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Supply chain management

Supply chain management

Article covers the supply chain management with the use of Theory of Constraints (TOC) approach. The TOC suggests to consider the supply chain as an integrated system and when making a decision on each level of the supply chain, one should focus on the global optimization, rather than on the local improvements, as it often happens.

  • Methodology of the supply chain management.
  • Video about the concept of the supply chain management due to the Theory of Constraints.
  • Video-case about the implementation of the Theory of Constraints’ solution at a high-profile retail chain.

Managing the supply chain by categories

Management of the supply chain depends on its category. The existing models should be divided into two categories: “cooperating” and “non-cooperating” chain of supplies.

Cooperating chain implies that each separate chain acknowledges its dependence on the rest of the chain. In such cases, management of the supply chains is the management of not separate segments of the system, but the system as a whole.

Links of the cooperating chain are ready to exchange information and to communicate efficiently to increase the overall effectiveness. It means that they are ready to share the risks and profits that are common to the whole chain. Such cooperating supply chains can be large companies with the geographically-distributed activities, as well as the independent companies.

Non-cooperating supply chain is a more frequent situation. In such cases, each separate element works for its own interests.

Considering that the separate elements of the supply chain can be quite successful, the non-cooperative supply chains rarely achieve a high level of total capacity. Non-cooperating chain can be the large companies: these are those that are segmenting their own functions by the centers of profit or by business units, which are competing for financing and are forced to produce their own profit.

The first version of cooperation in the supply chain is more sustainable and gives better results; that’s why we will consider the optimization of such systems exactly with the help of the Theory of Constraints.

Given the interdependence of links in the cooperating chain, the overall effectiveness of the chain will be determined by the “weakest”, least productive link. It’s this link that should be considered as strategically important: it sets the pace for the movement of value along the supply chain, and therefore, by focusing the efforts on its optimization, we can affect the effectiveness of the entire system. How to identify and work with the constraint?

Theory of Constraints offers the following algorithm:

  • Find constraints.
  • Decide how to make the most use of them.
  • Subdue everything to this decision.
  • Expand the constraint of the system.
  • If the constraint is removed, return to step 1.

 

The concept of supply chain management based on the TOC

At first glance, the market demand seems to be the main constraint, but this is not always the case. In the supply chain, there is always a link that will be a constraint in relation to the rest: delivery, order formation, storage space, etc. But it is important to remember that the demand in any case regulates the activity of the supply chain, because the main task of any company is to satisfy the needs and requests of customers.

The constraint or the controlling link transmits information to other elements of the system about the demand and the motion speed of commodity/reserve stocks along the chain. This is a place where logically the buffer (of reserve, time, etc.) should be implemented; it provides the most efficient use of the chosen constraint and ensures the constant availability of the necessary amount of stocks at this stage.

According to the Theory of Constraints, the buffer management is a foundation for monitoring the load of entire supply chain. The system of buffers that is present in narrow places of the supply chain balances and structures the completing by the non-constraint links, their tasks in such a number, timing, and sequence, in order to meet the requirements of the constraint link and the customer’s needs.
Watch the short video about the concept of supply chain management with use of the Theory of Constraints.

Reserve buffer is created at each stage of the supply chain and has the following structure:

The concept of supply chain management based on the TOC

Structure of the reserve buffer:

Constant adjustment of buffers, depending on the demand is called the Dynamic Buffer Management.

Video case about implementing the solution of the Theory of Constraints in order to manage the supply in a major retail chain.

 

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