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Distribution Model
As you know,
The Theory of Constraints (TOC) focuses on the areas of
greatest leverage in organizations. The constraints in any system dictate the
performance of the system as a whole and thus provide the focal point for any
significant improvement in performance.
TOC exposes the underlying root causes
driving the constraints, insuring that efforts are focused not on the symptoms,
but on the core problems. Unfortunately this is in stark contrast to the more
conventional approaches which address directly the manifest symptoms of the
situation. Such efforts can only end in failure with the continued re-surfacing
of the effects, as long as the root causes go untreated. Let us draw this
reasoning through to the distribution function
The Undesirable Symptoms in Distribution Systems
Distribution systems are complex networks linking manufacturing,
warehousing, transportation, sales, marketing, sales outlets, and customers.
Successful management depends on being able to operate within an inherently wide
array of variables, many of which are out of our direct control. It is not a
place for the timid manager.
While products, customers, sales
outlets, and manufacturing processes vary widely across companies and
distribution networks, they are oddly prone to a similar set of undesirable
effects:
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Selling
outlets frequently run out of some products
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Selling
outlets frequently experience excess inventories of some products
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Discounting
and incentives must be employed to reduce excess stock levels
-
Sales are
lower than desired―even
for popular products
-
System
inventories are very high
-
Inventory
turnover is lower than desired
-
Inventory
ages, generating spoilage and sub-par product performance
-
Lead times fro
launching new products are too long
-
Plants and
supply chains are always rushed to deliver the right products
-
Planning
future capacity needs is very difficult
-
Forecasting
demand is arduous and highly unreliable
Perhaps some of these effects sound familiar to
you. From groceries to high-tech, industrial products to clothing, automobiles
to magazines, the list is the same, with the effects differing only in degree
between organizations.
You may also have noticed that some items on the
list are particularly confounding. For instance, how can there be so much excess
inventory with frequent shortages? In most companies tremendous efforts are made
to improve management, collect mountains of data, employ sophisticated
predictive models, and strengthen infrastructures to address these symptoms.
Even then the effects manifest themselves and a healthy degree of good fortune
is required on top, just to achieve passing success. Why does it always seem to
be this way?
The Core Problem
With so many effects common to so many different distribution systems, it
must be that there is also a common core problem. While “unique factors” may
complicate situations in different systems, these cannot be at the heart of the
matter. And clearly, efforts at the symptom level, such as rapid inventory
transfers between sales outlets, tight product allocations, and increased shelf
lives, will at best provide a short-term “band-aid,” masking the real
problems.
One common avenue companies use to address the issue is to work
exceptionally hard on improving forecasting, in the belief that a better
“crystal ball” will enable them to predict the future. Undoubtedly some good
will come of these efforts, but even the best of crystal balls cannot predict a
buyers decision process on a given day in a particular sales outlet. And even
the best forecasters in the business will attest to the fact that the
reliability of any forecast degrades significantly the further it goes out into
the future. Companies invest millions of dollars to collect, manage, analyze,
and model market data in the hope of finally knowing exactly what will be sold
when, where, and to whom. The forecasters are not to blame, their models do get
better, and more reliable with practice. But what model will ever be successful
accurately predicting demand two months into the future, when it takes six
months to ramp up to meet that demand?
If the effects we focus on are merely symptoms, and forecasting is
inherently limited, what then is the core problem we must address? It may not
surprise you that the root cause is the abiding attempts we make to sub-optimize
the individual components of the system. A few examples will help.
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Most plants are driven to maximize the utilization of their
capacity, to run large batches, keep all of the resources activated, and produce
as much as possible. Satisfying these objectives inevitably leads to actions
that are not based on detailed customer needs, but rather follow local drivers
such as the lowest unit cost, material availability, etc.
-
Sales people and intermediate distribution centers are measured by
gross sales dollars or margin, with the sale being registered when the store or
selling outlet receives the order. This incentive pushes as much inventory into
the outlets as possible. If it doesn’t sell in the market who really loses?
The situation is magnified when other outlets go out of stock on that item and
lose sales because inventory is now back-ordered.
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The transportation network seeks to maximize the utilization of
trucks, ship cartons, and rail cars, shipping full loads. Sometimes this
translates into infrequent deliveries, causing more frequent stock-outs and when
a shipment does arrive it comes in a large lot, much of which will sit in
inventory there for some time.
The
list goes on and on. Well-intentioned efforts to optimize each individual link
in the end serve to debilitate the system, together resulting in the list of
symptoms described above.
The TOC Distribution Model
The TOC Distribution model was built specifically to address the
fundamental core problem at the root of the symptoms organizations face. It has
been proven in dozens of instances, in organizations small and large across an
array of industries. The avenue of the solution is to craft new, globally
focused objectives for every link in the distribution chain. Given that the
problem is pervasive in all areas of the system, the solution too requires the
broad involvement of all links. The resulting synergy from aligning the various
players is remarkable:
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Lead times
collapse to unheard-of figures
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Manufacturing
operations expose mountains of previously hidden capacity
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Inventory
falls to a shadow of previous levels
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Simultaneously
shortages and stock-outs are slashed
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Close matching
of supply to market demand reduces the need for discounting and sales
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Inventory
turns accelerate and ROI jumps
It may sound too good to be true at first, but
results like these are common in any leveraged solution that addresses the root
cause of a large problem.
Creating Change
In spite of the power and effectiveness of the TOC
Distribution Model, the solution represents a significant change for the
organization and for how its various parts operate on a daily basis. The first
element in bringing the top-management of the system and the leaders of the
individual parts of the Distribution system to want to pursue the avenue of the
solution. This is done through highly interactive, Socratic workshops which
cause the participants to discover for themselves the underlying root causes
inherent in the system which drive the problems they are encountering. The
workshop guides them to discover for themselves all the elements of the generic
system solution, demonstrating the remarkable gains it offers for their own
organization. The power of this approach is that it overcomes the primary
obstacle to change, the emotional resistance of organizations to change. It
replaces this resistance with another very powerful emotion, that of the
inventor of an idea. And when a management team, together, invents a potent,
system-level solution the emotion to drive change is very strong.
Now, a unique, global Throughput Operating Strategy
must be developed to apply the solution. This Strategy converts the more general
model into a company-specific application. It draws on the company’s larger
market strategy and the unique needs of their customers, products, distribution
arms, and plants to describe how their system should be structured to maximize
Throughput and minimize costs. It includes a definition of the roles each
“link” in the chain should play, and what measures should be instituted to
drive behavior.
With a sound Throughput Operating Strategy in
place, the task shifts to rolling out the needed changes broadly within the
company. Here the specific strategies employed become highly unique for each
organization, with the common thread being the need for widespread education to
shift the mindset of the individual parts of the organization and align everyone
with the Throughput Operating Strategy.
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see The TOC Center white paper
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