TOC in Supply Chain
Management
Dr. James R. Holt, PE (Jonah-Jonah)
Washington State University
14204 NE Salmon Creek Avenue
Vancouver, WA 98686
HTTP://WWW.CEA.WSU.EDU/ENGRMGT/
The Supply Chain
Raw
Materials
Refine /
Prepare
Distribute
Produce
Retail
Transport
Customer
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Short & Long Duration Chains
Dairy
Cows
Creamery
Deliver
Retail
Customer
Farmer
Cannery
Wholesale
Retail
Customer
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Complex Combinations
Brakes
Car
Lot
Tires
Bumpers
Upholstery
Engine
Transmission
Manuf.
Car
Car
Lot
Car
Lot
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Dedicated Chain
Mine
Smelter
Independent
Business
Unit
Rolling
Mill
Product
Independent
Business
Unit
Steel
Sales
Independent
Business
Unit
Single Firm - Totally Owned Industry - Sole Source
Transfer Prices Fixed by Policy
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Competitive Link Opportunity
Oil
Well
Refinery
Chemical
Plant
Cloth
Mill
Dress
Factory
Customer
Oil
Well
Refinery
Chemical
Plant
Cloth
Mill
Dress
Factory
Customer
Oil
Well
Refinery
Chemical
Plant
Cloth
Mill
Dress
Factory
Customer
Transfer Prices at Market Prices
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Individual Member of Chain
Independent
Business
Supplier
Client
Component
Process
Transactions
Transactions
Purchase
Receive
Check
Pay
Internal
Processing
Sell
Deliver
Invoice
Collect
Profit=Sales-Purchase-Inventory Cost-Overhead
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Simple Dist. Chain Game
1. My Plan for the Week
I Order Parts
Beginning Inv.
The Actual for the Week
Parts Come In
2.
Avail. Inventory
Orders Rec’vd
Product Flow
Cash Flow
Orders Filled
Income @ $+50
3. Back Orders
Remaining Inv.
BO @ $ -50
4.
Inv. @ $ -10
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Weekly
Income
$
Simple Game Example
1. My Plan for the Week
I Order Parts 5
Beginning Inv.
Product Flow
6
The Actual for the Week
Parts Come In 5
2.
Avail. Inventory 11
Orders Rec’vd 4
Cash Flow
Orders Filled
4
3. Back Orders
Remaining Inv.
7
Income @ $+50 200
Weekly
Income
BO @ $ -50 0
4.
Inv. @ $ -10 -70 $ 130
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Black Bean Business
Black Bean Business: A Simplified Distribution Game
Raw Material
Manufacture
Beginning
Inventory=>
6
Transportation
Week 1
(from upstream
materials)
Inventory=>
Remaining
Customer
Orders
(from down
stream clients)
Beginning
Cash On
Hand
$ 0
Orders
Filled
(for upstream
materials)
Product=>
Available
Retail
My Division:
My Order=>
I Receive=>
Distribution
Back
Orders
@$-10
@$+50
@$-50
$
$
$
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Weekly
Cash
Flow
$
Running
Total
Cash On
Hand
$
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
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Customer
Typical Production Solution
Raw
Materials
Machine
1
Machine
2
Machine
3
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Warehouse
Difficulty in Forecasting
Product A Demand
Number
80
60
Actual
40
Mean
20
0
1
2
3
4
5
6
7
8
9
10
Date
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Potential Future
Product A Demand
60
Actual
40
Mean
20
15
13
11
9
7
5
3
0
1
Number
80
Date
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Adjusting for Product Life
Product A Demand
60
Actual
40
Mean
20
Product B Demand
15
13
11
9
7
80
Date
Number
60
Actual
40
Mean
20
Date
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15
13
11
9
7
5
3
0
1
5
3
0
1
Number
80
Inventory Demand
Probability
90% Sure
Inventory Level
Mean 50
Std Dev 10
70
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DBR Production Solution
Constraint Buffer Protects
Replenishment
Raw
Materials
Shipping Buffer Protects
Short Lead Demand
Constraint
Machine
Low inventory system is very responsive to
customer needs.
Low inventory system is product change.
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Warehouse
Non-Cooperative Supply Chain
Raw
Material
Produce
Constraint
Transport
Distribute
Retail
Customer
Watch
Diligently
Watch
Diligently
Supply
Constraint
Client
Just-in-Time Production Using DBR
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Reference Supply Chains
Snow
River
Dam
Generator
Power
lines
Customer
Water
Well
Water
Treatment
Distribution
Water
Tower
Local
Lines
Customer
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Cooperative Supply Chain
Raw
Material
Produce
Constraint
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 Two
Before
Watch
Diligently
Watch
Diligently
Watch
Diligently
Watch
Diligently
Supply
Constraint
Client
Supply
Constraint
Client
Firm 2
Firm 1
After
Watch
Diligently
Watch
Diligently
Supply
Constraint
Firm 1
Client
Supply
Client
Firm 2
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Transfer Costs in
Cooperating Chains
RM
$20
Cap.
40/wk
TPM
$60
Labor $10/hour
OE $20/hour
T=
$1600
Labor=$-400
OE= $-800
Profit= $400
Cap.
40/wk
Sell
$100
Labor $10/hour
OE $20/hour
T=
$1600
Labor=$-400
OE= $-800
Profit= $400
Firm Total
T=
$3200
Labor=$-800
OE= $-1600
Profit= $800
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Incentive to Switch
Market
5ea @$70
RM
$20
Cap.
40/wk
35@
$60
Labor $10/hour
OE $20/hour
T=
$1650
Labor=$-400
OE= $-800
Profit= $450
Cap.
40/wk
Sell
$100
Labor $10/hour
OE $20/hour
T=
$1400
Labor=$-400
OE= $-800
Profit= $200
Firm Total
T=
$3050
Labor=$-800
OE= $-1600
Profit= $650
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Cooperative Dedicated
Sources
RM
$20
Cap.
40/wk
Best Supplier
60% of Orders
35@
$60
RM
$20
Cap.
40/wk
Cap.
40/wk
Sell
$100
Lesser Supplier
40% of Orders
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