HTTP:// TOC in Supply Chain Management Dr. James R. Holt, PE (Jonah-Jonah) Washington State...

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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


The Supply Chain

Raw Materials

Refine /Prepare

Produce Transport

Distribute Retail Customer


Short & Long Duration Chains

DairyCows

Creamery Deliver Retail Customer

Farmer Cannery Wholesale Retail Customer


Complex Combinations

Brakes

Tires

Bumpers

Upholstery

Engine

Transmission

Manuf.Car

Car Lot

Car Lot

Car Lot


Dedicated Chain

Mine SmelterRolling

MillProduct Steel

Sales

IndependentBusiness Unit



Single Firm - Totally Owned Industry - Sole Source

Transfer Prices Fixed by Policy


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


IndependentBusiness

ComponentProcess

Supplier Client

Transactions Transactions

PurchaseReceiveCheck

Pay

Internal Processing

Individual Member of Chain

SellDeliverInvoiceCollect

Profit=Sales-Purchase-Inventory Cost-Overhead


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.


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.


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:


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


Traditional Supply Chain Solution

Raw Materials

Produce Distribute Retail Customer


Typical Production Solution

Raw Materials

Machine1

Machine2

Machine3 Warehouse


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


Potential Future

Product A Demand

0

20

40

60

80

1 3 5 7 9 11 13 15

Date

Nu

mb

er

Actual

Mean


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


Inventory Demand Probability

Mean 50Std Dev 10

90% SureInventory Level

70


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.


Non-Cooperative Supply Chain

Raw Material

ProduceConstraint

Transport Distribute Retail Customer

Constraint ClientSupply

Watch Diligently

Watch Diligently

Just-in-Time Production Using DBR


Reference Supply Chains

Snow River Dam Generator Powerlines

Customer

WaterWell

WaterTreatment

DistributionWater Tower

LocalLines

Customer


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.


How to…?

Start with TwoBefore


Watch Diligently

Watch Diligently


Watch Diligently

Watch Diligently

Firm 1 Firm 2After


Watch Diligently

ClientSupply

Watch Diligently

Firm 1 Firm 2


Transfer Costs in Cooperating Chains

Cap.40/wk

Cap.40/wk

Labor $10/hourOE $20/hour

RM$20

TPM$60

Sell$100


T= $1600Labor=$-400OE= $-800Profit= $400

T= $1600Labor=$-400OE= $-800Profit= $400

Firm Total

T= $3200Labor=$-800OE= $-1600Profit= $800


Incentive to Switch

Cap.40/wk

Cap.40/wk


RM$20

35@$60

Sell$100


T= $1650Labor=$-400OE= $-800Profit= $450

T= $1400Labor=$-400OE= $-800Profit= $200

Firm Total

T= $3050Labor=$-800OE= $-1600Profit= $650

Market 5ea @$70


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

HTTP:// TOC in Supply Chain Management Dr. James R. Holt, PE (Jonah-Jonah) Washington State...

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