TOC in Supply Chain

Management
Dr. James R. Holt, PE (Jonah-Jonah)
Washington State University
14204 NE Salmon Creek Avenue
Vancouver, WA 98686

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 The Supply Chain

Raw Refine /
Produce Transport
Materials Prepare

Distribute Retail Customer

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Short & Long Duration Chains

Dairy
Creamery Deliver Retail Customer
Cows

Farmer Cannery Wholesale Retail Customer

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Complex Combinations

Brakes Car
Lot
Tires

Bumpers Manuf. Car

Car Lot
Upholstery

Engine Car
Lot
Transmission
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 Dedicated Chain

Rolling Steel
Mine Smelter Product
Mill Sales

Independent Independent Independent

Business Business Business
Unit Unit Unit

Single Firm - Totally Owned Industry - Sole Source

Transfer Prices Fixed by Policy

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Competitive Link Opportunity

Oil Chemical Cloth Dress

Refinery Customer
Well Plant Mill Factory

Oil Chemical Cloth Dress

Refinery Customer
Well Plant Mill Factory

Oil Chemical Cloth Dress

Refinery Customer
Well Plant Mill Factory

Transfer Prices at Market Prices

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Individual Member of Chain
Independent
Supplier Business Client
Component
Process
Transactions Transactions

Purchase Internal Sell

Receive Processing Deliver
Check Invoice
Pay Collect

Profit=Sales-Purchase-Inventory Cost-Overhead
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 Simple Dist. Chain Game

1. My Plan for the Week The Actual for the Week

I Order Parts Parts Come In
2.
Beginning Inv. Avail. Inventory
Orders Rec’vd

Product Flow Cash Flow

Orders Filled Income @ $+50
Weekly
3. Back Orders BO @ $ -50 Income
4.
Remaining Inv. Inv. @ $ -10 $

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 Simple Game Example

1. My Plan for the Week The Actual for the Week

I Order Parts 5 Parts Come In 5
2.
Beginning Inv. 6 Avail. Inventory 11
Orders Rec’vd 4

Product Flow Cash Flow

Orders Filled 4 Income @ $+50 200
Weekly
3. Back Orders BO @ $ -50 0 Income
4.
Remaining Inv. 7 Inv. @ $ -10 -70 $ 130

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 Black Bean Business
Black Bean Business: A Simplified Distribution Game
Beginning
Raw Material Manufacture Transportation Distribution Retail Customer Cash On
Hand

Beginning
Inventory=> 6 My Division: $ 0

My Order=> Orders
(for upstream
Filled @$+50 $
materials)
Week 1

Running
I Receive=> Orders Weekly
Product=> Back Total
(from upstream
Available
(from down
Orders @$-50 $ Cash
Cash On
materials) stream clients) Flow
Hand

Inventory=>
Remaining @$-10 $ $ $

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 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.

Supply Quickly and Maintain High

Avoid Stock Outs Levels of Inventory
(Back Orders)
We effectively
meet our customer
requests
Minimize the Cost Maintain Low
of Operation Levels of Inventory

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 Traditional Supply Chain
Solution

Raw
Produce Distribute Retail Customer
Materials

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Typical Production Solution

Raw Machine Machine Machine

Materials 1 2 3 Warehouse

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 Difficulty in Forecasting
Product A Demand

80

60
Number

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

80

60
Number

Actual
40
Mean
20

0
1

11

13

15
Date

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 Adjusting for Product Life
Product A Demand

80

60
Number

Actual
40
Mean
20

0
Product B Demand
1

11

13

Date 15 80

60
Number
Actual
40
Mean
20

0
1

11

13

15
Date

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Inventory Demand
Probability

90% Sure
Inventory Level

Mean 50 70
Std Dev 10

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 DBR Production Solution
Constraint Buffer Protects Shipping Buffer Protects
Replenishment Short Lead Demand

Raw Constraint
Materials Machine Warehouse

Low inventory system is very responsive to

customer needs.
Low inventory system is product change.

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Non-Cooperative Supply Chain

Raw Produce
Transport Distribute Retail Customer
Material Constraint

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 Customer

lines

Water Water Water Local

Distribution Customer
Well Treatment Tower Lines

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 Cooperative Supply Chain

Raw Produce
Transport Distribute Retail Customer
Material Constraint

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 Watch
Watch Diligently Diligently
Diligently

Watch
Diligently

Supply Constraint Client Supply Constraint Client

Firm 1 Firm 2
After
Watch
Diligently

Watch
Diligently

Supply Constraint Client Supply Client

Firm 1 Firm 2
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 Transfer Costs in
Cooperating Chains

RM Cap. TPM Cap. Sell

$20 40/wk $60 40/wk $100

Labor $10/hour Labor $10/hour

OE $20/hour OE $20/hour Firm Total

T= $1600 T= $1600 T= $3200

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

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 Incentive to Switch
Market
5ea @$70
RM Cap. 35@ Cap. Sell
$20 40/wk $60 40/wk $100

Labor $10/hour Labor $10/hour

OE $20/hour OE $20/hour Firm Total

T= $1650 T= $1400 T= $3050

Labor=$-400 Labor=$-400 Labor=$-800
OE= $-800 OE= $-800 OE= $-1600
Profit= $450 Profit= $200 Profit= $650

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 Cooperative Dedicated
Sources
Best Supplier
RM Cap. 60% of Orders
$20 40/wk
35@ Cap. Sell
$60 40/wk $100
RM Cap.
$20 40/wk Lesser Supplier
40% of Orders

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