How we experimented with the Theory of Constraints in Ukraine
Many of those who read this blog know that I advocate that the implementation of ERP systems is not solely for the implementation of the ERP system. This project should bring some economic benefits for the company. And perhaps this is only if management techniques are being introduced along with the system. Otherwise, the ERP system will be just an accounting program in which you can record events and documents, but you will not be able to make any decisions, and the company will not get better . To make the right decisions in the field of management and management methods are needed. Here's how, for example, certain methods of controlling conveyor production were invented at Toyota and this brought Toyota's fantastic success. And already on these techniques, you can put an ERP system on top. Then it will bring effect.
If you catch bream with the help of spinning, then this will bring only losses. There will be costs, but the result is zero. Because here, too, techniques and knowledge are needed before proceeding. The same is true in business.
A month ago, we launched a project in Ukraine, where we tested our new solutions in the field of Theory of Constraints (TOC). The Theory of Constraints is also an enterprise management technique, like the Toyota Kanban, but TOC is more advanced and, unlike Kanban, works well in the case of torn demand, high variability of orders. About some performance indicators of this project in figures a little lower.
And here are two very important points.
Firstly, it is Ukraine. And I am very glad that common sense prevailed. Despite the fact that politicians are actively quarreling between our peoples, we have completed a wonderful project together with Metrotail and are in very good relations.
Secondly, we tested in Metrotile our new improved TOC algorithms, which, in our opinion, should add efficiency to traditional TOC methods. The task is simple - maximum satisfaction of demand with minimum stocks.
In 2012, we had the first project to implement the Theory of Constraint algorithms for inventory and procurement management. Then in 2013 there were also projects in production. It became clear that TOC is really very effective and able to take the company that implemented these techniques to a new level. Orders are delivered on time, stocks are falling, production speed is increasing.
They began to think about where to go next, how to improve TOC methods. What else can we improve so that the performance is even better? It was necessary to come up with something so that the satisfaction of demand was maximum with even lower stocks.
We analyzed the current stocks of customers and came to an interesting conclusion: to increase the level of efficiency, you need to get rid of ... reserving goods in warehouses.
We realized that it was necessary to develop methods that would allow us to raise the level of satisfaction of demand to the maximum (100%), but at the same time relieve the company of the need to reserve goods in warehouses.
Of course, the easiest way is to simply put in the warehouse a quantity equal to the sum of all orders. But this will cause an avalanche-like increase in stocks. What was needed was a dynamic needs management system, which, depending on the situation with stocks, orders, procurements and current production, constantly changes the procurement and production schedule so that inventories are minimal and demand is maximized.
If the main goal of the company is to make money, then the reserve of goods in the warehouse is an entity that completely contradicts this goal.
As soon as you reserved a product, you immediately potentially reduced the company's performance indicators. Turnover, level of satisfaction of demand, cash flow.
A reserved product is a product actually frozen, taken out of circulation. You cannot make money on this product. You froze working capital, took a place in the warehouse. Moreover, a client will come to you tomorrow, ready to buy this product, but will not be able to (the product is in reserve). And the client for whom you reserved this product will pick it up in two weeks. During this time, you actually have time to purchase it two more times.
I analyzed the situation of those of our customers who do not use TOC techniques (we do not force anyone). Some customers reserve up to 50% of the warehouse. That is, half of the inventory is simply taken out of circulation. There are reserves that are more than a year old !!!
This is all explainable. After all, each sales manager fights for his local effectiveness. So that it is to his customers that all goods are shipped without delay. For this, he reserves the goods in order to be safe. However, if we talk about the entire company as a whole, then its effectiveness (that is, profit) only suffers from this.
We launched a special algorithm in Metrotile that manages reserves exclusively in automatic mode. The manager cannot reserve the stock. His task is very simple - to place an order and indicate the date when the client wants to receive this product. Everything. The system then decides when and what needs to be reserved at the warehouse. Which order to reserve, and which to send to purchase or production, how to build a procurement and production schedule so that all orders are shipped on time. The situation is changing and the order sent to the purchase can be satisfied (not reserved) by the warehouse every other day, and another order will take its place in the procurement.
Approximately such a picture is constantly in front of the eyes of buyers
And this is in front of the dispatcher of production (although there is no production there yet)
After a couple of weeks of operation, the general Metrotail went even further and completely abandoned the reserves. Now the company has no reserves at all.
November Results:
2,200 items shipped.
These are approximately 500 orders.
Some problems with the timeliness of shipment arose only in 4 orders. This is less than 1%.
And, most importantly, the reasons for the failure in these four orders are clear to us - this is just a human factor related to the fact that people worked with new software. We took these errors into account and eliminated this human factor. What will be the results of the remaining months, I think clearly))
If you catch bream with the help of spinning, then this will bring only losses. There will be costs, but the result is zero. Because here, too, techniques and knowledge are needed before proceeding. The same is true in business.
A month ago, we launched a project in Ukraine, where we tested our new solutions in the field of Theory of Constraints (TOC). The Theory of Constraints is also an enterprise management technique, like the Toyota Kanban, but TOC is more advanced and, unlike Kanban, works well in the case of torn demand, high variability of orders. About some performance indicators of this project in figures a little lower.
And here are two very important points.
Firstly, it is Ukraine. And I am very glad that common sense prevailed. Despite the fact that politicians are actively quarreling between our peoples, we have completed a wonderful project together with Metrotail and are in very good relations.
Secondly, we tested in Metrotile our new improved TOC algorithms, which, in our opinion, should add efficiency to traditional TOC methods. The task is simple - maximum satisfaction of demand with minimum stocks.
In 2012, we had the first project to implement the Theory of Constraint algorithms for inventory and procurement management. Then in 2013 there were also projects in production. It became clear that TOC is really very effective and able to take the company that implemented these techniques to a new level. Orders are delivered on time, stocks are falling, production speed is increasing.
They began to think about where to go next, how to improve TOC methods. What else can we improve so that the performance is even better? It was necessary to come up with something so that the satisfaction of demand was maximum with even lower stocks.
We analyzed the current stocks of customers and came to an interesting conclusion: to increase the level of efficiency, you need to get rid of ... reserving goods in warehouses.
We realized that it was necessary to develop methods that would allow us to raise the level of satisfaction of demand to the maximum (100%), but at the same time relieve the company of the need to reserve goods in warehouses.
Of course, the easiest way is to simply put in the warehouse a quantity equal to the sum of all orders. But this will cause an avalanche-like increase in stocks. What was needed was a dynamic needs management system, which, depending on the situation with stocks, orders, procurements and current production, constantly changes the procurement and production schedule so that inventories are minimal and demand is maximized.
If the main goal of the company is to make money, then the reserve of goods in the warehouse is an entity that completely contradicts this goal.
As soon as you reserved a product, you immediately potentially reduced the company's performance indicators. Turnover, level of satisfaction of demand, cash flow.
A reserved product is a product actually frozen, taken out of circulation. You cannot make money on this product. You froze working capital, took a place in the warehouse. Moreover, a client will come to you tomorrow, ready to buy this product, but will not be able to (the product is in reserve). And the client for whom you reserved this product will pick it up in two weeks. During this time, you actually have time to purchase it two more times.
I analyzed the situation of those of our customers who do not use TOC techniques (we do not force anyone). Some customers reserve up to 50% of the warehouse. That is, half of the inventory is simply taken out of circulation. There are reserves that are more than a year old !!!
This is all explainable. After all, each sales manager fights for his local effectiveness. So that it is to his customers that all goods are shipped without delay. For this, he reserves the goods in order to be safe. However, if we talk about the entire company as a whole, then its effectiveness (that is, profit) only suffers from this.
We launched a special algorithm in Metrotile that manages reserves exclusively in automatic mode. The manager cannot reserve the stock. His task is very simple - to place an order and indicate the date when the client wants to receive this product. Everything. The system then decides when and what needs to be reserved at the warehouse. Which order to reserve, and which to send to purchase or production, how to build a procurement and production schedule so that all orders are shipped on time. The situation is changing and the order sent to the purchase can be satisfied (not reserved) by the warehouse every other day, and another order will take its place in the procurement.
Approximately such a picture is constantly in front of the eyes of buyers
And this is in front of the dispatcher of production (although there is no production there yet)
After a couple of weeks of operation, the general Metrotail went even further and completely abandoned the reserves. Now the company has no reserves at all.
November Results:
2,200 items shipped.
These are approximately 500 orders.
Some problems with the timeliness of shipment arose only in 4 orders. This is less than 1%.
And, most importantly, the reasons for the failure in these four orders are clear to us - this is just a human factor related to the fact that people worked with new software. We took these errors into account and eliminated this human factor. What will be the results of the remaining months, I think clearly))