This is the first post in a new series on the Theory of Constraints’ part replenishment and distribution solution. In this series, I will explore the replenishment model used by many of today’s companies and begin looking at why many companies struggle to balance minimizing inventory with avoiding stock-outs. I will also discuss the TOC distribution and replenishment model and present why it is a superior system for avoiding large quantities of inventory, as well as stock-outs. I will conclude the series with the results that you can expect from this model.
The current state of replenishment
Most businesses today are in some way linked to some kind of supply chain system. It really doesn’t matter if your company sells, distributes or manufactures goods, because you must have SKUs, parts, or raw materials from somebody else in order to do whatever it is you do before you pass it on to the next link in the supply chain. Many businesses typically use what’s referred to as the min/max model to manage their supply chain. Businesses replenish what they sell, but unfortunately, many times there are periods of excessive stock-outs of parts or raw materials, even though inventory levels appear to be high.
Wouldn’t it be great if there was a way to eliminate stock-outs and reduce on-hand inventory to a more manageable level? For everyone who experiences these annoying stock-outs, even though inventory levels are much higher than desired, there is hope for you.
Note: The above figure is from Reaching the Goal by John Arthur Ricketts – A book I highly recommend.
Replenishment was originally invented to manage distribution of goods, but it can also be used by service providers and even direct-sales businesses. Replenishment gets its name from the specific way in which goods are distributed or supplied. The figure above is a simplified version of a distribution chain. I say simplified because many businesses have many more factories, warehouses, and retail outlets in their distribution chains. In traditional distribution, products produced by the factories are immediately shipped in large batches to regional warehouses. Each regional warehouse, in turn, intermittently ships (pushes) smaller, but still sizeable batches to retail locations.
What is the cause of stock-outs at the retail level?
Most inventory is pushed through the chain to retail locations on the assumption that it will eventually be sold to the end consumer. Unfortunately, because variability is highest at retail locations, several undesirable effects occur. Some of the retail locations might end up having plenty of a particular product, while others have none of it. And, because there’s no easy way to ship inventory from one retail location to another, to reduce over-stocks and stock-outs, some locations have plenty of a particular SKU while others have none. When stock-outs occur, if the time required to restock a retailer from the warehouse is longer than customers are willing to wait, stock-outs turn into lost sales rather than backorders.
Coming in the next post
In Part 2 of this series, I will continue this discussion on parts or materials distribution and look into why we often have stock-outs, even when we have plenty of inventory.
Until next time,
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