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TOC in Supply Chain Management
Dr. James R. Holt, PE (Jonah-Jonah)
Washington State University
14204 NE Salmon Creek Avenue
Vancouver, WA 98686
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The Supply Chain
Raw Materials
Refine /Prepare
Produce Transport
Distribute Retail Customer
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Short & Long Duration Chains
DairyCows
Creamery Deliver Retail Customer
Farmer Cannery Wholesale Retail Customer
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Complex Combinations
Brakes
Tires
Bumpers
Upholstery
Engine
Transmission
Manuf.Car
Car Lot
Car Lot
Car Lot
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Dedicated Chain
Mine SmelterRolling
MillProduct Steel
Sales
IndependentBusiness Unit
IndependentBusiness Unit
IndependentBusiness Unit
Single Firm - Totally Owned Industry - Sole Source
Transfer Prices Fixed by Policy
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Competitive Link Opportunity
Oil Well
RefineryChemical
PlantClothMill
DressFactory
Customer
Oil Well
RefineryChemical
PlantClothMill
DressFactory
Customer
Oil Well
RefineryChemical
PlantClothMill
DressFactory
Customer
Transfer Prices at Market Prices
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IndependentBusiness
ComponentProcess
Supplier Client
Transactions Transactions
PurchaseReceiveCheck
Pay
Internal Processing
Individual Member of Chain
SellDeliverInvoiceCollect
Profit=Sales-Purchase-Inventory Cost-Overhead
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Simple Dist. Chain Game
My Plan for the Week
I Order Parts Parts Come In
Beginning Inv. Avail. Inventory
The Actual for the Week
Orders Rec’vd
Orders Filled
Back Orders
Product Flow
Income @ $+50
BO @ $ -50
Cash Flow
Inv. @ $ -10Remaining Inv. $
Weekly Income
1.
2.
3. 4.
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Simple Game Example
My Plan for the Week
I Order Parts Parts Come In
Beginning Inv. Avail. Inventory
The Actual for the Week
5
6
5
11
Orders Rec’vd 4
Orders Filled
Back Orders
Product Flow
4 Income @ $+50
BO @ $ -50
Cash Flow
200
0
Inv. @ $ -10 -70Remaining Inv. 7 $ 130
Weekly Income
1.
2.
3. 4.
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Black Bean Business
@ $-50
@ $+50
@ $-10
My Order=>(for ups tream
m ateria ls )
$ 06
$
$ $ $
$
I Receive=>(f rom ups tream
m ateria ls )
Product=>Available
Inventory=>Remaining
Orders(f rom dow n
stream c lients )
OrdersFilled
BackOrders
W eeklyCashFlow
RunningTotal
Cash OnHand
BeginningInventory=>
BeginningCash On
Hand
We
ek
1
Raw M ateria l M anufacture D istribution Reta il CustomerTransporta tion
B lack B ean B u sin ess: A S im p lif ied D is tr ib ution G a m e
M y D ivision:
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Generic Supply Chain Conflict
To meet customer demands (next link in chain as well as the end customer) I need to keep a significant inventory. But, the cost of inventory deeply erodes my profits. Missing an order erodes my future profits. My forecasts are inaccurate and replenishment takes too long. I’m stuck between a rock and a hard place.
We effectively meet our customer requests
Supply Quickly and Avoid Stock Outs (Back Orders)
Minimize the Cost of Operation
Maintain High Levels of Inventory
Maintain Low Levels of Inventory
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Traditional Supply Chain Solution
Raw Materials
Produce Distribute Retail Customer
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Typical Production Solution
Raw Materials
Machine1
Machine2
Machine3 Warehouse
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Difficulty in Forecasting
Product A Demand
0
20
40
60
80
1 2 3 4 5 6 7 8 9 10
Date
Nu
mb
er
Actual
Mean
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Potential Future
Product A Demand
0
20
40
60
80
1 3 5 7 9 11 13 15
Date
Nu
mb
er
Actual
Mean
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Adjusting for Product Life
Product A Demand
0
20
40
60
80
1 3 5 7 9 11 13 15Date
Nu
mb
er
Actual
Mean
Product B Demand
0
20
40
60
80
1 3 5 7 9
11
13
15
Date
Nu
mb
er
Actual
Mean
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Inventory Demand Probability
Mean 50Std Dev 10
90% SureInventory Level
70
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DBR Production Solution
Raw Materials
ConstraintMachine Warehouse
Constraint Buffer Protects Replenishment
Shipping Buffer Protects Short Lead Demand
Low inventory system is very responsive to customer needs.
Low inventory system is product change.
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Non-Cooperative Supply Chain
Raw Material
ProduceConstraint
Transport Distribute Retail Customer
Constraint ClientSupply
Watch Diligently
Watch Diligently
Just-in-Time Production Using DBR
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Reference Supply Chains
Snow River Dam Generator Powerlines
Customer
WaterWell
WaterTreatment
DistributionWater Tower
LocalLines
Customer
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Cooperative Supply Chain
Raw Material
ProduceConstraint
Transport Distribute Retail Customer
In the best world, individual business units cooperate and receive payment only when final customer pays.Inventory is greatly reduced. Quick delivery and response to change is possible.
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How to…?
Start with TwoBefore
Constraint ClientSupply
Watch Diligently
Watch Diligently
Constraint ClientSupply
Watch Diligently
Watch Diligently
Firm 1 Firm 2After
Constraint ClientSupply
Watch Diligently
ClientSupply
Watch Diligently
Firm 1 Firm 2
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Transfer Costs in Cooperating Chains
Cap.40/wk
Cap.40/wk
Labor $10/hourOE $20/hour
RM$20
TPM$60
Sell$100
Labor $10/hourOE $20/hour
T= $1600Labor=$-400OE= $-800Profit= $400
T= $1600Labor=$-400OE= $-800Profit= $400
Firm Total
T= $3200Labor=$-800OE= $-1600Profit= $800
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Incentive to Switch
Cap.40/wk
Cap.40/wk
Labor $10/hourOE $20/hour
RM$20
35@$60
Sell$100
Labor $10/hourOE $20/hour
T= $1650Labor=$-400OE= $-800Profit= $450
T= $1400Labor=$-400OE= $-800Profit= $200
Firm Total
T= $3050Labor=$-800OE= $-1600Profit= $650
Market 5ea @$70
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Cooperative Dedicated Sources
Cap.40/wk
Cap.40/wk
RM$20
35@$60
Cap.40/wk
RM$20
Best Supplier60% of Orders
Lesser Supplier40% of Orders
Sell$100