Constraints Handbook. McGraw-Hill.

• Develop "systems thinking" skills
• Adopt a Throughput world perspective
• Begin designing products and processes with a view to fulfilling customer needs
• Build a competitive operations strategy
• Form strategic partnerships
• Streamline your value stream
• Focus on synchronizing the flow throughout your supply chain

Getting there

The new competition

• Not between products
• Not even enterprises
• The new competition is between supply chains and their demonstrated abilities to serve (or fail to serve) their customers

Our view of success should begin internally but extend to our supply chain

Common UDEs in the supply chain

• Our inventories are too high!!!

• Our inventories are too low!!!

Dynamic

Buffer Management

for Inventory and the Supply Chain

What's your situation?

• Low inventory turn-over rates?
• Too much money tied up in inventory?
• Stock-outs leading to lost sales? lost customer?
• Excess inventories on other items--leading to obsolescence and other write-downs?
• Diminished profits as liquidations cannibalize markets for new products?
• Lack of responsiveness to markets and customers?

Our

misdirected

thinking

Sold Out!

Wow! We sure sold out of those items quickly!

Too bad! I'll bet we lost

600 sales and a dozen

customers because we

were out-of-stock on

more than a dozen

big-sellers last month!

True costs of lost sales are unknowable

What about the cost of lost customers?

Marketing and selling costs increase in order to replace lost customers or retain existing customers in the wake of poor customer service.

Unknown costs are frequently ignored

A big fat ZERO!

• Almost always on your most popular items (models, styles, colors, etc.)
• Your most intentional customers are disappointed

Typical "push" supply chain

Costs of carrying inventory are NOT unknown

Financial incentives

• Sales managers chalk-up sales

• CFO get to "book" revenues

... even if end-user has not made a purchase!

But they are hard to calculate accurately

Supply chain leaders

Replenishment Frequency versus Cost of Replenishment

Wal-Mart

Best Buy

Others

Fewer out-of-stocks allow for dramatically increased sales and reductions in sales and marketing expenses

How?

• Reduced replenishment time
• Reduced inventories
• Fewer out-of-stocks
• Increased customer satisfaction
• Increased market share
• Lower marketing costs
• Reduced selling expense

Reduced replenishment time

Reduced inventories

Increased market share

The Lean Supply Chain

• Start with the customer
• Deliver based on real demand at the consumer level
• Produce what is sold
• Supply what is consumed
• Balance the flow (not capacity)

Increased customer satisfaction

Fewer out-of-stocks

Inherent simplicity

Initial Buffer Size Calculations

Initial Buffer Size

=

ToC Replenishment Days

times

Average Daily Usage

times

Variability Factor

times

Paranoia Factor

Once initial buffer sizes are calculated and set...

Approximately right...

Not precisely wrong.

• Replenishment frequency should be made as short as possible
• Replenishment orders should be placed regularly--even if shipments are on a different schedule
• Replenishment should be calculated in the same mode as "Max Stock Level"

40% increase in revenues

50% reduction in investment

Typical results from ToC implementations

Too Much RED

(TMR)

Improve inventory turns by a factor of 2.8

Too Much Green

(TMG)

Cooling-Off Period

Number of days to allow a buffer to stabilize after a change in the buffer size

Set priorities by

Buffer Penetration

"Pull" SDCs

• Seasons of the year
• Holidays
• Other events

"Push" SDCs

• Special promotions
• Price increases or decreases
• "Policies" (e.g., quarter-end, month-end)

Sudden Demand Changes (SDCs)