TOC Replenishment in a wholesale- dominated market, an oxymoron?

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A lot of my friends in the distribution industry (and I have lots of them!) are quite intrigued by the fact I make a living out of implementing things as simple as “The Goal 1” and “Its Not Luck 2”.

Yes of course, they have read the books during the course of their MBAs, but that was the classroom, right? Reality is complicated. There is the unpredictable competition, the conflicting interests of trade channel partners, of course the pressure of internal (stretch) targets, the economic uncertainty and on top of all this the ever changing consumer mindset. How can something as simple as “supply according to consumption” ensure that they will be able to meet their sales targets in an environment of such changing complexities?

When presented with the complete logic and taken through the CRT3 , some of them grudgingly agreed to the solution but were extremely skeptical of the results. At least they seemed so. One of them called me after some months and wanted an urgent meeting. He explained to me that he had tried implementing the replenishment solution but contrary to expectations, the results were quite discouraging.

The inventory kept in the regional warehouses was higher than normal yet the stockouts increased leading to considerable loss of sale and very quickly the system had to revert to the old forecast based placement of stocks.

A few questions later the mystery unraveled itself.

True to the book, they calculated the buffers based on the lead time, level of demand and variability of both. The trouble was that the company’s monthly sales graph showed a remarkable skew towards the end of the month. As much as 50% of the sales happened in the last week of the month. Yes the familiar “hockey stick” is back again!

And now understand the conflict: If you sized the buffers to the average sales factored for variability, the buffers will not be large enough to protect the month end peak, and if you tried to keep the buffers to the maximum sale, the inventory levels would be so high that the bean counters would throw a fit (besides not having the space in warehouses!)

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