Three inventory management models

How to effectively use the potential of key supply chain management approaches? What to choose: MRP, Lean or TOC? To understand which approach your business needs, you need to consider the key differences, strengths and weaknesses of each system.

The software, which is created for inventory management in the supply chain, implements specific methodologies and experience of developers. The methodology here is a standard set of tools, the effectiveness of which has been practically verified by many enterprises, and the results of application have significantly improved profitability, writes CNews.ru.

If the algorithms are based on the logic of one person, then either he is a genius, and his methodology will become a new standard in the industry, or, as often happens, the system lacks criticism, and such programs suffer from imperfection. Therefore, the cases of implementing the vision of one person will not be considered.

The "push" MRP systems

The "push" (classic) type of MRP (material planning system) is probably the most common. The logic put in the mechanism of work of similar systems, is simple enough: the forecast of sales for the following period (usually month) which commercial and marketing departments translate in the plan of sales and represent to top-management is developed.

The confirmed plan of sales of finished goods by means of specifications is easily converted into the plan of purchases of raw materials. When there is an understanding of how much and what to produce, the question remains when to produce. The answer to this question is the production plan. In its preparation, as a rule, the balance of raw materials, finished products, insurance stock, as well as production constraints are taken into account: optimal batches, queues, throughput capacity, etc. Rarely, but sometimes the cost of placing an order, storage, shortage of products is also taken into account.

Optimization in the ejection system is achieved through improved forecasting, automation, and the purchase of more productive equipment. At the functional level, there are typical conflicts between functions. Thus, sales conflicts with production. Selling units often push forward urgent orders, which breaks the production schedule. Production is not always able (physical limitations, lack of raw materials) or willing (production efficiency indicators are "killed") to change the schedule. The key dilemma that arises here is to achieve efficiency in the short or long term. The strength of such a system is detailed planning, the weakness is execution.

Вытягивающие системы Lean и TОC

The lean manufacturing system is designed to balance flow, level production capacity and manage flow rate by changing the amount of "kanban" in circulation. "A kanban is a card on which all the necessary information and the quantity of parts to be produced is indicated.

Based on the forecast or the usual average, the "cycle time" (rhythm or speed of operation) is calculated for which the production unit produces the unit of production. The calculations take into account the number of sales for the previous month to the number of minutes of production. Also, taking into account the number of nomenclatures, the cycle time is determined (a series of production of the entire nomenclature in the amount corresponding to the cycle time).

There is no production plan as such - there is a planned order or production speed. As the stock of raw materials and semi-finished products is stored almost in front of each workstation, the signal for production or replenishment is the presence of a "kanban" card. Thus, stocks have to be managed almost everywhere.

Optimization strategy, better known as Kaizen, combines management philosophy and a set of specific tools and involves all employees of the company. The Kaizen system is based on the idea of continuous improvement, which consists of the implementation of many even small ideas of employees at all levels of the company.

Optimization of reserves is achieved by reducing the time of changeover, minimum batches, production cycle, work that does not add value. The strong point is the implementation, while the relatively weak point is the planning.

Theory of Constraints (TOC)

The main idea of the theory of restrictions is connected with the fact that the improvement of productivity of separate elements will not lead to perfection of all system. To visualize the concept of TOC it is possible by means of a chain where its reliability is defined by the weakest link. In order to maximize the use of existing production facilities, it is enough to use the weakest link most effectively. For this purpose, the TOC has a tool called "drum-buffer-rope".

The "drum" is the speed at which a bottleneck can be processed, and the "buffer" is a stock of semi-finished products to exclude periods of downtime of bottlenecks, since the downtime here is equal to the inactivity of the entire system. And the "rope" is a mechanism that pulls out the necessary amount of products and replenishes the buffer, ensuring the presence and, most importantly, prevents the accumulation of excesses in the system. But in most companies the real bottleneck is not a machine tool, but the market. Therefore, the tool of dynamic buffer management is more often used in practice.

The buffer size is calculated as follows: the initial buffer is defined as (consumption from the order to the next delivery * average daily consumption + set coefficient of 20% or 30% of the calculated number). The starting point is not really important. Important are the rules on the basis of which the buffer increases or decreases by a third. If the majority of the period between deliveries was in the red zone of the buffer, it increases, if in green - decreases. The system's efforts are aimed at keeping the stock level in the yellow zone corridor at all times. The idea of such management is to move away from the point value of the forecast value to the flow management based on the dynamics of the residuals.

Similarly to Lean, the strength lies in the execution field, and the weakness lies in the planning field. The dynamics of the buffer indirectly reflects all the conditions of work with goods: batches, production order, sales fluctuations, write-offs, re-records and even specifications. But the cause-and-effect relations are not clearly separated and it is difficult to understand a separate problem: "Why did you have such a stock? Therefore, even knowing in advance about a significant change, for example, the peak of sales, it is difficult to change the buffer correctly - it is not known what part of its size is actually sales, and what part - other factors. Consequently, manual change "breaks" its original idea of dynamic calculation.

Hybrid Demand Driven Material Requirements Planning (DDMRP)

The methodology has its roots in TOC, and the ideas of MRP, Lean, Six Sigma, and an essential block of innovations have been developed here. The key element in stock management is the buffer. Like the classic TOC buffer, it has three zones: red, yellow and green, but that's where the similarities end. The key difference here is a clear causal relationship between the factors that determine the size of the buffer.

The yellow zone in the scheme is the delivery shoulder and average daily consumption. The red zone shows the very nature of variability and characteristics of this SKU group. Green zone: conditions for work with orders and production limitations.

Let's consider the key differences from previous approaches to inventory management in supply chains.

Storage areas. Not only GP and raw materials as ejection systems, and not almost everywhere as ejection systems. DDMRP has a whole technique to determine where in the commodity structure it makes sense to store the stock. Before you can set up a stock, you need to answer three key questions. Will the Lead Time be reduced? Will demand and supply fluctuations be reduced? Is the ROI (Rate of Return on Investment) increasing?

The perception of the nature of the stock changes accordingly. If in MRP the insurance stock is excessive by definition and is used to cover the imperfections of the current system, and in Lean the stock is considered as necessary at least, in DDMRP - as a lever for supply chain management.

At the operational level, only real demand (customer orders) is used to generate orders, and since each buffer displays clear cause-effect relationships, they can be easily managed. This makes the buffer in the DDMRP a link between the strategic and operational levels and allows you to move away from the production plan to "master system settings". Conceptually, this means the following: the company ceases to produce with the hope of selling in the future, and instead, a properly tuned system makes it possible to produce what the client wants, while taking into account all the limitations and at minimal cost.

Unsubscribed SKUs (stock accounting units) that are between buffers - dependent on buffered SKUs, similar to the classic MRP. Buffered SKUs are independent of each other (similar to TOC or Lean).

The width of the red buffer zone depends on the fluctuations of demand for this position.  Yellow is the basis for covering demand. Green - the buffer zone determines the frequency and minimum volume of each order. The black line shows the dynamics of the actual GS balance. In the DDDMRP, each color determines the influence of a particular factor on the stock level, which opens up new opportunities for continuous improvement. It is an indicator that shows where efforts need to be made to improve service without investment. 

To sum up, it can be concluded that the methodology is just a set of tools that are different and should be used for each specific problem. Inappropriate or incorrect use of even the most advanced tool does not guarantee success. On the other hand, having only a chisel and a hammer, a good master can work wonders.

Continuing the analogy with the tools, it is appropriate to remember the proverb: "If the hammer is your only tool, all problems look like nails to you. Learn all the approaches to inventory management, try to put the idea behind the idea into practice and you are guaranteed to open up horizons that you have not seen before, and the problems will be perceived as nothing more than new opportunities for improvement, because the necessary tools for their implementation you already have. And remember: it is important not to break what is working now. It is better to seek help or advice from more experienced colleagues, mentors or consultants. Don't waste your efforts inventing bicycles, let's just use them.