The owner is defined as the top decision maker in the organization. Since the TOC pull distribution/replenishment solution requires changes that typically require high-level authorization, it is best to convince the top decision maker to embark on the TOC solution. Customarily, the owner's goal is to get the best financial results possible for the organization, as his personal compensation (if he is not the owner himself) will usually be measured this way as well. Therefore, to convince the owner to embark on a TOC project is relatively straightforward as TOC directly targets financial results through the T channels. However, the owner plays another, more important role in the TOC project; by demonstrating his personal and active involvement in the project and radiating the project's top priority to everyone in the organization, the owner can make the project very successful. Without his championing the project, the project might suffer from lack of others' attention, dragging the implementation out for months, and eventually leading to poor results.

End users implement and manage using the new processes demanded by the TOC pull distribution/replenishment solution. The end user includes "anybody who performs an action with or according to the software." The end users, while less effective as individuals, are very influential as a group. Therefore, the buy-in process here is no less important. Proper training must be conducted, explaining the reasons for the change of processes.35 Users can buy-in to the concepts but not perform the required processes to make it happen. The end user goal is convenience, and it is important to educate the end users and thoroughly explain why after switching to the new methodology the end user's life would become much simpler, not more complex, especially when he will be able to have much better control in meeting his job responsibilities and much higher visibility in the organization. It is also very important to create a win for the end users by reaching the goal of the implementation-the best way is to tie the success of the project to their own income by bonuses, stock options, or otherwise. This will ensure they will be totally committed to the changes they need to endure and will willingly embrace them.

The IT staff function is central to any big initiative, especially the TOC distribution solution. IT has a major impact on the start of the project. They must install the software and make sure it is running correctly. They must import or link the software to inputs and outputs, and then later perform maintenance and updates to the software. IT can really affect the parameters and are usually the internal experts in the company for setting the correct parameters in the software. The IT function is generally filled by very capable, educated people who are very analytical and intelligent. Therefore, if IT is correctly bought in, they will become very powerful allies to the implementation and will help achieve the full project benefits. The main goal of the IT function is typically self-value. In order to achieve the buy-in, it is important to communicate to IT that their influence will grow after implementing TOC (since the organization will heavily depend on them for making parameter decisions). Therefore, IT is key to the success of the implementation.

Actual Results of the TOC Distribution/Replenishment Solution

Based on the combined experience of TOC consultants and software companies in implementing the TOC distribution/replenishment solution,36 it is safe to say that the results are remarkable. Using the approach listed here (especially to set initial buffer sizes), significant results were achieved in three months. The average results of implementing the TOC solution are a 40 percent increase in sales, coupled with a 50 percent reduction in inventory investment. Inventory turns improved by a factor of 2.8. Think about the impact of this solution on the ROI in inventory.

These impressive results demonstrate that the TOC distribution/replenishment solution works. Planning the implementation carefully, selecting the right consultants, selecting the right software, and creating buy-in are requirements; successful management causes a huge competitive edge, increased control over inventory and sales, and therefore higher profitability.

Summary

It is clear that traditional supply chains do not function effectively. Most organizations have given up on the possibility of having 95 percent or higher inventory availability. If organizations do reach a state of 95 percent or higher availability, they do it with huge inventories and the associated cost of keeping excess inventory (and where inventory is missing, the high expediting costs). On the other hand, stockouts hurt their sales as well. The dilemma is whether to stock little inventory (and suffer stockouts and lost sales) or to stock a lot of inventory (and suffer the high inventory investment and associated inventory costs). Recall that we must have the right item (what) at the specific location (where) at the right time (when) to be successful. It is clear that if an effective and simple solution exists to answer these questions without having large inventories, then organizations would willingly embrace it.

The TOC distribution/replenishment solution is quite new in comparison to the reorder point/economic order system invented by Harris (1915) and the min-max inventory system (the basic models used in many distribution requirements planning systems) invented shortly thereafter. In comparison to these inventory systems, the TOC system is the new kid on the block. A major fundamental of the TOC system is the use of the PWH as the hub in the distribution network. PWHs37 have existed in the past but were not considered the major distribution point or the buffer protecting the whole network. PWHs held little inventory. This centralization of inventory at the PWH concept is now making a comeback (this time called "logistical centers") but the understanding that the system would function, financially and operatively, much better by pull rather than by push is relatively new. The TOC solution uses the PWH/CWH as the hub and pulls inventories through the chain to the consumption point. This pull approach is new. The TOC concepts of stock buffer size, BM, the focus on T, and the DBM mechanism are new, unique, and very effective. TOC offers remarkable results achieved in a short time period, often in a manner of "too good to be true." Implementation of the TOC distribution/replenishment solution is difficult (it is a paradigm shift) but, by following a few simple guidelines, the obstacles can be minimized.

References

Blackstone Jr., J. H. 2008. APICS Dictionary. 12 ed. Alexandria, VA: APICS.

Cox III, J. F. and Walker II, E. D. 2006. "The poker chip game: A multi-product, multi-location, multi-echelon, stochastic supply chain network useful for teaching the impacts of pull versus push inventory policies on link and chain performance," INFORMS Transactions on Education, Special Issue on Supply Chain Management Education 6(3):319.

Harris, F. E. 1916. "What quantity to make at once," The Library of Factory Management. Vol. V. Operations and Costs. Chicago: A. W. Shaw Company, pp. 4752.

Sullivan, T. T., Reid, R. A. and Cartier, B. 2007. TOCICO Dictionary. http://www.tocico.org/? page=dictionary.

Recommended Reading

Goldratt, E. M. 2009. The Choice. Great Barrington, MA: North River Press.

Knowledge Base at: www.inherentsimplicity.com.

Schragenheim, E., Dettmer, H. W., and Patterson, J. W. 2009. Supply Chain Management at Warp Speed. Boca Raton, FL: CRC Press.

About the Author.

Amir Schragenheim, since 2004, has been the President of Inherent Simplicity Ltd., a software firm specializing in TOC software for Production and Distribution environments. Inherent Simplicity is currently the only software supplier in the areas of production and distribution to Goldratt Consulting, Eli Goldratt's consulting firm, in their Viable Vision strategic projects.

Mr. Schragenheim holds an MBA from Tel Aviv University magna cum laude, and majored in Marketing and Strategy. He is a TOCICO certified expert in Supply Chain Logistics, Project Management, Finance and Measures and Holistic Business Strategy. Mr. Schragenheim is a regular speaker at both the TOCICO International and Regional Conferences.

Mr. Schragenheim started his professional career with TOC in 1998 when with Eli Schragenheim, he developed computer simulations of production and project management to demonstrate the power of TOC.

CHAPTER 12.

Integrated Supply Chain

Beyond MRP-How Actively Synchronized Replenishment (ASR) Will Meet the Current Materials Synchronization Challenge

Chad Smith and Carol Ptak

Introduction.

The effectiveness of any system has to be judged by the results that it achieves. In today's environment, companies and supply chains that struggle with effective materials planning consistently see at least one or a combination of three main business results: Unacceptable inventory performance. This is identified as having too much of the wrong material, too little of the right material, high obsolescence, or low inventory turns. Companies frequently can identify many of these problems at the same time.

Unacceptable service level performance. Customers continue to put pressure on the company, which quickly exposes poor on-time delivery, low fill rates, and poor customer satisfaction. In addition, customers consistently attempt to drive prices down.

High expedite-related expenses and waste. In an attempt to fix the previous two unacceptable business results, managers will commit to payment premiums and additional freight charges or increase overtime in order to fulfill promises. When the promises are still not fulfilled, then the company is exposed to financial penalties.

The purpose of this chapter is to present an alternative demand-driven approach for planning and controlling material flow and contrast it to the poor business results embedded in most traditional material requirements planning (MRP) systems. This includes a discussion of the core problems causing these results. The concepts and procedures underlying this new planning and control system are based on several Theory of Constraints (TOC) concepts including strategic buffering, replenishment, and Buffer Management (BM).

Copyright 2010 by Chad Smith and Carol Ptak.

FIGURE 12-1 The current situation for many complex manufacturing environments.

Actively Synchronized Replenishment (ASR) is not dependent on a Drum-Buffer-Rope (DBR) environment, but many DBR implementations will be dependent on ASR. The same is true for Lean environments. ASR is not dependent on Lean, but many Lean implementations will benefit from the implementation of ASR. Both DBR and Lean are pull systems and are inherently in conflict with the standard material planning systems, which push materials. This demand-driven materials and inventory approach is in many ways agnostic to a company's desired capacity scheduling approach. In other words, no matter what kind of capacity scheduling approach a company chooses to use, a methodological compromise is not required to ensure material availability. This chapter provides the description of a proven approach that successfully creates pull-based materials flow and synchronization in complex environments where traditional MRP was historically a necessity but performed its functions poorly.

The conflict cloud in Fig. 12-1 clearly describes the current situation for many complex manufacturing environments. On one hand, there is a necessity to effectively plan in advance of real customer orders to order long lead time materials, incorporate sales and marketing data and plans, plan capital and staffing levels, and develop contingency plans for potential problems. This has driven the management team to focus on systems and approaches that emphasize predictability. Some companies have developed a very sophisticated sales and operations planning process in order to minimize the potential for problems within the planning horizon. On the other hand, there are three well-known rules of forecasting.

1. Forecasts are always in error.

2. The more detailed the forecast is, the more error will be realized.

3. The further into the future the forecast goes, the more error will be realized.

These three rules of forecasting represent how the focus on predictability exposes companies to the risk associated with variability and volatility. The necessary inventory and resource costs to compensate for forecast error are too expensive in this hypercompetitive time. This has driven managers to focus on reducing planning lead times and implementing pull-based strategies like Lean and DBR to improve overall company agility. It is well known that when a company can react quickly, then there is less exposure to market volatility and variability. In order to resolve this conflict effectively, a solution must be deployed that allows companies to effectively plan and strategize without the inherent risks that come along with conventional approaches.

The organization of this chapter consists of this introduction which briefly describes the realities of manufacturing complex long lead-time products in a constantly changing environment. Next, we surface problems (undesirable effects) and then identify the underlying cause (core problem) of using push systems to manage both production and inventories in this environment. Finally, the direction and exact solution to the core problem is described. To demonstrate how significant this approach has been, some case studies of implementation successes are presented.

Identifying the Real Problem-Rethinking the Scope of Supply Chain Management

In the last 20 years, there has been much attention and emphasis on developing supply chain solutions from both a methodological and a technological perspective. In truth, most of what has been developed has been a revolution for the distribution and logistics between consumers and suppliers. Distribution and logistics are no longer the constraint worldwide. Now it is well known across the supply chain what is sold and when it has moved. A logistics company can provide real-time updates as parts move around the world. Ultimately, however, at the heart of any supply chain is manufacturing and, in most supply chains, it is several different manufacturing sites and processes that must be effectively coordinated and synchronized to bring a finished item into the distribution pipeline. Now, the question is how to increase the coordination and synchronization? An AMR Report concluded that: Today's companies have a dilemma. They need to reduce costs in the face of product complexity, shorter product lifecycles, and increased regulatory compliance. While companies apply a broad range of supply chain strategies to address these challenges, the buck ultimately stops with manufacturing. This is forcing a fundamental redefinition of the role that manufacturing needs to play in today's supply networks, underscoring the need for demand-driven manufacturing and agility. (Masson et al., 2007, 1) In truth, Supply Chain Management (SCM) solutions do not deal with the manufacturing implications and coordination (materials and capacity) of the items that they are demanding and supplying. While there is a wide array of different (and effective) methodologies and technologies to schedule manufacturing capacity, there is one universal materials system and approach throughout the world to manage materials known as MRP. To be consistent with current global understanding we will use the following definition from the APICS Dictionary (Blackstone, 2008, 81): Material requirements planning (MRP)-A set of techniques that uses bill of material data, inventory data, and the master production schedule to calculate requirements for materials. It makes recommendations to release replenishment orders for material. Further, because it is time-phased, it makes recommendations to reschedule open orders when due dates and need dates are not in phase. Time-phased MRP begins with the items listed on the MPS and determines (1) the quantity of all components and materials required to fabricate those items and (2) the date that the components and material are required. Time-phased MRP is accomplished by exploding the bill of material, adjusting for inventory quantities on hand or on order, and offsetting the net requirements by the appropriate lead times. ( APICS 2008, used by permission, all rights reserved.) Let us be very clear-MRP is not going away (and it shouldn't). Since the detailed description of its specifications by Orlicky (1975) in his classic book, Material Requirements Planning, MRP has provided the foundation for the design and material planning within most manufacturing environments. An Aberdeen Group Study (2006, 17, Table 3) showed that 79 percent of companies that bought Enterprise Resources Planning (ERP) systems also bought and implemented the MRP module.

Even after over 50 years of using MRP and other technologies to plan and coordinate material, how is it that companies and supply chains can struggle so mightily with materials synchronization and the business effects identified at the start of this chapter? After careful examination of many companies and the supply chains in which they participate, there appear to be two main reasons why those effects happen in today's manufacturing enterprises: 1. MRP was not designed to deal with today's challenges. The sheer size of ERP systems today hides the reality that for most mid-range and large manufacturers, MRP remains a critical module in their ERP system, and the changing global manufacturing environment has exposed critical shortcomings in most MRP implementations and tools. Variability and volatility are on a dramatic rise and the implementations of pull-based philosophies like Lean and TOC are proliferating. These conditions and approaches are putting extreme pressure on MRP systems and even creating conflicting modes of operation (push versus pull). We need to be reminded that MRP was designed in the 1950s, commercially coded in the 1970s, and really has not changed since. The reality is that it was never designed with today's factors and pull-based concepts in mind.

2. Users are forced to make incomplete and unsatisfactory compromises. Most companies are not blind to the shortcomings. Materials and Production Control personnel often find themselves in a dilemma regarding their MRP system. There are powerful aspects of MRP that are still relevant and necessary. MRP is possibly even more relevant than ever as we have more complex planning scenarios than ever. At the same time, there are disastrous consequences to ignoring MRP's shortcomings in today's environment. Given this conflict, Materials and Production Control personnel are forced to find various, often unsatisfactory and incomplete, ways around this conflict.

A Brief History of MRP

The invention of MRP in the 1950s was nothing short of a revolution for manufacturing. For the first time, companies could plan for needed materials based on an overall master schedule exploded through a bill of materials (BOM). The manual single- and double-order point systems were no match for the proliferation of products coming to market after World War II. The world was in the age of marketing! We found that we could no longer live without things that did not exist 10 years earlier. Class "A" MRP implementations yielded significantly reduced inventory and improved on-time deliveries. APICS-the American Production and Inventory Control Society-was founded in 1957 in Ohio to disseminate the education necessary to effectively use the tools that were quickly being developed. In 1976, the APICS CPIM certification was introduced and quickly became a standard worldwide of the mastery of the production and inventory control techniques of the day including inventory management, MRP, production activity control, and master planning. Driven by this available APICS education through the 1970s and with the APICS MRP Crusade, MRP quickly became the number one tool that inventory-related management personnel relied upon to ensure that material was available to meet manufacturing and market requirements.

Even in these simpler, more predictable times, MRP was successful as measured by significant bottom-line results including dramatic inventory reduction in only a small percentage of companies that implemented the tool. The early adopters showed significant results, but as MRP came into more widespread use, the same results were not achieved. This significant failure rate of MRP was a major point of discussion in the APICS meetings at the time. One big reason was that MRP was intended to do only that-plan material. APICS professionals at the time knew that capacity was a critical consideration. However, the computer power at the time was limited and even if the capacity algorithms were available, it was just not possible to calculate both at the same time. Remember that the first MRP systems were written in only 8K of memory! However, computers quickly became more powerful and closed-loop MRP was developed to answer the problems of the day. The APICS Dictionary (Blackstone, 2008, 21) defines Closed-loop MRP as: A system built around material requirements planning that includes the additional planning processes of production planning (sales and operations planning), master production scheduling, and capacity requirements planning. Once this planning phase is complete and the plans have been accepted as realistic and attainable, the execution processes come into play. These processes include the manufacturing control processes of input-output (capacity) measurement, detailed scheduling and dispatching, as well as anticipated delay reports from both the plant and suppliers, supplier scheduling, and so on. The term closed loop implies not only that each of these processes is included in the overall system, but also that feedback is provided by the execution processes so that the planning can be kept valid at all times. ( APICS 2008, used by permission, all rights reserved.) Closed-loop MRP was the next evolution and allowed the planning of both material and capacity. Still, the development and implementation of an MRP system was far from a guarantee of success. The tool was far more sophisticated and the available APICS education provided people who understood how the tools worked, but still the implementation was not a guarantee of success.

Technology became more powerful and the client-server age was upon us. In the 1980s, MRP II (manufacturing resources planning) was developed to provide further integration to the core business system by incorporating the financial analysis and accounting functions. MRP II in the APICS Dictionary (Blackstone, 2008, 78) is defined as: A method for the effective planning of all resources of a manufacturing company. Ideally, it addresses operational planning in units, financial planning in dollars, and has a simulation capability to answer what-if questions. It is made up of a variety of processes, each linked together: business planning, production planning (sales and operations planning), master production scheduling, material requirements planning, capacity requirements planning, and the execution support systems for capacity and material. Output from these systems is integrated with financial reports such as the business plan, purchase commitment report, shipping budget, and inventory projections in dollars. Manufacturing resource planning is a direct outgrowth and extension of closed-loop MRP. ( APICS 2008, used by permission, all rights reserved.) MRP II systems became more commercially available. No longer was it necessary for companies to develop these systems. Software companies catering to the needs of different industries and platforms provided a wide variety of software products off the shelf. At the same time, the APICS education and certification program provided industry with professionals capable of utilizing these systems. Still, the systems that were so advanced at the time were no guarantee of bottom line success. In the 1990s, as technology began to move to Internet architecture, ERP was the next evolution and brought all the resources of an enterprise under the control of a centralized integrated system. In the APICS Dictionary, ERP (Blackstone, 2008, 45) is defined as: Framework for organizing, defining, and standardizing the business processes necessary to effectively plan and control an organization so the organization can use its internal knowledge to seek external advantage. ( APICS 2008, used by permission, all rights reserved.) Companies continued to invest in technology pursuing the holy grail of integrated planning and yet significant bottom line results were not achieved. In the mid 1990s, advanced planning and scheduling (APS) systems1 leveraged the visibility of the company's resources in ERP and promised to keep all scarce resources busy all the time. The APICS Dictionary (Blackstone, 2008, 4) defines an APS as: Techniques that deal with analysis and planning of logistics and manufacturing during short, intermediate, and long-term time periods. APS describes any computer program that uses advanced mathematical algorithms or logic to perform optimization or simulation on finite capacity scheduling, sourcing, capital planning, resource planning, forecasting, demand management, and others. These techniques simultaneously consider a range of constraints and business rules to provide real-time planning and scheduling, decision support, available-to-promise, and capable-to-promise capabilities. APS often generates and evaluates multiple scenarios. Management then selects one scenario to use as the "official plan." The five main components of APS systems are (1) demand planning, (2) production planning, (3) production scheduling, (4) distribution planning, and (5) transportation planning. ( APICS 2008, used by permission, all rights reserved.) Once again, the implementation of these complex systems was rarely a significant bottom line success. This is not to say that the software did not implement or did not run. The reality was that the improved bottom line results promised in the business case were the exception rather than the rule.

Throughout this entire evolution, the MRP calculation kernel stayed the same. Fundamentally, MRP is a very big calculator utilizing the data about what you need and what you have to calculate about what you need to go get and when. At its very core, even the most sophisticated ERP system of the day is inherently a push system based on a forecast or plan and the assumption that all the input data are accurate. In the most stable of environments, this assumption may be somewhat possible, but how does the 21st century global economic environment fit with this approach?

Can MRP Meet Today's Challenge?

The world that existed when MRP was developed no longer exists. We are now in a world where global capacity far exceeds global demand. Customers can purchase what they want, when they want it, at a price they want to pay due to the lack of transactional friction available now through the Internet. Since they now have this freedom to go anywhere to purchase anything with a few clicks of a mouse, customers are increasingly fickle. The push strategy of produce and promote of the post-WWII era just does not work anymore.

While some manufacturers turn to various technologies and process improvement approaches to reduce variability in individual processes on the shop floor, the reality is that variability and volatility are rising dramatically when you examine the bigger picture. No longer can a company compete simply by looking internally. Now a company must consider the entire enterprise as well as the supply chain within which it operates. Today's manufacturing operations are far more susceptible to disruptions throughout their internal operations and external supply chain due to: Global sourcing and demand Shortened product life cycles Shortened customer tolerance time New materials More product complexity and customization Demands for leaner inventories Inaccurate forecasts Material shortages Complex synchronization issues More product variety Long lead time parts/components More offshore suppliers The bottom line is that these factors combine to create an environment where planning scenarios that are more complex exist and those scenarios often come with higher stakes attached.

In Table 12-1, we outline the organizational effects of typical MRP implementation attributes.

Table 12.1 The Organizational Effects of Typical MRP Attributes As defined in the APICS Dictionary and taught in APICS education, these basic MRP attributes and functions are well understood. The limitations and implementation issues have been the subject of many APICS dinner meetings and conference presentations over the lifetime of the technology. One only needs to examine the APICS international conference proceedings from the past three decades and you will discover a variety of proposed solutions and workarounds. The early pioneers like Ollie Wight, George Plossl, Dave Garwood, and Walt Goddard provided many ideas that were built upon as practitioners continued to struggle with these issues. These suggested policies, procedures, and workarounds, however, can contain functionality that has nothing to do with MRP. Sometimes this additional functionality simply moves the pain points to another part of the organization. Many times, the additional functionality does not overcome limitations that are more fundamental and design issues that tend to go unaddressed.

Conventional MRP implementations just do not fit the new pull-based manufacturing and materials solutions required to be fast, lean, and flexible in today's hypercompetitive environment. Users are frustrated because they cannot complete their work inside the system. To get the job done, they extract data to Excel or Access. Even worse, they use manual sticky notes and manual scheduling white boards. Gone is the desired integration driving the investment in the formal system. In the effort to get the job done at any level, the IT landscape is more complicated and the costs to support it constantly increase.