Presenter: Dr Alan Barnard, CEO Goldratt Research Labs Date: 27 th August

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 LabsDate: 27th August

CASE STUDY 2Finding & Testing a solution to

SHORTAGES & SURPLUSES within Book Publishing Supply Chain

Finding & Testing SIMPLE Solutions for COMPLEX Problems



Case Study 1Case Study 1Helping Achieve “Helping Achieve “One-Simple-One-Simple-

ABBABB” with ” with TOC in SAPTOC in SAPPresenter: Dr Alan Barnard, CEO Goldratt Research LabsContributors: 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

3© 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



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 …




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




RESEARCH QUESTIONSQ1: 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?




RESEARCH METHOD1.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



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 RoboticsPower

ProductsAutomation Products



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

Competitors 4 Competitors also have aggressive operational excellence programs

SubSub

Revenues COPQEBIT

2 Shareholders expect Increase EBIT (growth)Reduce COPQ (stability)

P

T



ABB’s Continuous Improvement ABB’s Continuous Improvement EvolutionEvolution

1988 2010

Num

ber o

f fac

torie

s us

ing

TOC

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



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)


TOC Research ProjectsDistribution 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%


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)



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


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%


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%



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

Units 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,

[email protected]



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)



NeedHave 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

ActionCustomize 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



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 NeedEnsure out-

standing resultin 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



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 resultsProject

StartAgreement

2 3 4 51 6 7Development Piloting Implementation0

Analysis Planning Execution Sustain

1. Agreement on the problem2. Agreement on the direction of the solution

4. Agreement that no disastrous side effects will result5. 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).



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”.



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?



The Operations dilemma in supporting ABB’s The Operations dilemma in supporting ABB’s global “One-Simple-ABB” objective?global “One-Simple-ABB” objective?

NeedEfficient and fully integrated Finance, HR & OPS business processes across

ABBObjective

Create long term competitive edge in

our industry NeedContinuously

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



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?



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



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…”

2.1Reliability/Availability Competitive

Edge

2.2Rapid Response

Competitive Edge

1ABB Goal:

Profitable Growth

3.1.1Remarkable

Due Date Perf & Availability

3.1.2Selling

Reliability/Availability Selling as Comp. Edge

3.1.3Coping

with Sales Growth

3.2.1Remarkable

Rapid Response

3.2.2Protective

Capacity for RR orders

3.2.3Selling Rapid Response as Comp. Edge

3.2.4Expanding RR Client

Base

Using Goldratt’s Strategy & Tactic tree method to find a simple & robust Planning, Execution & Cont. Improvement solution…



Current Performance

Potential Performance

Over- / Under-committing Capacity

Releasing Too much / Too earlyMaterials / Purchased Parts not available

Unsynchronized Priorities in OperationsOther “Hidden” Disruptions to Flow

What really causes low Tput, poor DDP / Availability & Long LT?



Edge

2.2Rapid Response

Competitive Edge

1ABB Goal:

Profitable Growth

3.1.1Remarkable


3.1.2Selling


3.1.3Coping

with Sales Growth

3.2.1Remarkable

Rapid Response

3.2.2Protective




Base



Planning

How do we control release of ETO, MTO & MTS WO’s for Low WIP/high

CCR utilization?

Execution

How do we maintain right

priority of ALL WO’s on shop floor?

Ongoing Improvement

How do we continuously Improve flow by

identifying & removing local optima & other

“hidden” disruptions/ CCRs to improve flow?



Edge

2.2Rapid Response

Competitive Edge

1ABB Goal:

Profitable Growth

3.1.1Remarkable


3.1.2Selling


3.1.3Coping

with Sales Growth

3.2.1Remarkable

Rapid Response

3.2.2Protective




Base

Sales

How to QUOTE reliable due dates with

internal Constraint?

i.e. Not over-/under-commit

Procurement

How do we maintain High

RM Availability with Low

Inventory?



4.11.1 (Sales)TOC’s

PLANNED LOAD (PL) for Quoting

Safe Due Dates

4.11.2 (Buying)TOC’s

DYNAMIC BUFFER MGT (DBM) & TOC

Replenishment (TOCR) for

Inventory Mgt

4.11.3 (Planning)

TOC’s RELEASE

CONTRO (S-DBR) to control WIP

and improve Flow

4.11.4 (Execution)TOC’s

SINGLE PRIORITY SYSTEM

Buffer Mgt (BM) to keep priorities synchronized

4.11.5 (Improve)TOC’s

BUFFER ANALYSIS to Focus Process

Improvements & Capacity Elevation



Edge

2.2Rapid Response

Competitive Edge

1ABB Goal:

Profitable Growth

3.1.1Remarkable


3.1.2Selling


3.1.3Coping

with Sales Growth

3.2.1Remarkable

Rapid Response

3.2.2Protective




Base




Edge

1ABB Goal: Profitable

Growth

3.1.1Remarkable


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)

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



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



Identify CCR Overload

Identify Next Avail slot on CCR

Quoting Safe Orders Due Dates using CCR(s) Planned Load4.11.1Tactic2. 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.




Edge


Growth

3.1.1Remarkable








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)

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



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



1. SAP TOC DBM & Repl. GUI 2. Graph showing resizing of Stock Buffers

Maintaining Optimum RM & PP Inventory Levels with DBM / TOCR4.11.2Tactic1. 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)




Edge


Growth

3.1.1Remarkable








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)

TOC’s RELEASE CONTROL (S-

DBR) to control WIP and improve

T, DDP & LT




MP1

PP2

RM1

RM2

PP1

2.1 2.2 2.3 2.4

3.1 3.2 3.3

1.1 1.2

4.1

5.1 5.2 FG SHIPPING

CCR

Manuf Parts Release Date= Due Date – ATO Shipping Buffer

Shipping Buffer for ATO

RM1

RM2

PP1

RM3

PP2

MP1

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

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




Edge


Growth

3.1.1Remarkable








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)

TOC’s Buffer Mgt (BM) as

synchronized SINGLE

PRIORITY SYSTEM




Stock Replenishment Orders do not have “Due Dates”

Customer Production Orders do have “Due Dates”

Sample

Scr

een f

or sh

owing

Buffer

statu

s (Prio

rity)

of ea

ch or

der a

nd en

ablin

g

capt

uring

of re

ason

code

s for

“blac

k” an

d “re

d” or

ders

4.11.4 Single Priority System to Maintain Execution SynchronizationTactic1. 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




Edge


Growth

3.1.1Remarkable








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)TOC’s BUFFER ANALYSIS to

Focus Improvements

& Capacity Elevation




4.11.5 Focusing Mechanism for Process Improvement/ElevationTactic1. 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.



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



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



TOC in SAP at ABB“TOC in SAP” solution design: Determination of Earliest Due Date



“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)



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…



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….



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



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



Presentation OutlinePresentation Outline

1. Generic Research Problem1. Extent and Consequences of Shortages & Surpluses2. Cause(s) & Direction of Solution

2. Case Study: Random House Publishing1. Publishing Industry Background 2. Random House Company Overview3. Phase 1: Quantifying the Extent, Consequences & Causes4. Phase 2: Finding a Solution5. Phase 3: Testing the Solution

3. Research Findings4. Future Research



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



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 ProfitsBELIEF: 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?



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%



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

?



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 ProfitsBELIEF: Consumers are VERY sensitive to pricing...and discounts is necessary

since lower prices = more salesFEAR: 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)?



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



• 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



• 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?



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


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



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



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?



• 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



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 …?



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…



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?



Lost Sales (Stocked)

Potential

Current

Surpluses

Shortages

PROFITABILITY

AVAILABILITYProfitability

GAP

Potential

Current

AvailabilityGAP

Lost Sales (Non-Stocked)

Avoidable DiscountsCost 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



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…



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



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?



Quantifying the Opportunity for Quantifying the Opportunity for reducing reducing SHORTAGESSHORTAGES & & SURPLUSESSURPLUSES

Benefit of “flagging” the stock-outs in red...



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%



Typical Book Store – Concentration AnalysisTypical Book Store – Concentration Analysis

70

NOTE: Above Data for period of 185 Weeks (1/1/2005 - 7/18/2008)



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



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


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



PUBLISHERCDC

PUBLISHERRDCs or

RETAILER CDC

RETAILERS

PUSHInventory

Profile

PULL Inventory

Profile

No.

of D

ays

of In

vent

ory

in S

uppl

y C

hain

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)



300


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

Goa

l Uni

ts

Time / Stock BufferFeedback Rules: Adjust Target Level (Buffer Size) based on Level of Buffer Penetration



Launch Event

Special Event Seasonality Events

Stable Sales

Testing Robustness of TOC’s Dynamic Buffering regardless of Demand Pattern



• 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



Testing the Solution with 12 Testing the Solution with 12 Test vs. Control ShopsTest vs. Control ShopsResearch 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…?



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



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 !



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)…

80


TOC Research ProjectsAchieving

Viable Vision

2:1High

Availability

2:5Sales per

Shelf (SPS)

BASE GROWTH ENHANCED GROWTH2:3

Word-of-Mouth

2:4Resurrecting Dead Horses

2:2The Digital

World

2:6Editorial Section

RANDOM HOUSE STRATEGY & TACTIC L1-5

4:11:1Define test

sample

4:11:2Launch Tests

4:11:3Analyze the

results

3:1:1 RH Test – Impact on Book Shops

3:1:5 Change Chains &

Wholesalers’ order patterns

3:1:6Spread to all

Non-Bookshop Outlets

3:1:3Rollout to directly serviced Shops in

CDC area

3:1:4Spread to all Book Shops

3:1:2Parallel Test -

Impact on B&N

3:1:7Achieving Ongoing

Improvement

Results Achieved and Lessons Results Achieved and Lessons Learned so far?Learned so far?

NEXT STEPNEXT STEP



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

Documents

Presenter: Dr Alan Barnard, CEO Goldratt Research Labs Date: 27 th August