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

The Supply Chain Raw Materials Refine / Prepare ProduceTransport DistributeRetailCustomer

Short & Long Duration Chains Dairy Cows CreameryDeliverRetail Customer FarmerCanneryWholesaleRetail Customer

Complex Combinations Brakes Tires Bumpers Upholstery Engine Transmission Manuf. Car Lot Car Lot Car Lot

Dedicated Chain MineSmelter Rolling Mill Product Steel Sales Independent Business Unit Single Firm - Totally Owned Industry - Sole Source Transfer Prices Fixed by Policy

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

Independent Business Component Process SupplierClient Transactions Purchase Receive Check Pay Internal Processing Individual Member of Chain Sell Deliver Invoice Collect Profit=Sales-Purchase-Inventory Cost-Overhead

Simple Dist. Chain Game My Plan for the Week I Order PartsParts Come In Beginning Inv.Avail. Inventory The Actual for the Week Orders Rec’vd Orders Filled Back Orders Product Flow $+50 $ -50 Cash Flow $ -10Remaining Inv. $ Weekly Income

Simple Game Example My Plan for the Week I Order PartsParts Come In Beginning Inv.Avail. Inventory The Actual for the Week Orders Rec’vd 4 Orders Filled Back Orders Product Flow 4 $+50 $ -50 Cash Flow $ Remaining Inv. 7$ 130 Weekly Income

Black Bean Business

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 ProduceDistributeRetail Customer

Typical Production Solution Raw Materials Machine 1 Machine 2 Machine 3 Warehouse

Difficulty in Forecasting

Potential Future

Adjusting for Product Life

Inventory Demand Probability Mean 50 Std Dev 10 90% Sure Inventory Level 70

DBR Production Solution Raw Materials Constraint Machine 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 Produce Constraint TransportDistribute Retail Customer ConstraintClient Supply Watch Diligently Just-in-Time Production Using DBR

Reference Supply Chains SnowRiverDamGenerator Power lines Customer Water Well Water Treatment Distribution Water Tower Local Lines Customer

Cooperative Supply Chain Raw Material Produce Constraint TransportDistribute 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 Two Before ConstraintClient Supply Watch Diligently ConstraintClient Supply Watch Diligently Firm 1 Firm 2 After ConstraintClient Supply Watch Diligently Client Supply Watch Diligently Firm 1 Firm 2

Transfer Costs in Cooperating Chains Cap. 40/wk Cap. 40/wk Labor $10/hour OE $20/hour RM $20 TPM $60 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

Incentive to Switch Cap. 40/wk Cap. 40/wk Labor $10/hour OE $20/hour RM $20 $60 Sell $100 Labor $10/hour OE $20/hour T=$1650 Labor=$-400 OE=$-800 Profit=$450 T=$1400 Labor=$-400 OE=$-800 Profit=$200 Firm Total T=$3050 Labor=$-800 OE=$-1600 Profit=$650 Market

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