Post on 14-Dec-2015
1© 2004 TOCICO. All rights reserved.
THEORY OF CONSTRAINTS
CASE STUDY 1CASE STUDY 1Helping achieve Helping achieve
““One-Simple-ABBOne-Simple-ABB” with “” with “TOC in SAP” TOC in SAP” within Complex Manufacturing within Complex Manufacturing
EnvironmentEnvironment
Presenter: Dr Alan Barnard, CEO Goldratt Research Labs
Date: 27th August
CASE STUDY 2Finding & Testing a solution to
SHORTAGES & SURPLUSES within Book Publishing Supply Chain
Finding & Testing SIMPLE Solutions for COMPLEX Problems
2© 2004 TOCICO. All rights reserved.
THEORY OF CONSTRAINTS
Case Study 1Case Study 1Helping Achieve “Helping Achieve “One-Simple-One-Simple-
ABBABB” with ” with TOC in SAPTOC in SAP
Presenter: Dr Alan Barnard, CEO Goldratt Research Labs
Contributors: Dr Katja Rajaniemi, Improvement Manager ABB BU
Fredrik Nordstrom, Regional Manager ABB Ops Development Group
Lukasz Krupa, Leader, ABB Manufacturing IS Solutions
Alex D’ ’Anci, Regional Manager, ABB Ops Development Group
Eli Schragenheim, Goldratt Schools
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
• Research Background
• ABB Case Study:− Facts about ABB
− ABB’s Continuous Improvement Evolution at ROI
− The “One-Simple-ABB” Challenge for Operations Excellence− Conflict in leveraging and standardizing on best practices across ABB
− Conflict in leveraging and standardizing on a single IT Platform and ERP system
− Finding a Solution to the “One-simple-ABB” Challenge− Defining a simple yet robust TOC solution for 300+ different factories
− Defining “TOC in SAP” using Goldratt’s “Strategy and Tactic” (S&T) process
− Testing “TOC in SAP” solution through series of Pilots
− Results achieved to date & next steps
• Research Conclusions
Presentation OutlinePresentation Outline
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Research BackgroundResearch Background
RESEARCH PROBLEM
− Most companies today, have left the final choice of which which Planning, Execution and Continuous improvement (PECI) methods and which IT systems to support these to Business Units because BUs are:
− Responsible for continuously improving on their result.
− In the best position to decide which methods & systems best meet their specific requirements.
− Normally responsible for pay for these.
− No wonder BU’s have resisted most attempts to standardize or centralize IT and PECI’s …
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Research BackgroundResearch Background
RESEARCH PROBLEM
− However, not standardizing and leveraging Best Practices and a common IT platform, has major negatives for the Company as a whole…
− Providing Support to multiple IT platforms and different Improvement methods is a nightmare for Centralized functions and very costly
− Ensuring fast and reliable integration of data between different systems is a major challenge and occupies valuable management time every month
− Business Processes cannot be standardized to enable fast and accurate transactions.
− Best Practices are not shared and results achieved are not duplicated
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Research BackgroundResearch Background
RESEARCH QUESTIONS
Q1: Is it possible to find a "one-solution-fits-all" both in rules and ERP technology when it comes to planning, execution and improvement of operations especially considering the many specific local considerations resulting in "we are different”)?
Q2. Even if it was possible to theoretically find such a solution that could meet most business requirements, would it be possible to get buy-in from regional and plant managers under pressure to improve performance & reduce costs to test such a solution?
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Research BackgroundResearch Background
RESEARCH METHOD
1.Literature Review to identify which companies have tried and succeeded and which not and Why?
2.Consultation with Experts to determine if a “One-Solution-fits-all” solution design was possible and then whether such a solution can be implemented within a standard ERP System (the hypothesis to be tested)
3.Followed Action Research method using “Plan, Do, Review & Act” cycles to validate and continuously improve hypothesis
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Case Study: Facts about ABBCase Study: Facts about ABB
ABB is the world’s leading provider of power and automation technologies with strong market positions in core businesses
ABB’s goal is to create value for their stakeholders by helping customers Use Electrical Power more Efficiently, Increase Industrial Productivity, Lower Environmental impact in a sustainable way
Revenues in 2007: $29.2 billion and Orders for $34.3 b (large backlog)
Headquarters: Zurich, Switzerland
About 107,000 employees in 100 countries with Market-leading positions in most key products
Robust global value chain to serve established and emerging markets
300+ factories around the world
Process AutomationPower Systems Robotics
Power Products
Automation Products
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Suppliers Customers
Why Operational Excellence is critical to ABB…
3 Supply Partners expectBetter visibility (and prices) for Improved reliability and response
1 Customers expect more for less faster each year
Competitors4 Competitors also have
aggressive operational excellence programs
SubSub
Revenues COPQ
EBIT
2 Shareholders expect Increase EBIT (growth)Reduce COPQ (stability)
P
T
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
ABB’s Continuous Improvement ABB’s Continuous Improvement EvolutionEvolution
1988 2010
Nu
mb
er
of
fac
tori
es
usi
ng
TO
C
1992 ProductionTechnologyOrganization partof Corp. R&D inFinland
1993 first DBRimplementation
1999 12 Jonahs
trained
1998 Corp R&DProgram for Manufacturing Technologies
2001Eli GoldrattvisitsABB
2003OperationalExcellence Program (OEP) launched as CP3
2005Test TOC DistributionSolution
2006MT R&D Program becomesOperations Development Group.50 consultants in 4 centers
2007TOC in SAP
2002ConWIP
By 2008 ~100 Trained in “Advanced TOC”~500 in TOC through OEP
TOC + Lean Thinking + OEP = Operational Excellence
2007OEPfor IS
2008OEP forControllers
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Was the investment in Operational Was the investment in Operational Excellence worth it for ABB?Excellence worth it for ABB?
A study of ABB’s Operations Improvement projects (TOC+LEAN)
confirm an average payback time of less than 3 months !
1) Source: Copenhagen Institute for Futures Studies and Larry Keeley: www.doblin.com (3000 projects examined)
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Distribution Transformers production unit
2005 TPT (Line1) - 75%TPT (Line2) - 65%
Distribution Transformers production unit
2005 TPT > - 50%Delivery time > - 25%Total inventory reduction 1,2 MUSD while 40% volume increase
LV Motors manufacturing unit 2005 Productivity +38%TPT -17%
Tap Changer manufacturing unit 2005 TPT - 50%Delivery time > - 60%
HV Bushings manufacturing unit 2005 Capacity +30%TPT - 50%OTD from 8 to 93%
Value chain from a component factory in Europe to a product factory in Asia
2005 Replenishment time - 72%Total inventory turns +200%On Time Delivery from 83 to 95-100%
Technology Development Centre 2005 Project OTD from 45 to 87% withsignificantly reduced cycle timeFunctional Completion Rate incr. to 100%
Cables manufacturing unit 2004 TPT - 80%WIP - 60%
Distribution Transformers production unit
2004 TPT - 70%Delivery time - 48% OTD from 70 to 96%while 245% increase in orders received
HV Switchgear 2004 Capacity +43%
Sample TOC & Lean success stories in ABB (1/2)
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Sample TOC & Lean success stories in ABB (2/2)
Power Transformers production unit
2007 WIP and LT - 40%OTD (On Time Delivery) from 86 to 100%Capacity +100% without planned expansion
Distribution Transformers production unit
2007 WIP - 45%TPT - 70% OTD from 45% to 98%
Distribution protection and control products manufacturing unit
2007 Delivery time - 50%OTD from 40 to 100% Capacity + 30 % with existing resources
MCB production unit 2007 Delivery time - 50% for stock and non-stock itemsOTD from 84% to 97%
Power Transformers production unit
2006 Productivity +30%Delivery time - 50% (from 6 to 3 months) WIP - 35%
Distribution Transformers production unit
2006 Capacity +30%TPT - 64%Delivery time - 32%Inventories - 44%OTD from 66 to 98%
MV Circuit Breakers manufacturing unit
2006 Capacity +260%TPT - 60%Delivery time - 60%OTD from 77 to 100%
LV Breakers and Switches production unit
2006 Capacity +25%Delivery time - 80%OTD from 23 to 90%
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
What is the benefit of using TOC as a focusing tool What is the benefit of using TOC as a focusing tool for LEAN & Six Sigma vs. using each in isolation?for LEAN & Six Sigma vs. using each in isolation?
Sanmina-SCI Case Study•Leading global electronics manufacturing services (EMS) company employing over 48,000 people and revenue of $11.7 Billion
•Set-up experiment over 2.5 years to test financial impact of LEAN, Six Sigma and TLS (TOC focusing LEAN & 6S)
•21 Participating plants with:11 Plants on Six Sigma 4 Plants on Lean6Plants on TLS
•TLS, Lean, and Six Sigma all offered benefits
•TLS showed 3.9 times greater financial benefit delivering 89% of total benefits achieved from only 6 out of 21 plants
Per Project Financial Return
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
Lean Six Sigma TLS
Methodology
Un
its
Return
Contribution % to realized savings by method applied
Lean4%
Six Sigma7%
TLS89%
Source: Apics Magazine, May 2006 and TOCICO 2007 presentation by Dr Russ Pirasteh, Sanmina-SCI,
russ.pirasteh@sanmina-sci.com
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
But how do you achieve Step-Change AND But how do you achieve Step-Change AND Continuous Improvement within any organization?Continuous Improvement within any organization?
Source: ‘Kaizen: The Key to Japan’s Competitive Success’, by Masaaki Imai
P DCA
S DCA
= Standardize, Do, Check, ActContinuous (Evolutionary) Improvement
through institutionalizing Best Practices
= Plan, Do, Check, ActStep-Change (Revolutionary) Improvement
through Constraint Focused interventions (Kaizen)
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Need
Have a way to Roll -out best-practices
efficiently & effectivelyObjective
Ensure leverage of Best-Practices
in all Business units
NeedHave a way to
ensure out-standing result
in each BU
Action
Standardize ourimprovement
approach
Action
Customize an improvement
approach for each business unit
What blocks a company such as ABB from identifying and spreading best-practices, learnings and results effectively in a big organization?
The “Best Practice” Standardization Dilemma
Really?
Each BU/Factories is different which mean there are no “one-solution-fits-all” that can be rolled out
Because:
Conflict
Operational Excellence Operational Excellence Acceleration ChallengeAcceleration Challenge
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Action
Standardize ourimprovement
approach
ActionDevelop
approach with target unit personnel each
time
Resolving the Standardization Dilemma:
Despite the many differences between the plants where TOC+LEAN were implemented, it seemed to deliver similar results without any significant differences in the “what” and “how to”…
Need
Roll-outbest practices
effectivelyObjective
Ensure leverage of Best-Practices
in all units Need
Ensure out-standing result
in each unit
Direction of solution:Use TOC to focus & synchronize Planning, Execution & Cont. Improvement solution (TOC + LEAN) and an participative engagement approach for getting contribution and consensus
Operational Excellence Operational Excellence Acceleration ChallengeAcceleration Challenge
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
ABB Gate Model for Process Improvement ABB Gate Model for Process Improvement projects of Best Practices using a holistic projects of Best Practices using a holistic TOC approachTOC approach
Project scope
definition
ProjectExecution
Plan
Final solution
agreement
ProjectHand -over
Pilot results
Close project
Validate results
Project Start
Agreement
2 3 4 51 6 7Development Piloting Implementation
0
Analysis Planning Execution Sustain
1. Agreement on the problem
2. Agreement on the direction of the solution
4. Agreement that no disastrous side effects will result
5. Agreement on the implementation requirements and the plan itself
3. Agreement that the solution will yield the desired results
…. addressing resistance to change as an organizational constraint:
6. Agreement by all collaborators including management that we can move forward with confidence
But how do a standardize “Best Practices” without standardizing the IT Platform?Source: ABB developed (based on Cooper´s Stage-gate model).
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TOC Research Projects
ABB’s ERP System reality after years of ABB’s ERP System reality after years of acquisitions and empowered BU and acquisitions and empowered BU and Regional IT decision making..Regional IT decision making..
• As a result of numerous acquisitions, ABB at one time had more than 500 ERP systems and 70 different ERP brands in operation across its businesses.
• Most of the factories and distribution centres were also using in-house developed Spreadsheets and Databases for supporting their preferred Planning, Execution and Continuous Improvement Methods
• Integration of systems and data (and support) had become a nightmare and major risk to the business.
• In late 2006, a decision was made at the ABB board, to embark on a (challenging) journey of standardization on a common IT / ERP Platform (or at least range of platforms) and simplification based on “best-practices”.
• The initiative was titled “One-simple-ABB” or “OsA”.
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TOC Research Projects
ABB’s “One-simple-ABB” decision ABB’s “One-simple-ABB” decision and consequences...and consequences...
Press Release in March 2007
“Today, ABB signed a strategic agreement with the German-based ERP provider, SAP to help deploy common SAP ERP software through its global operations to help unify and simplify some of ABB’s most important business processes. The OsA initial target is one ERP per country, and ultimately one ERP platform per region for all of ABB that would enable a high degree of standardization in the human resources, finance and administration and corporate governance functions as well as in the operational excellence “best-practices”
Yes, BUT....Would it really be possible to find and get agreement that a “One-simple-ABB” solution was possible for managing the
diversity and complexity of ABB’s 300+ factories?
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
The Operations dilemma in supporting ABB’s The Operations dilemma in supporting ABB’s global “One-Simple-ABB” objective?global “One-Simple-ABB” objective?
Need
Efficient and fully integrated Finance, HR & OPS business processes across
ABBObjective
Create long term competitive edge in
our industryNeed
Continuously Improve customer service and sales
through efficient & effective operations
ActionDeploy a common
ERP platform across ABB and limit
selection of SCM & MES systems
ActionAllow each site to develop own / use 3rd party ERP, SCM
& MES systems
Each BU/Factory is unique and using a common ERP platform or limiting choices in SCM / MES methods & systems will jeopardize results and or ownership
Because:
The “One-Simple-ABB” Dilemma
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Action
Deploy SAP as the dominant ERP
system
Implement proper TOC scheduling method for each
specific environment
Need
Need Action
Objective
Efficient and fully integrated Finance, HR & OPS business processes across
ABB
Create long term competitive edge in
our industry
Continuously Improve customer service and sales
through efficient & effective operations
Direction of win-win solution:•Get agreement that TOC can provide “one-solution-fits-all”•Find a way to Modify SAP R3 to support TOC (TOC Planning, Execution & POOGI rules).•ABB to launch a “TOC in SAP” initiative to validate above hypothesis
The “One-Simple-ABB” Solution for Operations
Yes, BUT…Q1: Would it really be possible to define a TOC “One-solution-fits-all”?Q2: Would it really be possible to modify SAP to support this solution?
The Operations dilemma in supporting ABB’s The Operations dilemma in supporting ABB’s global “One-Simple-ABB” objective?global “One-Simple-ABB” objective?
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Jan 2007
March 2007
Jun 2007
Aug 2007
Oct 2007
Nov 2007
Ongoing
TOC Solution Validation & Pilot Selection
Web-call with Dr. Eli Goldratt
SAP Development & TestCollaboration of ABB, TOC & SAP
Experts
Roll-out & ValidationCont. To validate
robustness & results
Project Start“TOC in SAP” Intro W/Shop In
Zurich
TOC Solution DesignSAP
Blueprint Experts convert Solution Design into Functional
Reqs
“Go-Live”At Pilot Site In
Brno
““TOC in SAP” Project TOC in SAP” Project at ABBat ABBGetting Agreement & testing TOC Solution Design Getting Agreement & testing TOC Solution Design & SAP functionality& SAP functionality
So, what was the process we used to find and test a “SIMPLE & ROBUST” solution...
...introducing Goldratt’s Strategy & Tactic Tree
W/Shop in Krakow reviews ABB diversity
W/ShopsIn Brno to specify the solution
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Finding a simple & robust SCM solution for Finding a simple & robust SCM solution for ABB that is generic enough to be used by all ABB that is generic enough to be used by all factoriesfactories
“The best solutions start with the right questions…”
2.12.1Reliability/Availability Competitive
Edge
Reliability/Availability Competitive
Edge
2.22.2
Rapid Response Competitive
Edge
Rapid Response Competitive
Edge
11
ABB Goal: Profitable Growth
ABB Goal: Profitable Growth
3.1.13.1.1
Remarkable Due Date Perf & Availability
Remarkable Due Date Perf & Availability
3.1.23.1.2Selling
Reliability/Availability Selling as Comp. Edge
Selling Reliability/Availabi
lity Selling as Comp. Edge
3.1.33.1.3
Coping with Sales
Growth
Coping with Sales
Growth
3.2.13.2.1
Remarkable Rapid
Response
Remarkable Rapid
Response
3.2.23.2.2
Protective Capacity for RR orders
Protective Capacity for RR orders
3.2.33.2.3
Selling Rapid Response as Comp. Edge
Selling Rapid Response as Comp. Edge
3.2.43.2.4
Expanding RR Client
Base
Expanding RR Client
Base
Using Goldratt’s Strategy & Tactic tree method to find a simple & robust Planning, Execution & Cont. Improvement solution…
25
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Current Performance
Potential Performance
Over- / Under-committing Capacity Over- / Under-committing Capacity
Releasing Too much / Too earlyReleasing Too much / Too early
Materials / Purchased Parts not availableMaterials / Purchased Parts not available
Unsynchronized Priorities in OperationsUnsynchronized Priorities in OperationsOther “Hidden” Disruptions to FlowOther “Hidden” Disruptions to Flow
What really causes low Tput, poor DDP / Availability & Long LT?
Finding a simple & robust SCM solution for Finding a simple & robust SCM solution for ABB that is generic enough to be used by all ABB that is generic enough to be used by all factoriesfactories
2.12.1Reliability/Availability Competitive
Edge
Reliability/Availability Competitive
Edge
2.22.2
Rapid Response Competitive
Edge
Rapid Response Competitive
Edge
11
ABB Goal: Profitable Growth
ABB Goal: Profitable Growth
3.1.13.1.1
Remarkable Due Date Perf & Availability
Remarkable Due Date Perf & Availability
3.1.23.1.2Selling
Reliability/Availability Selling as Comp. Edge
Selling Reliability/Availabi
lity Selling as Comp. Edge
3.1.33.1.3
Coping with Sales
Growth
Coping with Sales
Growth
3.2.13.2.1
Remarkable Rapid
Response
Remarkable Rapid
Response
3.2.23.2.2
Protective Capacity for RR orders
Protective Capacity for RR orders
3.2.33.2.3
Selling Rapid Response as Comp. Edge
Selling Rapid Response as Comp. Edge
3.2.43.2.4
Expanding RR Client
Base
Expanding RR Client
Base
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
PlanningPlanning
How do we control release of ETO, MTO & MTS WO’s for Low WIP/high
CCR utilization?
How do we control release of ETO, MTO & MTS WO’s for Low WIP/high
CCR utilization?
ExecutionExecution
How do we maintain right
priority of ALL WO’s on shop floor?
How do we maintain right
priority of ALL WO’s on shop floor?
Ongoing ImprovementOngoing Improvement
How do we continuously Improve flow by
identifying & removing local optima & other
“hidden” disruptions/ CCRs to improve flow?
How do we continuously Improve flow by
identifying & removing local optima & other
“hidden” disruptions/ CCRs to improve flow?
Finding a simple & robust SCM solution for Finding a simple & robust SCM solution for ABB that is generic enough to be used by all ABB that is generic enough to be used by all factoriesfactories
2.12.1Reliability/Availability Competitive
Edge
Reliability/Availability Competitive
Edge
2.22.2
Rapid Response Competitive
Edge
Rapid Response Competitive
Edge
11
ABB Goal: Profitable Growth
ABB Goal: Profitable Growth
3.1.13.1.1
Remarkable Due Date Perf & Availability
Remarkable Due Date Perf & Availability
3.1.23.1.2Selling
Reliability/Availability Selling as Comp. Edge
Selling Reliability/Availabi
lity Selling as Comp. Edge
3.1.33.1.3
Coping with Sales
Growth
Coping with Sales
Growth
3.2.13.2.1
Remarkable Rapid
Response
Remarkable Rapid
Response
3.2.23.2.2
Protective Capacity for RR orders
Protective Capacity for RR orders
3.2.33.2.3
Selling Rapid Response as Comp. Edge
Selling Rapid Response as Comp. Edge
3.2.43.2.4
Expanding RR Client
Base
Expanding RR Client
Base
SalesSales
How to QUOTE reliable due dates with
internal Constraint?
i.e. Not over-/under-commit
How to QUOTE reliable due dates with
internal Constraint?
i.e. Not over-/under-commit
ProcurementProcurement
How do we maintain High
RM Availability with Low
Inventory?
How do we maintain High
RM Availability with Low
Inventory?
27
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
4.11.1 (Sales)4.11.1 (Sales)
TOC’s PLANNED LOAD (PL) for Quoting
Safe Due Dates
TOC’s PLANNED LOAD (PL) for Quoting
Safe Due Dates
4.11.2 (Buying)4.11.2 (Buying)
TOC’s DYNAMIC BUFFER MGT (DBM) & TOC
Replenishment (TOCR) for
Inventory Mgt
TOC’s DYNAMIC BUFFER MGT (DBM) & TOC
Replenishment (TOCR) for
Inventory Mgt
4.11.3 (Planning)4.11.3 (Planning)
TOC’s RELEASE
CONTRO (S-DBR) to control WIP
and improve Flow
TOC’s RELEASE
CONTRO (S-DBR) to control WIP
and improve Flow
4.11.4 (Execution)4.11.4 (Execution)
TOC’s SINGLE PRIORITY
SYSTEMBuffer Mgt (BM) to
keep priorities synchronized
TOC’s SINGLE PRIORITY
SYSTEMBuffer Mgt (BM) to
keep priorities synchronized
4.11.5 (Improve)4.11.5 (Improve)
TOC’s BUFFER
ANALYSIS to Focus Process
Improvements & Capacity Elevation
TOC’s BUFFER
ANALYSIS to Focus Process
Improvements & Capacity Elevation
Finding a simple & robust SCM solution for Finding a simple & robust SCM solution for ABB that is generic enough to be used by all ABB that is generic enough to be used by all factoriesfactories
2.12.1Reliability/Availability Competitive
Edge
Reliability/Availability Competitive
Edge
2.22.2
Rapid Response Competitive
Edge
Rapid Response Competitive
Edge
11
ABB Goal: Profitable Growth
ABB Goal: Profitable Growth
3.1.13.1.1
Remarkable Due Date Perf & Availability
Remarkable Due Date Perf & Availability
3.1.23.1.2Selling
Reliability/Availability Selling as Comp. Edge
Selling Reliability/Availabi
lity Selling as Comp. Edge
3.1.33.1.3
Coping with Sales
Growth
Coping with Sales
Growth
3.2.13.2.1
Remarkable Rapid
Response
Remarkable Rapid
Response
3.2.23.2.2
Protective Capacity for RR orders
Protective Capacity for RR orders
3.2.33.2.3
Selling Rapid Response as Comp. Edge
Selling Rapid Response as Comp. Edge
3.2.43.2.4
Expanding RR Client
Base
Expanding RR Client
Base
28
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
2.12.1Reliability/Availability Competitive
Edge
Reliability/Availability Competitive
Edge
11
ABB Goal: Profitable
Growth
ABB Goal: Profitable
Growth
3.1.13.1.1
Remarkable Due Date Perf & Availability
Remarkable Due Date Perf & Availability
Defining, communicating & validating the Defining, communicating & validating the proposed ERP changes using S&T structure proposed ERP changes using S&T structure
4.11.1 (Sales)4.11.1 (Sales)
TOC’s PLANNED
LOAD (PL) for Quoting Safe
Due Dates
TOC’s PLANNED
LOAD (PL) for Quoting Safe
Due Dates
Why is the change needed?
Necessary Assumption
What is the objective of the change?Strategy
Why will the change achieve the objective?
Parallel Assumptions
How will the change be implemented?
Tactic
Quoting Safe Due Dates using CCR(s) Planned Load4.11.1
• When Sales/Planning accept an order due date which the factory cannot achieve, it jeopardize ABB’s Reliability CE.
• Even if the constraint is in the market, fluctuations in demand or supply can cause specific resources (CCRs) to be overloaded. Under such circumstances, quoting fixed lead times is very likely to result in missed due dates resulting in poor DDP.
Due-dates given by the sales force/planning are (almost) always met even during periods of capacity overloads (Target: 99% DDP)
1. Safe Due-date are given according to first available slot on CCR(s) + ½ Production Time Buffer
2. The ERP system is modified to provide Safe Due Date based on CCR Planned Load + ½ PTB within minutes and Sales/Planning is trained to use it.
• It is relatively easy to meet all due-dates when the commitments are given based on actual planned loads on the CCR(s) and S-DBR and BM are in place to control release & align priorities.
• The ERP systems can be modified to provide (within mins) a safe due date based on CCR(s) planned load + ½ Production Time Buffer (if CCR is about in middle of flow)
TOC’s PLANNED LOAD DETAILS
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Quoting Safe Orders Due Dates using CCR(s) Planned Load
CCR
Back Orders Overdue
Material Release Date
Safe Due Date
½ PTB ½ PTB
Production Time Buffer (PTB)
4.11.1
Supply Time Buffer (STB)
Material Order Date
Tactic1. Safe Due-date are given according to first available slot on CCR(s) + ½ Production Time Buffer
Total Load in
Time on CCR
Quote this “safe” due
date to customer
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Identify CCR Overload
Identify Next Avail slot on CCR
Quoting Safe Orders Due Dates using CCR(s) Planned Load4.11.1
Tactic2. The ERP system is modified to provide Safe Due Date based on CCR Planned Load + ½ PTB within
minutes and Sales/Planning is trained to use it.
31
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
2.12.1Reliability/Availability Competitive
Edge
Reliability/Availability Competitive
Edge
11
ABB Goal: Profitable
Growth
ABB Goal: Profitable
Growth
3.1.13.1.1
Remarkable Due Date Perf & Availability
Remarkable Due Date Perf & Availability
Why is the change needed?
Necessary Assumption
What is the objective of the change?Strategy
Why will the change achieve the objective?
Parallel Assumptions
How will the change be implemented?
Tactic
Maintaining Optimum RM & PP Inventory Levels4.11.2• Having too much Raw Material (RM) and or Purchased Parts
(PP) in the stores or ordering too early can easily drain the company’s cash /WH space.
• Having too little RM, PP can and most frequently do cause delays that can cause lost production and potentially missed due dates (jeopardizing building of a “Reliability” Comp. Edge)
• .The target levels of RM & PP inventories held are continuously monitored and when needed are suitably modified (not too much/too little)
1. Target Levels are sized based on Max Demand within Reliable Replenishment time (Rt=OLT + SLT)
2. Inventory levels are maintained by replenishing on actual consumption & resizing on buffer penetration
3. The ERP system is modified to enable DBM & TOCR functionality
• TOC;s Dynamic Buffer Management & Replenishment of RM & PP Inventory, is a robust mechanism that enables setting, replenishing & adjustment of inventory targets, according to the actual level of demand & supply ensuring low levels of inventory& high availability.
• Most ERP systems do not provide a mechanism for auto resizing inventory target levels based on actual changes in demand/supply
TOC REPLENISMENT & DBM DETAILS
4.11.2 (Buying)4.11.2 (Buying)
TOC’s DYNAMIC BUFFER MGT (DBM)
& TOC Replenishment
(TOCR) for Inv Mgt
TOC’s DYNAMIC BUFFER MGT (DBM)
& TOC Replenishment
(TOCR) for Inv Mgt
Defining, communicating & validating the Defining, communicating & validating the proposed ERP change using S&T structure proposed ERP change using S&T structure
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
300
Month 1 Month 2 Month 3
400
200
100
Auto Up-size Buffer based on level of Red-zone penetration
Auto Down-size Buffer based on no Yellow Zone penetration
TOC Planning Rule: Size Buffer Target Level based on “Peak Demand within Reliable Replenishment Time”TOC Execution Rule: Order daily & Replenish up to Target Level frequently (e.g. daily) on actual demandTOC Feedback Rule: Re-size buffers based on red-zone penetration
TOC Replenishment & Dynamic Buffer Management RulesWhat are the New TOC Planning, Execution & Feedback Rules…
Stock in Pipeline Stock on Hand
Maintaining Optimum RM & PP Inventory Levels with DBM / TOCR
Tactic1. Target Levels are sized based on Max Demand within Reliable Replenishment time (Rt=OLT + SLT)2. Inventory levels maintained by replenishing on actual consumption & resizing on buffer penetration
4.11.2
Actual Demand
33
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
1. SAP TOC DBM & Repl. GUI 2. Graph showing resizing of Stock Buffers
Maintaining Optimum RM & PP Inventory Levels with DBM / TOCR4.11.2
Tactic1. The ERP system is modified to enable DBM & TOCR functionality
TOC DBM & Replenishment
3. List of Buffers requiring Resizing (proposals to purchaser, not automated until validated)
34
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
2.12.1Reliability/Availability Competitive
Edge
Reliability/Availability Competitive
Edge
11
ABB Goal: Profitable
Growth
ABB Goal: Profitable
Growth
3.1.13.1.1
Remarkable Due Date Perf & Availability
Remarkable Due Date Perf & Availability
Why is the change needed?
Necessary Assumption
What is the objective of the change?Strategy
Why will the change achieve the objective?
Parallel Assumptions
How will the change be implemented?
Tactic
TOC Release Control to prevent Over-production4.11.3• Having too many orders on the shop floor masks priorities,
promotes local optima behavior and therefore prolongs the lead-time and significantly disrupts due-date-performance (DDP).
• Having too little orders on the shop floor will cause starvation of CCRs and cause lost production and potentially missed due dates (jeopardizing building of a “Reliability” Comp. Edge)
• .The shop floor is populated ONLY with orders that have to be filled within a predefined horizon.
1. For each group of products currently having similar lead times, a buffer time is set to be equal to 50% of the current avg lead-time. Orders are released to the floor only a buffer time before their committed due-date, and if all materials are available. (WIP frozen until its time arrives).
2. The ERP system usage is modified to support S-DBR release control and automatic material availability check.
• In traditionally run plants touch time is a very small fraction (<10%) of the lead time.• Vast experience shows that, in traditionally run plants, restricting the release of materials, to be just half the current lead time before the corresponding due date, leads only to good results and to no negative ramifications* (lead time shrinks to less than half, DDP improves considerably, throughput goes up and excess capacity is revealed). These results are achieved irrespective of whether or not a bottleneck exists.
• * Except for environments which are dominated by heavily dependent set-up matrixes. Those environments have to be dealt in a different way.
TOC RELEASE CONTOL (S-DBR) DETAILS
4.11.3 (Planning)4.11.3 (Planning)
TOC’s RELEASE CONTROL (S-
DBR) to control WIP and improve
T, DDP & LT
TOC’s RELEASE CONTROL (S-
DBR) to control WIP and improve
T, DDP & LT
Defining, communicating & validating the Defining, communicating & validating the proposed ERP change using S&T structure proposed ERP change using S&T structure
35
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
MP1MP1
PP2PP2
RM1RM1
RM2RM2
PP1PP1
2.12.1 2.22.2 2.32.3 2.42.4
3.13.1 3.23.2 3.33.3
1.11.1 1.21.2
4.14.1
5.1 5.25.2 FG SHIPPING
FG SHIPPING
CCR
Manuf Parts Release Date= Due Date – ATO Shipping Buffer
Shipping Buffer for ATO
RM1RM1
RM2RM2
PP1PP1
RM3RM3
PP2PP2
MP1MP1
1. Raw Materials for Stock Manuf Parts Release based on “Replenish Frequently on Actual Consumption
MPS = DRUM = ORDERSPart # Qty Due Date Buffer FG001 5 13/3 66% FG002 10 16/3 23%
MANUF PARTS RELEASEPart # Qty OD DD Buffer TypeM001 5 05/2 04/3 66% ATOM002 10 07/2 07/3 20% Cust
Part sales to customers
GREEN ZONE RED ZONEYELLOW ZONE
Shipping Buffer for MTOGREEN ZONE RED ZONEYELLOW ZONE
2. Raw Material for Non-Stock Manuf Parts Release = DD – MTO Shipping Buffer
Stock Manuf (Common) Parts
Non-Stock (Unique) Manuf Parts
RAW MATRL RELEASE (ROPE)Part # Qty OD DD Buffer TypeP001 5 05/2 04/3 66% TimeP002 10 07/2 07/3 30% Stock
DefinitionsBuffer Status = (Buffer Time – Remaining Duration) / Buffer TimeRed Zone = Time req’d for expediting a medium-sized order
4.11.34.11.3 Controlling the Release in Manufacturing (MTO/ATO)
“Customer” Orders
“Customer” Orders
GREEN ZONE RED ZONEYELLOW ZONE
S-DBR Planning (Release Control) Solution
Quote LT’s on Planned CCR Load
Tactic1. Target Levels are sized based on Max Demand within Reliable Replenishment time (Rt=OLT + SLT)2. Inventory levels maintained by replenishing on actual consumption & resizing on buffer penetration
36
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
2.12.1Reliability/Availability Competitive
Edge
Reliability/Availability Competitive
Edge
11
ABB Goal: Profitable
Growth
ABB Goal: Profitable
Growth
3.1.13.1.1
Remarkable Due Date Perf & Availability
Remarkable Due Date Perf & Availability
Why is the change needed?
Necessary Assumption
What is the objective of the change?Strategy
Why will the change achieve the objective?
Parallel Assumptions
How will the change be implemented?
Tactic
Single Priority System to Synchronize Execution4.11.4
• Hectic priorities (hot, red-hot and do-it-NOW) cause chaos on the floor
• Even when material release is properly choked, not having a priority system can cause some orders to still be late..
The shop floor is governed by a simple, yet robust, priority system
1. TOC Buffer Management is the ONLY priority system used on the shop floor.
2. The ERP system (and MES/RFID systems) are modified to ensure the Purchase Order List, “Work-to-List” and Distribution Shipment List are prioritized based on buffer status (1st Black, 2nd Red, 3rd Yellow, 4th Green)
• Vast experience has shown that when work is released according to set time buffers, excellent results are obtained by using a crude priority system that is based solely on the time lapsed since the release.
• Buffer Management (BM) is setting priorities only according to the degree the buffer-time is consumed (four color code system - green: less than one third of the buffer time passed is lowest priority and black: more than the time buffer passed is the highest).
TOC SINGLE PRIORITY SYSTEM DETAILS
4.11.4 (Execution)
4.11.4 (Execution)
TOC’s Buffer Mgt (BM) as
synchronized SINGLE
PRIORITY SYSTEM
TOC’s Buffer Mgt (BM) as
synchronized SINGLE
PRIORITY SYSTEM
Defining, communicating & validating the Defining, communicating & validating the proposed ERP change using S&T structure proposed ERP change using S&T structure
37
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Stock Replenishment Orders do not have “Due Dates”
Customer Production Orders do have “Due Dates”
Sampl
e Scr
een
for s
how
ing
Buffe
r sta
tus
(Prio
rity)
of e
ach
orde
r and
ena
blin
g
capt
urin
g of
reas
on c
odes
for “
blac
k” a
nd “
red”
ord
ers
4.11.4 Single Priority System to Maintain Execution Synchronization
Tactic1. Target Levels are sized based on Max Demand within Reliable Replenishment time (Rt=OLT + SLT)2. Inventory levels maintained by replenishing on actual consumption & resizing on buffer penetration
SAP SAP
38
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
2.12.1Reliability/Availability Competitive
Edge
Reliability/Availability Competitive
Edge
11
ABB Goal: Profitable
Growth
ABB Goal: Profitable
Growth
3.1.13.1.1
Remarkable Due Date Perf & Availability
Remarkable Due Date Perf & Availability
Why is the change needed?
Necessary Assumption
What is the objective of the change?Strategy
Why will the change achieve the objective?
Parallel Assumptions
How will the change be implemented?
Tactic
Focusing Mechanism for Process Improvement/Elevation4.11.5• Most local improvement initiatives in manufacturing, which use good tools (Root Cause analysis, Lean and Six Sigma techniques) do improve the local performance but, many times, those local improvements do not translate into global improvements
•Not having sufficient protective capacity results in long LT & poor DDP
All local improvements initiatives in manufacturing do contribute meaningfully to the global performance and there is enough protective capacity for high DDP
1. For all Red & Black Orders and Stock Buffers, Production Supervisors/workers/purchasers record “what was black/red order waiting for?”
2. CCRs are identified and effectively removed through focused process improvement / elevation to the extent that most loaded resource has at least 20% protective capacity.
3. The ERP (and MES) systems are modified for POOGI.
If a CCR exists, work-in-process piles up in front of it. When materials release is restricted, the only work centers that have work-in-process piling up in front of them are the real CCRs.
CCRs can be identified also by recording “what black & red orders were waiting for?” In most of the cases additional capacity can be exposed by better EXPLOITATION like: - Ensuring that CCRs do not take lunch or shift change breaks, - Offloading work from the CCRs to less “effective” work centers that have ample excess
capacity, - Using LEAN /Six Sigma techniques to shrink the set-up time/reduce variation on the CCRs, - ELEVATING capacity with overtime or capex approval for the CCRs, etc.
TOC BUFFER ANALYSIS (POOGI) DETAILS
4.11.5 (Improve)4.11.5 (Improve)
TOC’s BUFFER ANALYSIS to
Focus Improvements
& Capacity Elevation
TOC’s BUFFER ANALYSIS to
Focus Improvements
& Capacity Elevation
Defining, communicating & validating the Defining, communicating & validating the proposed ERP change using S&T structure proposed ERP change using S&T structure
39
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
4.11.5 Focusing Mechanism for Process Improvement/Elevation
Tactic1. For all Red & Black Orders an Stock Buffers, Production Supervisors record “what was black/red order
waiting for?” 2. CCRs are identified and effectively removed through focused process improvement / elevation to the
extent that most loaded resource has at least 20% protective capacity.
40
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
TOC in SAP at ABBTOC in SAP at ABB“TOC in SAP” solution design: Order Processing “TOC in SAP” solution design: Order Processing Part IPart I
41
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
TOC in SAP at ABBTOC in SAP at ABB“TOC in SAP” solution design: Order Processing Part “TOC in SAP” solution design: Order Processing Part IIII
42
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
TOC in SAP at ABB“TOC in SAP” solution design: Determination of Earliest Due Date
43
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
“After analyzing SAP recommendations and data from nearly 2 months, we are confident that the the TOC rules were implemented correctly and that we are now confident that we can switch of our Off-line & 3rd Party systems.
The new Dynamic Buffer Management Functionality enables us to react quickly to changes in inventory values, which was not possible earlier, as we didn’t have time to monitor values manually.
We are very happy, are continuing to use the functionality and will be expanding it to other product lines”
Operations Managers
Factories in Brno and Vaasa
TOC in SAP at ABBTOC in SAP at ABBResults from Brno (Czech Republic) and Vaasa Results from Brno (Czech Republic) and Vaasa (Finland) (Finland)
44
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
TOC in SAP at ABBTOC in SAP at ABBNext StepsNext Steps
Implemented "TOC and SAP” now in 8 factories:•in Brno, Czech Republic•in Chonan, Korea, 2 factories•in Vaasa, Finland, 2 factories•in Baroda, India•in Przasnysz, Poland, 2 factories
And planning the implementations (in the work queue)•In Vaasa, Finland, 3rd factory•in Dalmine, Italy•in Ratingen, Germany. Has “SDBR in MES”•in Xiamen and Beijing China•in Skien, Norway.•…until all 300+ factories are reached…
45
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Research ConclusionResearch Conclusion
• The “TOC in SAP” initiative, showed that the ambitious goal of “One-Simple-ABB” can be achieved even in the management of operations (Planning & Execution and Continuous Improvement) in complex and different operational conditions.
• The partnership between ABB and Goldratt Research Labs made it possible to:
− Define a ROBUST enough TOC Planning, Execution and Continuous Improvement solution that could cope with all the variations and complexities of 300+ factories
− Define a SIMPLE enough TOC Solution which could be supported with relatively small modifications within a standard ERP system such as SAP.
− Break new ground by using the Strategy & Tactic Tree to define, communicate and get buy-in for the new TOC solution in a way that focused and accelerated the achievement of consensus and development of the required SAP functionality…which is also accelerating all new SAP implementations
− Deliver this project and its associated results in a record time for SAP solution design, development and testing in less than 9 months….
46
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Acknowledgments to Project Acknowledgments to Project Team ContributionsTeam Contributions
• Stefan Forsmark, Operations Manager for ABB’s Power Products Division/BU Transformers.
• Thomas W. Schmidt, IS Manager for ABB’s Power Products Division
• Goethe Wallin, Operations Manager for ABB’s Power Products Division/BU Medium Voltage
• Karol Kaczmarek, Global Project Manager Operational Excellence, ABB BU Transformers
• Erich Beeler, IS Manager, ABB BU Transformers, Engineering IS
• Dr Katja Rajaniemi, Global Process Improvement Manager, ABB BU Medium Voltage
• Bill Vick, Global Operations Improvement Manager, ABB BU Medium Voltage
• Miroslaw Bistron, Leader of Manufacturing IS program, ABB’s Power Products Division
• Lukasz Krupa, Leader of Manufacturing IS program, ABB’s Power Products Division
• Fredrik Nordstrom, ABB GF Q&O / ODG
• Vesa Enestam, Eliaps Oy, SAP SCM Consulting
• May-Jing Li, Project Manager, ABB Group Function IS, 'One Simple ABB' and SAP R/3
• Martin Korthaus, SCM II Consulting, SAP
• John Trip, Goldratt-TOC Ltd
• Dr Alan Barnard, CEO, Goldratt Research Labs
• Eli Schragenheim, Principal, Goldratt Schools
• Dr Eli Goldratt, Chairman, Goldratt Group
47© 2004 TOCICO. All rights reserved.
THEORY OF CONSTRAINTS
CASE STUDY 2Finding & Testing a solution to
SHORTAGES & SURPLUSES within Book Publishing
Presented By: Presented By: Dr. Alan Barnard (CEO Goldratt Research Labs, TOCICO Chairman 2003-2006)Dr. Alan Barnard (CEO Goldratt Research Labs, TOCICO Chairman 2003-2006)
Date:Date: 2727thth August 2009 August 2009
48
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Presentation OutlinePresentation Outline
1. Generic Research Problem1. Extent and Consequences of Shortages & Surpluses
2. Cause(s) & Direction of Solution
2. Case Study: Random House Publishing1. Publishing Industry Background
2. Random House Company Overview
3. Phase 1: Quantifying the Extent, Consequences & Causes
4. Phase 2: Finding a Solution
5. Phase 3: Testing the Solution
3. Research Findings
4. Future Research
49
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Research ProblemResearch ProblemExtent & Consequences of Extent & Consequences of SHORTAGESSHORTAGES
1. How many of YOU frequently don’t find what you want at a SHOP? *Either because the retailer was “Out-of-Stock” (OOS) or it decided not to carry the item you wanted?
2. What is YOUR (consumer) response to this SHORTAGE?
− Come back later to same retailer to buy same product?
− Buy a similar product from same retailer and same supplier?
− Buy a similar product from same retailer but different supplier?
− Go to other retailer to buy same product?
− Do not buy anything?
What is the consequences of this SHORTAGE on:
BANKSUPPLIERCONSUMER SHOP
50
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Consequences of SHORTAGES on ProfitabilityFor Book Publisher and Retailer…
Quantifying impact of 1% Lower Sales Volume on Net Profit
INSIGHT: 1% Lost Sales = 10% reduction in Profits
BELIEF: Lost Sales is not significant (2 – 3%) since today, consumers that want our products can in most cases find it somewhere.
FEAR: Is it really worth it to invest in trying to further reduce Shortages?
CHECK: How do we know shortages (out-of-stock) is really “only” 2-3%? Does it match our experience as Consumers?
51
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
What about SURPLUSES?
Results from International GMA Research Study (2002)Title: “Retail Out-of-Stocks: A Worldwide Examination of Extent, Causes and Consumer Responses”Scope: 661 Retail Outlets, 32 Product Categories, 71,000 Consumers Interviewed, 29 Countries
Retailers Lost Sales8 to 9% OOS x (9+31=40%) Consumer Response = 3 to 4%
Supplier Lost Sales8 to 9% OOS x (9+26=35%) Consumer Response = 3 to 4%
Impact on Lost Sales & Profitability
INDUSTRY RESEARCH: Extent, INDUSTRY RESEARCH: Extent, Consequences & Consumer Response to Consequences & Consumer Response to SHORTAGESSHORTAGES
But at 1:10 Leverage, 3 – 4% Lost Sales = Lost Profitability of 30 to 40%
52
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
1. How many of YOU have recently gone into a SHOP and bought something you did not really want / need simply because the shop offered a BIG discount?
2. How frequently does this happen to YOU?− Once a year?
− Once a month?
− Once a week?
What is the consequence of this SURPLUSES on:
Research ProblemResearch ProblemExtent & Consequences of Extent & Consequences of SURPLUSESSURPLUSES
BANKSHOP SUPPLIERCONSUMER
?
53
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Consequences of SURPLUSES on ProfitabilityFor Book Publisher and Retailer…
Quantifying impact of 1% Discount (Lower Price) on Net Profit
INSIGHT: 1% Discount in Price = 20% reduction in Profits
BELIEF: Consumers are VERY sensitive to pricing...and discounts is necessary since lower prices = more sales
FEAR: Reducing discount / increase in price WILL reduce sales much more
CHECK: Are consumers REALLY that sensitive to Price?Is it not possible to significantly reduce SURPLUSES (that lead to discounts)?
54
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
1. Where is the real Constraint in the Consumer Goods Supply Chain (e.g. for printed books)?
− Number of Customers willing to buy (books)…
…and what limits customers to buy more of the available books (OR what prevent retailers to sell more books)?
− Shortages (Out-of-Stocks) OR
− Shelf Space available in Book Shops to display all available books that would sell if they were available to buy...
2. What is the consequences of SURPLUSES on “Exploiting” the Retailer’s shelf space?
Surpluses is like having BRICKS on the Shelf……and BRICKS = LOST SALES of non-stock items selling elsewhere
Research ProblemResearch ProblemAnother important consequence of Another important consequence of SURPLUSESSURPLUSES
55
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
• More Sophisticated (and expensive) Forecasting Systems to predict consumer Demand…and more Collaboration efforts to share forecasts and supply problems
• Implementing Central & Regional Distribution Centers (CDC / RDC) to improve availability and responsiveness
• Bar Coding, High Tech Materials Handling & EDI
What was the result?Significant improvements in availability at CDC and RDC’s (95 –
98%) and in responsiveness (daily deliveries)…
But…did it really improve Shortages and Surpluses at Retail level and if not, WHY?
Research ProblemResearch ProblemPrevious attempts to solve the problemPrevious attempts to solve the problem
56
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
• What makes reducing Shortages and Surpluses so difficult in Consumer Goods?
− Large number of “Stock-Keeping-Units (SKUs)
− Unpredictable and High Variation in Demand and Supply
− Inter-dependencies between SKUs
• So, off-course, with this complexities, it is a very difficult decision on what to order, when to order and how much?
• This decision determines not only the success of retailer, but also the success of the distributor, manufacturer and material supplier.
Research ProblemResearch ProblemChallenges in reducing SHORTAGES & SURPLUSESChallenges in reducing SHORTAGES & SURPLUSES
So, who do we leave this critical & complex decision to?…and Are these people really in the best position to decide?
57
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Shortages
Surpluses
Actual Demand
Stock Level based on customers ordering large batches typically monthly (based on inaccurate F/Cast)
Stock Level based on customers ordering daily or weekly based on with actual consumption
25
100
Month 1 Month 2 Month 3
The KEY to achieve “profitable availability of more SKU’s” is to get each link to ORDER LESS MORE FREQUENTLY (START)
….rather than the traditional practice of
,,,ORDER MORE LESS FREQUENTLY (STOP)
Yes, BUT…the Cause and Solution has been known for long time, so why don’t we see MORE Supply Chains adopting this…especially BOOK Publishing
ROP
Order LT
Supply LT
Order LT
Supply LT
Research ProblemResearch ProblemCause(s) of SHORTAGES and SURPLUSESCause(s) of SHORTAGES and SURPLUSES
58
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Case StudyCase StudyPublishing Industry BackgroundPublishing Industry Background
• The publishing industry, due to slow or even declining sales, has been under SEVERE pressure to find ways to improve for many years…
• The book publishing industry think shortages is low but has experienced very high returns (surpluses) for many years (no-sale-return policy)* A Typical Book Publisher have 30% - 50% returns of all books printed
Pile’em high…. Watch’em fly…”
• Many Book Publishers & Retailers assumed that high returns was simply the “price you pay” to not lost any sales…but most still considered it as an improvement opportunity* A Typical Book Publisher’s Print & Distrib. Costs is only 30% of Selling Price
59
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Case StudyCase StudyRandom House PublishingRandom House Publishing
• In February 2008, Goldratt Research Labs was approached by Random House Publishing.
• They are considered one of the best in managing returns, and still have 28% of every book printed returned to be shredded.
• There were no reliable data about the level of surpluses (and or shortages within retailers), and it appeared as if the consequences of these were not fully understood.
Could Theory of Constraints help to quantify the extent, consequences and causes of the problem… and help to find a solution?
60
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
• Market Position: Random House is the world’s largest general-interest book publisher, with ore than 11,000 new books issued a year and 500 million books sold annually
• Employees: 5,779 (as of December 31, 2008)
• Revenues: € 1.7 billion (Fiscal Year 2008)
• Shareholders: Bertelsmann AG (100%)
• Published Authors include: F. Scott Fitzgerald, Ernest Hemingway, John Gresha, Danielle Steel, Dan Brown and Barack Obama…
Case StudyCase StudyRandom House Key FactsRandom House Key Facts
61
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Random House Income Statement in € millions 2008 2007 2006 2005 2004 Revenues 1,721 1,837 1,947 1,828 1,791 Operating EBIT 137 173 182 166 140 EBIT % of Sales 8.0% 9.4% 9.3% 9.1% 7.8%
Employees (in absolute numbers) 5,779 5,764 5,804 5,395 5,383
Case StudyCase StudyRandom House PublishingRandom House Publishing
The Pressure to improve….
What would be the impact of a significant reduction in Surpluses on profitability …?
62
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
IMPACT of Reducing Returns on ProfitabilityFor Book Publisher…Quantifying impact of Reducing Returns from 30% to 15% on Net Profit
INSIGHT: 50% reduction in returns = 50% increase in Profits
FEAR: But what if Changes to reduce Returns causes Sales Volume to drop?
Lets use Theory of Constraints to analyze the situation…
63
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Random House PublishingRandom House PublishingResearch QuestionsResearch Questions
• Is it possible to reduce returns without reducing sales?
• Is “High Returns” the only “cost” of surpluses at retail level?
• What is the “real level” of unavailability (shortages) of books at retail level?
• Is it possible to do much better…?
… and if so, what changes would be needed in the way the links in the Book Publishing Supply Chain is managed?
64
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Lost Sales (Stocked)
Potential
Current
Surpluses
Shortages
PROFITABILITY
AVAILABILITYProfitability
GAP
Potential
Current
AvailabilityGAP
Lost Sales (Non-Stocked)
Avoidable Discounts
Cost of Avoidable Returns
Impact of Shortages and Surpluses Impact of Shortages and Surpluses on Publisher and Retailer on Publisher and Retailer ProfitabilityProfitability
But how do we quantify the impact of Surpluses / Returns (and Shortages) on Profitability?
Price lower than PoV
65
© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Applying TOC’s 5 Focusing Steps to the Book Publishing Supply Chain…
Step 1: IDENTIFY the System’s Constraint
Step 2: Decide how to EXPLOIT the System’s Constraint
Step 3: SUBORDINATE everything to the above decision
“Until the consumer has bought, nobody has really sold…”The System Constraint therefore is the No. of Consumers willing to buy
“Exploiting the System Constraint” means “Having the Right Product, at the right place and right time (when consumer is ready to buy).
What conditions block better exploitation?1)Shortages of Products already stocked2)Unavailability of Products that sell elsewhere but which is not stocked due to shelf-space constraints (occupied by Surpluses).
Actually Surpluses in a retail shop is like having bricks on the shelf…
Change any Policy, Measurement and or Behaviour that contribute to current high level of both Shortages and Surpluses
YES, BUT, how to we find these and will it really be a win:win to change these…
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Feb 2008
March 2008
April 2008
June 2008
July 2008
Nov 2008
Project StartConference Call to share
real damage & extent of
Surpluses & Shortages
Random House Research ProjectsRandom House Research ProjectsProject Timeline Project Timeline
So, what was the process we used to find and test a “SIMPLE & ROBUST” solution to the problem of
SHORTAGES and SURPLUSES…
TOC EvaluationShare generic TOC analysis & solution
to shortages & surpluses
SimulationDevelop
simulation to validate
damage of PUSH and benefits of
PULLCustomized S&T
Dr. Goldratt with Exco construct
customized S&T and plan Test
TestTest impact of
“Less more Frequently” with 12 Test
Shops and with B&N data
Analyse Test ResultsAnalyse Test Results for 12
Test vs. Control Shops and agree
on next steps
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Case StudyCase Study
Book Publishing Research Challenge #1What makes quantifying the Extent, Consequences and
Causes of Surpluses & Shortages so difficult?• Despite excellent “Point-of-Sale” data available from most retailers,
Publishers do not have visibility of actual shortages and surpluses at retails.
• Retailers can buy directly from Publishers (to get best price) or from Wholesalers (to get best availability and response).
• Therefore, knowing the availability (or unavailability) at one Publishers and Wholesalers do not give a true picture of unavailability at retail level.
Is there a simple way to quantify the likely level of shortages and surpluses at retail level?
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Quantifying the Opportunity for Quantifying the Opportunity for reducing reducing SHORTAGESSHORTAGES & & SURPLUSESSURPLUSES
Benefit of “flagging” the stock-outs in red...
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Quantifying the Opportunity for Quantifying the Opportunity for reducing reducing SHORTAGESSHORTAGES & & SURPLUSESSURPLUSES
Stock-out Lost Sales = Stock-out Days x Sales Velocity/day= 8%
Surpluses Lost Sales = Surplus Days x Replacement Sales Velocity/day= 7%
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Typical Book Store – Concentration AnalysisTypical Book Store – Concentration Analysis
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NOTE: Above Data for period of 185 Weeks (1/1/2005 - 7/18/2008)
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Overcoming the challenges to reduce Overcoming the challenges to reduce shortages & surpluses in Book Publishingshortages & surpluses in Book Publishing
Book Publishing Research Challenge #2What makes reducing Surpluses & Shortages so difficult?
• Uncertainty of consumer demand
• Weak incentives for retailers & distributors to improve returns…due to an industry policy of “No Sales-Return Any time” creates an incentive to rather order too much than too little..
• Distributors & retailers create buffers for the same “end-consumer demand.
• Printing & Binding economies of scale that drive large batches.
• A strong held belief that “Title visibility in the marketplace drives demand (but there is little research to quantify this relationship)
• Supply chain constraints like warehouse proximity and limited rush reprint capacity at printers
The goal is to print & distribute closer to what sells to the end consumer
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Shortages
Surpluses
Actual Demand
Stock Level based on customers ordering large batches typically monthly (based on inaccurate F/Cast)
Stock Level based on customers ordering daily or weekly based on with actual consumption
25
100
Month 1 Month 2 Month 3
The KEY to achieve “profitable availability of more SKU’s” is to get each link to ORDER LESS MORE FREQUENTLY (START)
….rather than the traditional practice of
,,,ORDER MORE LESS FREQUENTLY (STOP)
Yes, BUT…the Cause and Solution has been known for long time, so why don’t we see MORE Supply Chains adopting this…especially BOOK Publishing
ROP
Order LT
Supply LT
Order LT
Supply LT
Research ProblemResearch ProblemCause(s) of SHORTAGES and SURPLUSESCause(s) of SHORTAGES and SURPLUSES
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
PUBLISHERCDC
PUBLISHERRDCs or
RETAILER CDC
RETAILERS
PUSHInventory
Profile
PULL Inventory
Profile
No
. o
f D
ays
of
Inve
nto
ry
in S
up
ply
Ch
ain
OLT = Daily
SLT = 1 to 4 weeks
PRINTER
OLT = Daily
SLT = 1 to 4 days
OLT = Daily
SLT = 1 to 2 days
1-4wks
1 - 4days
Change in Inventory Profile in moving from PUSH to PULL (less more frequently)
SKU Target Level = Maximum Demand with Reliable Replenishment Time Where RRt = Order LT + Supply LT)
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
300
Month 1 Month 2 Month 3
400
200
100
Auto Upsize Buffer based on level of Red-zone penetration
Keeping correct inventory levels4:25
Auto Downsize Buffer based on lack of Yellow zone penetration
Sizing Stock Buffers with Sizing Stock Buffers with Uncertainty and variability in Uncertainty and variability in demand and supplydemand and supply
Planning Rule: “Be Paranoid but not Hysterical”Target Stock Level for each Title at each Storage Location = Maximum Demand within Reliable Replenishment Time
Actual Demand
Execution Rules: Replenish up to Target level in sequence of buffer status more frequently (e.g. daily)
Too much
Too little
Good Enough
Go
al U
nit
s
Time / Stock BufferFeedback Rules: Adjust Target Level (Buffer Size) based on Level of Buffer Penetration
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Launch Event
Special Event Seasonality Events
Stable Sales
Testing Robustness of TOC’s Dynamic Buffering regardless of Demand Pattern
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
• In general, Goldratt Research Labs have found that if a company reports formally a 1-3% “Lost Sales” due to unavailability of product, improving availability to close on 100% (to end consumer) typically will result in increase in sales of 10 to 30%
• The Table below shows the results from actual implementation tests:
Industry Official Lost Sales
Availability before TOC
Availability after TOC
Avg Increase in Sales within 1st year of TOC rollout
Fruit Supplier 2-5% 85 -90% >98% 30% (worst 5%, best 200%)
Bread & Flour Supplier
2-5% 80-95% >99% 20% (worst 5%, best 300%)
Cosmetic Supplier
2-5% 90-98% >99% 10% (worst 2.5%, best 50%)
Sportswear Supplier
10-20% 80 – 85% >97%(Total Inv down
60%)
25%(worst 10%, best 100%)
Note: In reality, most “lost sales” are not recorded. The dramatic increase in sales achieved with improved availability verifies this.
Results from Past TOC’s Replenish-to-Results from Past TOC’s Replenish-to-Consumption (RTC) ImplementationsConsumption (RTC) Implementations
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Testing the Solution with 12 Testing the Solution with 12 Test vs. Control ShopsTest vs. Control Shops
Research Questions:1. Acceptance Rate?
• % of Shops accepting the offer for the Publisher to “Replenish Daily on Actual Consumption
2. Difficulty to setup up RTC system?
• How difficult would it be to set up a system for a shop to share daily sales with the publisher and to receive daily deliveries?
3. Really Win:win (Value = Benefits – Costs)?
• What will be the impact “Less more Frequently” on Shortages (Out-of-Stock) and Surpluses and on Lost Sales…?
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
78
Similar level of “Stock-outs” before and after the Launch of Test
Impact on Shortages (OOS)Impact on Shortages (OOS)Typical Control Shop – Before vs. AfterTypical Control Shop – Before vs. After
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Impact on Shortages (OOS)Impact on Shortages (OOS)Typical Test Shop – Before vs. AfterTypical Test Shop – Before vs. After
79
Zero “Stock-outs” after the Launch of Test !
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Results Achieved and Lessons Results Achieved and Lessons Learned so far?Learned so far?
• Importance of knowing how to answer simple question of “By how much has Sales gone up?” due to this change...
• Very high level of acceptance rate of offer to replenish daily based on actual sales (>80%)
• “Replenishing Daily on Actual Consumption” can help significantly reduce Shortages & Surpluse:
− Sales Increase by preventing Shortages around 2.5-10%
− Sales increase by replacing Surpluses (if done on wide enough scale) can be 5-20%.
• Implementing Dynamic Buffer Management (with so many SKUs) and frequent bad decisions is expected to increase Sales even more
• Replacing a BRICKS with any Item that sells will increase Sales (BRICKS = More than Needed / Really Slow Runner)
• Major leverage opportunities to reduce SURPLUSES & SHORTAGES are the really HIGH Runners and the LOW Runners (1’s, 2’s & 3’s that should be 0’s,1’s & 2’s)…
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Achieving
Viable Vision
Achieving
Viable Vision
2:1High
Availability
2:1High
Availability
2:5Sales per
Shelf (SPS)
2:5Sales per
Shelf (SPS)
BASE GROWTH ENHANCED GROWTH
2:3Word-of-Mouth
2:3Word-of-Mouth
2:4Resurrecting Dead Horses
2:4Resurrecting Dead Horses
2:2The Digital
World
2:2The Digital
World
2:6Editorial Section
2:6Editorial Section
RANDOM HOUSE STRATEGY & TACTIC L1-5
4:11:1Define test
sample
4:11:1Define test
sample
4:11:2Launch Tests
4:11:2Launch Tests
4:11:3Analyze the
results
4:11:3Analyze the
results
3:1:1 RH Test – Impact on Book Shops
3:1:1 RH Test – Impact on Book Shops
3:1:5 Change Chains &
Wholesalers’ order patterns
3:1:5 Change Chains &
Wholesalers’ order patterns
3:1:6Spread to all
Non-Bookshop Outlets
3:1:6Spread to all
Non-Bookshop Outlets
3:1:3Rollout to directly serviced Shops in
CDC area
3:1:3Rollout to directly serviced Shops in
CDC area
3:1:4Spread to all Book Shops
3:1:4Spread to all Book Shops
3:1:2Parallel Test -
Impact on B&N
3:1:2Parallel Test -
Impact on B&N
3:1:7Achieving Ongoing
Improvement
3:1:7Achieving Ongoing
Improvement
Results Achieved and Lessons Results Achieved and Lessons Learned so far?Learned so far?
NEXT STEPNEXT STEP
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© 2006, Alan Barnard, Goldratt Group. All rights reserved.
TOC Research Projects
Always Remember…“Your FOCUS (or lack of it) will determine your reality…”
Thank you!
For more information….
visit
www.goldrattresearchlabs.com
www.toc-goldratt.com