TOC in Supply Chain Management

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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 Materials
Refine / Prepare
Produce
Transport
Distribute
Retail
Customer
3
Short Long Duration Chains
Dairy Cows
Creamery
Deliver
Retail
Customer
Farmer
Cannery
Wholesale
Retail
Customer
4
Complex Combinations
Brakes Tires Bumpers Upholstery Engine

Transmission
Car Lot Car Lot Car Lot
Manuf. Car
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Dedicated Chain
Mine
Smelter
Rolling Mill
Product
Steel Sales
IndependentBusiness Unit
IndependentBusiness Unit
IndependentBusiness Unit
Single Firm - Totally Owned Industry - Sole Source
Transfer Prices Fixed by Policy
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Competitive Link Opportunity
Oil Well
Refinery
Chemical Plant
Cloth Mill
Dress Factory
Customer
Oil Well
Refinery
Chemical Plant
Cloth Mill
Customer
Dress Factory
Oil Well
Refinery
Chemical Plant
Cloth Mill
Customer
Dress Factory
Transfer Prices at Market Prices
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Individual Member of Chain
Independent Business Component Process
Supplier
Client
Transactions
Transactions
PurchaseReceiveCheckPay
Internal Processing
SellDeliverInvoiceCollect
ProfitSales-Purchase-Inventory Cost-Overhead
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Simple Dist. Chain Game
My Plan for the Week
The Actual for the Week
1.
I Order Parts
Parts Come In
2.
Beginning Inv.
Avail. Inventory
Orders Recvd
Product Flow
Cash Flow
Orders Filled
Income _at_ 50
Weekly Income
Back Orders
BO _at_ -50
3.
4.
Inv. _at_ -10
Remaining Inv.

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Simple Game Example
My Plan for the Week
The Actual for the Week
1.
I Order Parts
Parts Come In
5
5
2.
Beginning Inv.
Avail. Inventory
6
11
Orders Recvd
4
Product Flow
Cash Flow
Orders Filled
Income _at_ 50
4
200
Weekly Income
Back Orders
BO _at_ -50
0
3.
4.
Inv. _at_ -10
-70
Remaining Inv.
7
130
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Black Bean Business
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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. Im
stuck between a rock and a hard place.
Supply Quickly and Avoid Stock Outs (Back Orders)
Maintain High Levels of Inventory
We effectively meet our customer requests
Minimize the Cost of Operation
Maintain Low Levels of Inventory
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Traditional Supply Chain Solution
Raw Materials
Produce
Distribute
Retail
Customer
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Typical Production Solution
Raw Materials
Machine 1
Machine 2
Machine 3
Warehouse
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Difficulty in Forecasting
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Potential Future
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Adjusting for Product Life
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Inventory Demand Probability
90 Sure Inventory Level
70
Mean 50Std Dev 10
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DBR Production Solution
Constraint Buffer Protects Replenishment
Shipping Buffer Protects Short Lead Demand
Raw Materials
Constraint Machine
Warehouse
Low inventory system is very responsive to
customer needs. Low inventory system is product c
hange.
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Non-Cooperative Supply Chain
Raw Material
Produce Constraint
Transport
Distribute
Customer
Retail
Watch Diligently
Watch Diligently
Supply
Constraint
Client
Just-in-Time Production Using DBR
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Reference Supply Chains
Snow
River
Dam
Generator
Customer
Power lines
Water Well
Water Treatment
Distribution
Water Tower
Customer
Local Lines
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Cooperative Supply Chain
Raw Material
Produce Constraint
Transport
Distribute
Customer
Retail
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 Diligently
Watch Diligently
Watch Diligently
Watch Diligently
Supply
Supply
Constraint
Client
Constraint
Client
Firm 2
Firm 1
After
Watch Diligently
Watch Diligently
Supply
Supply
Constraint
Client
Client
Firm 2
Firm 1
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Transfer Costs in Cooperating Chains
Cap. 40/wk
Cap. 40/wk
RM20
Sell100
TPM60
Labor 10/hourOE 20/hour
Labor 10/hourOE 20/hour
Firm Total T 3200Labor-800OE -1600Profit
800
T 1600Labor-400OE -800Profit 400
T 1600Labor-400OE -800Profit 400
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Incentive to Switch
Market 5ea _at_70
Cap. 40/wk
Cap. 40/wk
RM20
Sell100
35_at_60
Labor 10/hourOE 20/hour
Labor 10/hourOE 20/hour
Firm Total T 3050Labor-800OE -1600Profit
650
T 1650Labor-400OE -800Profit 450
T 1400Labor-400OE -800Profit 200
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Cooperative Dedicated Sources
Best Supplier60 of Orders
Cap. 40/wk
RM20
Cap. 40/wk
35_at_60
Sell100
Cap. 40/wk
RM20
Lesser Supplier40 of Orders