Managing a protective capacity in make-to-availability

environment by Eli Schragenheim and Amir Weisenstern

The need for protective capacity The core of the logistical solution for managing a make-to-availability is TOC

replenishment where the company frequently replenishes upon consumption and

dynamically adjusts stock buffers.

Creating an initial buffer

In many situations, there is a need to convert a product from a make-to-order to a

make-to-stock and then a stock buffer must be filled with stock before commencing

replenishment.

Demand fluctuates

In a make-to-availability environment, the company reacts to a fluctuated market

demand. When the demand suddenly increases, buffers are depleted rapidly.

Therefore, to ensure availability, we need to produce and replenish the stock buffer

immediately

Demand grows

One of the characteristics of TOC replenishment is that the availability of a product

becomes higher which leads to more sales. When demand gets higher for a certain

product, there is a need to increase its buffer size and replenish to the buffer

increment. In addition, as the company capitalizes on the replenishment solution and

creates a marketing order, the demand for products becomes even higher.

Since production must react quickly to all demand increments it must maintain

sufficient protective capacity. In different wording, production must not commit to all

its capacity but rather reserve some.

The amount of protective capacity that is required A correlation exists between the load on production and the ability to deliver reliably

on promise. When the load is below 80% there are very few problems to deliver on

any promise given. However, when the load crosses the 80% mark, the level of

troubles starts to climb up. When crossing the 90% the trajectory is steeper, and when

crossing the 100%, there is no way to deliver on promise

The conclusion is that in order to cater for sudden increase in market demand, it is

recommended to have approximately 20% protective capacity and never to go below

10%.

Exploiting the protective capacity The protective capacity may be used in 2 ways:

1. Not producing anything and when market demand increases, serve it fast. or

2. When not needed, produce an item that can be sold later

When the organization is in a situation that it has a real bottleneck (i.e. it can sell

anything it produces), option #2 is the preferred1 option and we name this protective

capacity "market buffer."

Market buffer usage

Since we cannot know in advance when production will use the market buffer, it is

impossible for sales to commit on it. The market buffer can be used to produce a

product to stock, and only when it is available, sales can offer it to the market.

In order to decide what items to produce using the market buffers, Sales and

Operations should have an open dialog. Some of the parameters that should be

considered are:

• Every CCR in Production has its own market-buffer-products.

• The products can be easily sold, for a good price, upon availability.

• The potential price of the product when sold under no obligation.

• The ability to segment the product without cannibalizing other products or

other offers.

• Note - there is no need that all products would have a certain ratio for the

market buffer. Actually it’d be simpler to have distinct product for the market

buffer, but this is not a strict requirement.

1 See "market buffer" document for more elaboration

80% 90% 100%

100%

Probability of

missing due

date

commitment

Load on system constraint

• Note - once Sales and Production decide what products should be used for

market buffer, Sales would NOT commit to deliver those products unless

Production notified that so-and-so quantity is going to be available very soon.

In other words, the initiative to produce those items lies solely on Production.

Putting the market buffer into practice Whenever there is an opportunity to produce a new order, we check the total load of

the Capacity Constraint Resource (CCR) for a certain horizon into the future. If the

load is less than the maximum load expected before it we use the opportunity to

produce a product for the market buffer.

There is a second check before putting a market buffer order – if there is an indication

that the system is in a need to expedite then it is better not to produce and keep the

capacity free in order to have better response.

Calculating the load The main parameter of the load calculation relates to the horizon. We would like to

take the longest possible horizon without going into forecast mode (i.e. guessing the

load).

There might be cases in which the chosen horizon is longer than our existing

knowledge about the actual load from existing orders. In that case we will need to

factor some reservation due to the unknown load.

Let's examine some examples

Time

Maximum

load

expected

before the

CCR

Load before the

CCR

Work orders for

market buffer

Time

Visible load before

the CCR

Partial visibility to the horizon

Work orders for market buffer

Reservation due to

partial visibility

Maximum

load

expected

before the

CCR

1. A typical production buffer is 10 days and we are on a pure make-to-order. A

horizon of 10 days has full visibility and is clearly an adequate one.

2. A typical production buffer is 10 days and we have a hybrid environment of

make-to-order (MTO) and make-to-stock (MTS). The production has no

dependant setups. In this case we can use all existing MTO and MTS that

exists in the system. There is an option to add artificial MTS orders to the top

of the buffers (in case the production orders do not fill the buffer in full) since

we are pretty sure that these orders will be released to the shop floor soon2.

However, since they are not part of today's load we can also ignore them and

relate to them when they will enter the system.

3. Production is going through a repetitive sequence (known sometimes as

"wheel" or "campaign") of 16 days mainly due to dependant setups. A typical

recommendation for a horizon is 1/2 of the cycle (i.e. 8 days), include the

missing portion to the top of the buffer for the products scheduled for these

period3 and also leave some reservation for new orders that will come in and

will have to be served in the current schedule.

Preventing a vicious cycle

Market demand might rise due to better availability and new clients coming in. As a

result the protective buffer will be reduced and performance will deteriorate when it

becomes too little. Therefore, there is a need to monitor the system load4

When the system load trend peaks continuously and eats into the protective capacity it

is imperative to

• Elevate the capacity or

• Decide how to reduce the regular load 5

2 We cannot be 100% confident since buffer size might be decreased during this time

3 It is also okay to add an artificial order to cover for the missing portion for the next link in case that

the next delivery is within the horizon. 4 Taking into account all orders (including artificial ones) and the reservation factor. Excluding the

orders served for market opportunities 5 There are mechanism such as increasing price, dumping non-profitable clients, etc.

Time

Maximum

load

expected

before the

CCR