For a known large SDC that marks a decrease in demand (also defined as Sudden Demand Decrease): 1. Stock builddown.

2. Disable the DBM (cooling period).

3. Back to normal (or sometimes even above normal).

Note that Steps 2 and 3 in both cases are the same-the same actions need to be performed in order to treat these SDCs correctly. Only the first step is different in both cases.

Figure 11-10 describes a typical SDC with these steps across time, containing the management of two consecutive SDCs-one sudden increase and then a gradual decrease in demand.

Stock Buildup

In this phase, the purchase order is issued to the supplier to replenish the stock to the forecasted buffer level after the SDC (notice that the changed demand pattern [sales] is after the SDC and not during it). Two different environments (distributor and manufacturer) exist. Each is a little different.

Distributor situation: If the SKU is a purchased item, and the supplier has no problems supplying the larger quantities (the required quantity is the difference between before and after the SDC), the best way to perform the buildup is a one-time order from the supplier. The order should be received a full supplier lead time before the suspected start of the SDC, with some extra time buffer to cover for the supplier's unreliability (Murphy always strikes). For example, a distributor holds a buffer of 200 units from a specific item in the CWH to manage normal consumption. The regular lead time of this supplier is two weeks. During Christmas, he knows consumption doubles. He should double the buffer (to 400) of this SKU approximately 2.5 to 3 weeks before Christmas sales increase.

FIGURE 11-10 The Inherent Simplicity steps for managing a typical SDC. ( 2010 Inherent Simplicity. All rights reserved.) Manufacturer situation: If the SKU is manufactured by us, or by another manufacturing supplier that cannot support providing large quantities from his inventory, the best way to perform the buildup is to manufacture/order the missing quantity in batches, over a longer period of time, depending on our production capacity or on our supplier's ability to supply. Again, provide a time buffer by requesting delivery one receipt cycle ahead. For example, let us take the same case as above, only this time a batch of 80 units per 2 weeks is the maximum manufacturing can handle. In this case, the buffer should be adjusted three times-once increased by 40 units approximately 7 weeks before Christmas sales start, then by 80 units 5 weeks before, and then by another 80 units 3 weeks before. Sales should be monitored to ensure that the orders are appropriate.

Disabling the DBM (Cooling Period)

After changing the buffer size to reflect the future demand, disable the DBM algorithm in the same way it is disabled during the cooling period after a DBM buffer change.32 It is important that while the changes are realized, the DBM will not start operating as the whole purpose of treating the SDCs this way is to ignore the reality because we have better knowledge of the future reality. Normal DBM activity will disrupt the proper handling of an SDC and might have very negative ramifications; hence, the need to disable it during this time.

Back to Normal

After realizing the changed buffer size at the CWH/PWH/RWHs to get ready for the different future demand, the SDC occurs within a small time frame. It is important for the chain to be very responsive in the replenishment to the consumption points and in the decisions to increase or decrease the buffers at the various consumption points according to the DBM mechanism after the SDC.

Stock Builddown

Usually, a Sudden Demand Increase33 is accompanied by a Sudden Demand Decrease, which brings the demand for the SKU back to "normal." Sometimes, this situation is less problematic because the demand drops very gradually, allowing the DBM to adjust. The traditional after-Christmas sales and end-of-year sales are an example of a more gradual decline caused by the dumping of excess inventories at significantly lower prices. The point is that it is very important to try to refrain from being left with excess inventory after the Sudden Demand Decrease. Being left with large amounts of SKUs after an SDC will focus salespeople's attention on the wrong products, will force the consumption points to offer huge discounts on the SKUs, and will occupy shelf space, otherwise much better used for the star items. It also establishes a consumer demand pattern of waiting until after Christmas to buy items.

The builddown is very similar to the buildup of inventory-it is important to decide whether the reduction of the stock in the system will be done in one step or in a few steps-depending on the steepness, the demand drops. Usually, the demand drops gradually and therefore it is best to absorb the reduction in a few steps. Important note: just as the increase in inventory was planned over a period of time, the decrease in inventory should be planned and will take time. Depending on the expected aggregated demand until the peak demand falls, it is important to set the buffer size to be decreased, stopping the replenishment well ahead of the demand decrease and in this way ensuring that one is not left with too much stock at the end of the peak. In most of the cases, it is enough to lower the stock buffer size (target) about a replenishment time before the demand is expected to start dropping, thereby stopping the replenishment of the SKU until the amount of inventory on hand goes below the (new) buffer size. Replenishing within the peak is done under stress. Suppliers and distribution channels feel the high demand and are under pressure. Therefore, it is important to reduce the pressure on some of the items-those that we don't need until the end of the peak-maintaining the focus of everyone involved.

Implementing the TOC Distribution/Replenishment Model-How Can Software Help and Is It Really Needed?

To successfully implement the TOC methodology to manage a distribution environment, three major requirements need to be fulfilled: 1. Replenishment-replenish stock buffer size according to consumption at all locations.

2. DBM-manage the stock buffer size constantly at all stock locations and adjust it to support the consumption points' demand. It is very important, especially for environments that manage a large number of buffers, to have the software automatically manage the DBM changes.

3. Managing predictable SDCs-override the DBM mechanism during SDC buffer changes.

These requirements are not the only ones that need to be implemented, but these three are necessary conditions for success in any manufacturer/distribution implementation of the TOC principles.

Even considering only these three requirements, the conclusion must be that no distribution organization can manage based on TOC without software, unless it is a really small distribution chain (anything more than 100 buffers to manage requires some kind of software or additional personnel). The question is, what kind of software should be used?

First, define how many buffers are likely to be kept under the TOC distribution/replenishment model34: The number of items that will be managed-this is the number of items the company currently offers the market.

The number of stock locations in which the items will be managed-all warehouses (PWH, RWH) and client shops for the manufacturing environment and all warehouses (CWH, RWH) and client shops in which the future the SKUs will be stocked in a distributor environment.

The estimate on the number of SKUs and therefore buffers that will need to be managed stems from the multiplication of the two previous items.

In general, there are three options to choosing software: 1. Develop the needed software components within the existing ERP system used by the organization.

2. Develop the needed software components as Excel sheets external to the ERP system.

3. Purchase an external TOC distribution/replenishment solution software.

The answer to the question of which option to choose depends mainly on the operation scale.

For any environment where less than 500 buffers are required, using internal software is a possibility (whether an Excel sheet or a development of the current IT system).

For any environment where more than 500 buffers are required, the recommended solution is to get external software, which is fully focused on the TOC processes and decision making.

For an environment where an ERP system is operating effectively and more than 500 buffers are required, the IT staff should read and study this chapter closely before undertaking the development and integration of the TOC distribution/replenishment solution into their existing ERP. This is far from an easy task, and is usually not recommended due to the reasons that follow. One should also recognize that the TOC distribution/replenishment solution works best where S-DBR is fully functional. If this is the chosen option, consulting should be used for the process.

The benefits of using external TOC software over developing an internal solution are the following: 1. Quality assurance-Ensuring that the internally developed software module is doing what it should is very problematic. The good TOC add-on software vendors are investing most of their efforts on checking the validity of the modules.

2. Reliability-Ensuring that now and in the future, no changes or additions are made to the modules (causing negative ramifications) by people who "think they know the philosophy and the environment."

3. Development-The TOC body of knowledge in distribution/replenishment is currently growing rapidly. TOC consultants and software companies develop new insights continuously, and the TOC software companies invest time and efforts in order to incorporate the latest knowledge into their software. Unless you have a highly skilled TOC expert leading or advising the company continuously and dedicated software designers developing the distribution/replenishment functionality, an internally developed system will never keep up with the developments in the field.

4. Proper know-how-Many fine details are not within the public knowledge domain. When considering companies with special needs, such as seasonal products, limited shelf-life products, fashion products, and groups of similar products or large numbers of buffers, only a TOC software company can incorporate software modules to correspond with those needs without significant investment in time and money to determine how to handle the environment and product characteristics.

5. Long development lead time-Based on our experience trying to help other companies develop and test the logic for distribution/replenishment software modules incorporating the environment and product characteristics, the time needed is significant. It usually takes at least twice the amount of time originally planned to complete the development-usually between six months to two years for full functionality.

6. The Excel problem-While Excel is an excellent tool for many applications, an Excel sheet, despite its relative ease in building and use, is especially not recommended. An Excel sheet is very easy to change. Anyone, including people without the proper knowledge of the distribution/replenishment solution, has the ability to modify it on purpose or by accident, and therefore it cannot really be used in order to enforce the correct use of the distribution/replenishment solution. Additionally, an Excel sheet is very hard to debug. Both quality and reliability are issues in the use of Excel sheets for this application.

Testing the Solution on a Smaller Scale

The TOC distribution/replenishment solution can be tested in two forms prior to implementation. Both forms have advantages and disadvantages.

Simulation

It is possible to do a kind of "simulation" in order to show what results can be achieved prior to implementing the TOC distribution/replenishment solution for a specific environment. In the simulation, the real consumption data and stocking level figures can be simulated and benchmarked against the historical data. This same data can then be used with the TOC distribution/replenishment solution to provide a partial result for comparing against the current environment and its traditional distribution/replenishment methods. The comparison should show the impact of the changes in policies, procedures, etc., on inventory levels, investment, OE, stockouts, and service levels for this specific environment. TOC will increase availability, while reducing the total inventories held. A typical simulation result we have conducted in Inherent Simplicity is shown in Fig. 11-11.

FIGURE 11-11 An Inherent Simplicity simulation example. ( 2010 Inherent Simplicity. All rights reserved.) However, this simulation has a few significant drawbacks that are very important to emphasize. The first two drawbacks are general and apply to most simulations: 1. A simulation is based on certain assumptions (such as the actual replenishment time, frequency of replenishment, etc.); one invalid assumption might cause a very different result in the simulation versus real life.

2. Human behavior cannot be simulated by the computer unless some very specific assumptions are modeled, ones that will not be simple to quantify.

The second drawback is quite large, and could cause the following six misalignments between the simulated state and what would have happened in reality had the TOC solution been implemented. The first three of the six emphasize the focus on T, on which the old environment failed to capitalize; the second three examine the impact on OE.

1. More sales are generated by the TOC solution due to elimination of item shortages in the real-life situation. Since there was no stock, a sale could not occur even though in the simulated state the stock might have existed. Additionally, recognize that these lost sales might be as high as 15 percent! (Reality will have better results than the simulation.) 2. More sales are generated by the TOC solution due to the change in the retailers' focus from slow- to fast-moving items. (Reality will have better results than the simulation.) 3. In the longer-term, more sales are generated through the TOC solution due to the improvement in the company reputation for short lead times and high due date performance. (Reality will have better results than the simulation.) 4. Less obsolescence (depends on the environment) is achieved by the TOC solution due to the higher inventory turns. This can be calculated roughly based on the difference in inventory turns between the simulated state and the real-life state. (Reality will have better results than the simulation.) 5. Frequently, higher transportation costs are generated by the TOC solution. This can be calculated based on the assumptions on frequency of replenishment, although usually other factors might affect the calculation, such as the rate of acceptance of the suppliers to switch to rapid replenishment. (Reality will have worse results than the simulation.) 6. In the TOC solution, cross-shipments are virtually eliminated. Expediting shipments are also reduced significantly. (Reality will have better results than the simulation.) Because of these drawbacks, the simulation is only useful in giving a general direction of the solution and for buy-in purposes because it usually underestimates the magnitude of benefits of the TOC solution.

Pilot Project

Running a pilot project on a small part of the business prior to implementing the solution across the business is a valid way to test the solution and its ramifications. For a large organization, starting the solution on a part of the system makes a lot of sense. The following points are important to note while conducting a pilot project.

Design the pilot based on valid test parameters. The pilot and control group test sites should be selected so that the pilot and control group results are meaningful for the current set of conditions (economic, organization, product, etc.). The historical data of results should be similar for these two sites. The distribution/replenishment pilot is then implemented over a sufficient test period (generally three to six months). The test period should be long enough to eliminate the impact of the starting conditions, to get down the learning curve on how to manage with DBM, and to experience some of the difficulties of this environment. The results of the pilot are compared to both its historical results and to the control group results.

Define in advance what is to be measured in the pilot. Generally, growth in sales, number of stockouts, length of stockouts (measure of exposure to lost sales), service levels (impact on T), inventory levels (impact on I), expediting and overtime costs (impact on OE), lead time, and due date performance (impact on future T) are excellent measures. The results of the inventory turns or ROI (both macro measures) should be checked and compared as well.

Equally important is to determine the decision criteria for the pilot ahead of time. What do the results have to be for the TOC distribution/replenishment to be deemed a success and warrant full implementation? When should it be abandoned? For example, if the inventories of the pilot compared to the control group and its historical data are reduced by 30 percent while availability improves (increased T) and the other measurements did not suffer deterioration, then the TOC solution will be implemented in all of the RWHs.

Other considerations are as follows: The most upstream point in the supply chain under the pilot organization's control (typically the PWH/CWH) should be part of the pilot-at least for the chosen SKU portfolio to support the pilot chain flow.

It is advisable to include some downstream nodes for the same SKUs as the effect of the pull distribution solution will be higher the closer the implementation is to the actual consumers.

If the pilot is run on a PWH, it must be possible to give higher priorities to the pilot SKUs over the control group SKUs in order to show the benefits. Otherwise, it is imperative to hold some safety stocks that will be triggered should the replenishment time pass without actual replenishment. This answers the question, "If I have implemented the full TOC distribution/replenishment solution, will I be able to respond this rapidly to the chain needs?"

The pilot should manage a minimum of at least 100 buffers.

The same items should be managed in both environments.

Most of the buffers (at least 50 percent) of the pilot need to belong to fast-running items. This is to demonstrate the difference in focus on T caused by focusing on fast versus slow movers in the two different environments. Both the pilot and the control group have the same items but certainly, the inventories will have a significant difference on the retailer focus.

A sample of buffers can belong to slow-running SKUs to test where the best decision point would be between managing items to be held for availability and items managed to order.

Managing the TOC Buy-in Process

Managing a change in an organization is never an easy task. Implementing TOC adds some complexities, as the underlying message brought to the organization that embarks on TOC might be interpreted as, "It's so simple you should have thought of that by yourself." The TOC pull system is much simpler than traditional push systems and generates better results. However, any change is not a trivial process. It encompasses breaking old habits and this is difficult. Implementing TOC requires breaking several old habits. Therefore, it is a challenging task although the new processes are simple. Some of the changes TOC brings are as follows: A paradigm shift is involved. TOC challenges the most basic assumptions of traditional management: the focus on cost saving everywhere (for example, ordering big batches, moving big batches, storing big batches, and selling big batches everywhere in the chain). Therefore, ongoing training is essential to understand the impact of these cost-savings actions and how TOC treats these same decisions.

New processes are introduced. The introduction of the PWH/CWH by itself involves several new processes (for example, shifting inventory control from make-to-stock to make-to-availability), as well as determining new methods to handle seasonality, moving to daily replenishment, etc.

A lot of data needs to be collected, processed, and managed. The TOC pull distribution/replenishment solution requires very frequent updates of data, as well as relatively high data accuracy levels in order to be the most effective. An axiom in inventory management applies: the lower the inventory level, the better the accuracy and management of inventory must be.

Software helps standardize processes. It formalizes the processes required for data collection and processing. However, some complexities exist with software; the IT department must cooperate fully. For example, if IT insists on using a self-made solution rather than a ready-made system, the implementation might be delayed by several months and sometimes even years. A proper financial justification focusing on the increase in T and reduction in I investment based on the rapid implementation of a turnkey system is hard to deny.

Let me elaborate on this last point. In order to be able to make the project a success, three groups in the company must cooperate with each other. They are: The owner The end users The IT staff Each has their own goals, needs, and wants. Each must buy-in to the solution for it to be implemented and managed effectively.