Abstract: Inventory Management along a supply change is complicated by the multiple uncertainties and by long feedback mechanisms. This paper discusses how the Theory of Constraints greatly improves supply chain performance in cooperating and non-cooperating chains. The Drum-Buffer-Rope concept is applied to cooperating chains. TOC assisted just-in-time concepts are applied to non-cooperating chains.

Inventory control is a key element in supply chain management. The inventory relationship between supply chain components contributes to the cultural and attitudinal relationship. Very often, the cost of inventory determines if an individual component is very profitable, barely profitable or is not profitable.

Each component of the chain is faced with the Generic Inventory Dilemma. To have an excellent inventory management system, we must have enough inventory to prevent stock-out situations. In today's fierce competitive environment, stock-outs drive our customers to the competition and they are hard to win back. To have an excellent inventory management system, we must minimize the cost of inventory. The cost of inventory can make or break us.

In order to have inventory to prevent stock-outs, we must maintain a high inventory system. We need the inventory to protect us against poor forecasts and the high variability of fluctuating markets. In order to minimize the cost of inventory, we need to maintain a low inventory system. Almost everyone views inventory as a liability now. But, we can't maintain a high inventory system and a low inventory system at the same time. It just doesn't make sense. (See Fig. 1.)

Fig. 1. The supply chain dilemma.

We have a dilemma. The generic solution to this dilemma must address the assumptions behind the arrows. "We manage our inventory such that we minimize the cost and at the same time maximize the protection of our deliver system." Yes, this would be great, but how to do it? And, in a supply chain, we are not just dealing with supplier/manufacturing or manufacturing/distributor relationships. We must deal with a long sequence logistically disconnected with each other. (See Fig. 2.)

Each component of the supply chain is a specialist at their process. Many processes are complicated or expensive and would be virtually impossible without the supply chain. Can any individual person drill an oil well, refine the oil, produce plastic, form it into a flexible doorstop? If so, what would the doorstop cost?

In the typical supply chain, individual components are separate entities that depend upon each other. They pass money and materials back and forth Each component adds value to the product. But, enlightened members of the chain understand there is no real value produced until a customer is satisfied. In a free market, the 'added value' contributed by each component is determined by competitive situations and alternative methods. The profit margin at any component is determined by the environment and the effectiveness/efficiency of the individual component. Component managers focus on Local Optima and have little influence over the rest of the supply chain.

The Theory of Constraints Solution to supply chain management has several components. And, the application of the components depends upon the nature of the relationship between components of the supply chain. The TOC Concepts presented here will focus on a single line chain (often called an 'I' plant structure) for ease of communication. But , the principles apply just as well to 'T', 'A', and 'V' plant structure or combinations.

There are two general categories of supply chain. A 'cooperating chain' and a non-cooperating chain.

The cooperating chain is an enlightened view where individual components recognizes its dependence on the whole chain. Members of the cooperating chain are willing to share information and to communicate quickly. They also are willing to share some of the risk of the whole chain and share in the profits of the whole chain. Members of a cooperating chain subordinate themselves to the better larger goals of the whole system. Large firms with logistically separated operations can be cooperating chains. The senior management can facilitate the necessary cooperation, communication and measurement systems.

Fig. 2. A typical supply chain.

The non-cooperating chain is the typical situation. Each individual component operates in its own best interest. While all components of the supply chain may be 'successful', rarely does a non-cooperating supply chain achieve high levels of performance. The non-cooperating chain can also describe large companies who have segmented their functions into profit centers or business process units that compete for company money and must produce their own profit.

Since the cooperating chain is the much preferred model, let's address it first.

In general, the constraint of a supply chain is the customer. It may not be the customer at all times, but the customer drives the chain. Consequently, we want to meet the customer demands. This implies we should maintain a buffer inventory of finished goods at the retail level for immediate customer use. We call this buffer a 'shipping' buffer. (See Fig. 3.)

Fig. 3. Locating a safety buffer in the supply chain.

In the supply chain, there may be one component that is more constrained than another. This link in the chain can be considered a 'constraint' and managed according to Drum-Buffer-Rope. One link in the supply chain may be viewed as strategic link. A strategic link has some characteristic that makes it the desirable place to hold inventory. It may be the place where variability can be aggregated to minimize system inventory and maximize response to the customer (quickly fill the shipping buffer). Or, the strategic link may be a component that is difficult to elevate. It might be a strategic asset. In any case, a cooperating chain should maximize the capability of the this 'selected' constraint by maintaining a constraint buffer to protect the controlling link of the system. Assume in this example, production is the most constrained component. (See Fig. 4)

Fig. 4. Safety buffer protecting a critical resource.

The constraint component, or the controlling link, communicates with the other components information about demand and material flow requirements. Information on customer demand triggers delivery responsibility at the controlling link. The components down stream maintain minimal inventory and are very responsive to material flowing through the system. The shipping buffer protects against stock-outs. The constraint component also communicates to initiate the beginning of the supply chain (up stream). The constraint buffer protects the controlling link from running short on materials. (See Fig. 5)

Fig. 5. Communication links in a cooperating supply chain.

All other components operate in 'road runner' ethic. They focus on rapid operations and moving materials down the supply chain as fast as possible. The combination of established buffers and minimal inventory everywhere else creates a rapid response system with minimal investment and maximum protection. The cooperative communication creates a 'pull' system upstream and a 'push' system down stream, for the best of both worlds.

In addition to increased communications and shifted inventory, the cooperating supply chain alters the way payments are made between components. With the shifted inventory, the constraint component and the retail carry an excessive inventory load. It is not fair to penalize them while they are protecting the through-put of the whole chain. Inventory can be carried on consignment until the final retail sale is made.

The cooperating supply chain operates much the same as a plant operating Drum-Buffer-Rope. Except, most components belong to more than one supply chain. It is feasible for segments of the supply chain to be cooperative and connect to other non-cooperating components. And, it is feasible for any component to deliver materials to a cooperating supply chain and still belong to a non-cooperating supply chain at the same time. The increased communication between components enables trust and confidence.

The other end of the scale is the non-cooperating supply chain. This represents the typical situation and internally competitive business units. There is still a significant gain possible when each component is evaluated independently.

An independent component of a supply chain receives input materials, processes them in some way and forwards them to the next step (client). The independent component has no control over suppliers or clients, but can configure itself to effectively influence them and to buffer itself against variation from either direction. (See Fig. 6)

Fig. 6. Separate, independent components within a supply chain.

The first thing for an individual component should do is create a highly responsive, low inventory Drum-Buffer-Rope system internal to the component. This will allow the component to be as flexible as possible to meet the demand.

An individual business component should be aware of actions elsewhere in the supply chain. There are many forms of public information available on most supply chains that enable an individual component to position itself with the capacity it has. (See Fig 7.)

Fig. 7. Necessary awareness channels in a non-cooperating chain.

An individual component in a non-cooperating supply chain can buffer itself from its suppliers and clients. At least two (preferably more) independent suppliers should be used. Sole source contracts restrict flexibility, reduce competition and jeopardize a components independence. Each supplier should receive some business all the time. The best suppliers receive volume preference, but poorer suppliers should be encouraged to improve quality and delivery. Rating suppliers publicly gives incentive for improvement.

An individual component in a non-cooperating supply chain should buffer itself from fluctuations in clients demand. No single client should account for more than 40% of the component's business. As much as possible, clients should be selected from markets that do not fluctuate in the same direction at the same time. (See Fig. 8.)

Fig. 8. Necessary additional suppliers and client channels in a non-cooperating chain.

An individual component managed according to Drum-Buffer-Rope minimize internal inventories. To minimize the inventory costs associated with suppliers and clients material buffers should be used. Buffers do not have to protect the total flow time. But, they should be sufficient to buffer the variability in the flow time.

Following these guidelines, an independent component within a non-cooperating supply change can perform well and grow even in a turbulent environment. A successful component may develop cooperating agreements with suppliers, clients or both. Those components who learn to be cooperating develop faster and faster. Small pockets of cooperating components can soon influence the whole chain for the benefit of the component companies and the end customer.

James R. Holt, Ph.D., PE., is an Associate Professor of Engineering Management at Washington State University - Vancouver and a Certified Associate of the Avraham Y. Goldratt Institute. He teaches Organizational Behavior, Operations Research, Statistics, Engineering Economics, Simulation, Information Systems and other special topics with at Theory of Constraints emphasis. Dr Holt was Department Head, Engineering and Environmental Management at the Air Force Institute of Technology, Wright-Patterson AFB, Ohio. Dr. Holt retired from the Air Force with 20 years experience in engineering, computer and technology management. He has published articles on project management, maintenance and artificial intelligence. He holds a BS in Mechanical Engineering (Utah State University), an MS in Facilities Engineering (Air Force Institute of Technology) and a Ph.D. specializing in Industrial Engineering / Business Administration (Texas A&M University). http://www.wsu.edu/~engrmgmt/holt/