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1 © 2004 TOCICO. All rights reserved. THEORY OF CONSTRAINTS CASE STUDY 1 Helping achieve “One-Simple-ABB” with “TOC in SAP” within Complex Manufacturing.

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Presentation on theme: "1 © 2004 TOCICO. All rights reserved. THEORY OF CONSTRAINTS CASE STUDY 1 Helping achieve “One-Simple-ABB” with “TOC in SAP” within Complex Manufacturing."— Presentation transcript:

1 1 © 2004 TOCICO. All rights reserved. THEORY OF CONSTRAINTS CASE STUDY 1 Helping achieve “One-Simple-ABB” with “TOC in SAP” within Complex Manufacturing Environment Presenter: Dr Alan Barnard, CEO Goldratt Research Labs Date: 27 th August CASE STUDY 2 Finding & Testing a solution to SHORTAGES & SURPLUSES within Book Publishing Supply Chain Finding & Testing SIMPLE Solutions for COMPLEX Problems

2 2 © 2004 TOCICO. All rights reserved. THEORY OF CONSTRAINTS Case Study 1 Helping Achieve “One-Simple-ABB” with TOC in SAP Case Study 1 Helping Achieve “One-Simple-ABB” with TOC in SAP Presenter: Dr Alan Barnard, CEO Goldratt Research Labs Contributors : 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 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 Outline

4 4 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Research 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 …

5 5 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Research Background 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

6 6 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Research Background RESEARCH QUESTIONS Q1: 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?

7 7 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Research Background RESEARCH METHOD 1.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

8 8 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Case 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 Automation Power Systems Robotics Power Products Automation Products

9 9 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Suppliers Customers Why Operational Excellence is critical to ABB… 3 Supply Partners expect Better 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 Sub Revenues COPQ EBIT 2 Shareholders expect Increase EBIT (growth) Reduce COPQ (stability) P T

10 10 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects ABB’s Continuous Improvement Evolution Number of factories using TOC 1992 Production Technology Organization part of Corp. R&D in Finland 1993 first DBR implementation Jonahs trained 1998 Corp R&D Program for Manufacturing Technologies 2001 Eli Goldratt visits ABB 2003 Operational Excellence Program (OEP) launched as CP Test TOC Distribution Solution 2006 MT R&D Program becomes Operations Development Group. 50 consultants in 4 centers 2007 TOC in SAP 2002 ConWIP By 2008 ~100 Trained in “Advanced TOC” ~500 in TOC through OEP TOC + Lean Thinking + OEP = Operational Excellence 2007 OEP for IS 2008 OEP for Controllers

11 11 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Was the investment in Operational 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: (3000 projects examined)

12 12 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Distribution Transformers production unit 2005TPT (Line1)- 75% TPT (Line2)- 65% Distribution Transformers production unit 2005TPT> - 50% Delivery time > - 25% Total inventory reduction 1,2 MUSD while 40% volume increase LV Motors manufacturing unit 2005Productivity+38% TPT-17% Tap Changer manufacturing unit 2005TPT - 50% Delivery time > - 60% HV Bushings manufacturing unit 2005Capacity+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 % Technology Development Centre 2005Project OTD from 45 to 87% with significantly reduced cycle time Functional Completion Rate incr. to 100% Cables manufacturing unit 2004TPT- 80% WIP- 60% Distribution Transformers production unit 2004TPT- 70% Delivery time- 48% OTD from 70 to 96% while 245% increase in orders received HV Switchgear 2004Capacity+43% Sample TOC & Lean success stories in ABB (1/2)

13 13 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Sample TOC & Lean success stories in ABB (2/2) Power Transformers production unit 2007WIP and LT- 40% OTD (On Time Delivery)from 86 to 100% Capacity +100% without planned expansion Distribution Transformers production unit 2007WIP- 45% TPT- 70% OTDfrom 45% to 98% Distribution protection and control products manufacturing unit 2007Delivery time - 50% OTD from 40 to 100% Capacity+ 30 % with existing resources MCB production unit 2007Delivery time - 50% for stock and non-stock items OTD from 84% to 97% Power Transformers production unit 2006Productivity +30% Delivery time- 50% (from 6 to 3 months) WIP - 35% Distribution Transformers production unit 2006Capacity +30% TPT- 64% Delivery time - 32% Inventories- 44% OTD from 66 to 98% MV Circuit Breakers manufacturing unit 2006Capacity+260% TPT- 60% Delivery time - 60% OTD from 77 to 100% LV Breakers and Switches production unit 2006Capacity+25% Delivery time - 80% OTD from 23 to 90%

14 14 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects What is the benefit of using TOC as a focusing tool 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 Lean 6Plants 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 Source: Apics Magazine, May 2006 and TOCICO 2007 presentation by Dr Russ Pirasteh, Sanmina-SCI,

15 15 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects But how do you achieve Step-Change AND Continuous Improvement within any organization? Source: ‘Kaizen: The Key to Japan’s Competitive Success’, by Masaaki Imai P D C A S D C A = Standardize, Do, Check, Act Continuous (Evolutionary) Improvement through institutionalizing Best Practices = Plan, Do, Check, Act Step-Change (Revolutionary) Improvement through Constraint Focused interventions (Kaizen)

16 16 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Need Have a way to Roll -out best-practices efficiently & effectively Objective Ensure leverage of Best-Practices in all Business units Need Have a way to ensure out- standing result in each BU Action Standardize our improvement approach Action Customize 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 Acceleration Challenge

17 17 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Action Standardize our improvement approach Action Develop 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-out best practices effectively Objective Ensure leverage of Best-Practices in all units Need Ensure out- standing result in 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 Acceleration Challenge

18 18 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects ABB Gate Model for Process Improvement projects of Best Practices using a holistic TOC approach Project scope definition Project Execution Plan Final solution agreement Project Hand- over Pilot results Close project Validate results Project Start Agreement Development PilotingImplementation 0 Analysis Planning Execution Sustain 1. Agreement on the problem 2. Agreement on the direction of the solution 4. Agreement that no disastrous side effects will result 5. 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).

19 19 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects ABB’s ERP System reality after years of acquisitions and empowered BU and 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”.

20 20 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects ABB’s “One-simple-ABB” decision 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?

21 21 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects The Operations dilemma in supporting ABB’s global “One-Simple-ABB” objective? Need Efficient and fully integrated Finance, HR & OPS business processes across ABB Objective Create long term competitive edge in our industry Need Continuously Improve customer service and sales through efficient & effective operations Action Deploy a common ERP platform across ABB and limit selection of SCM & MES systems Action Allow each site to develop own / use 3 rd 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: Not updating ERP ERP inaccurate Don’t trust ERP Use Legacy / 3 rd Party The “One-Simple-ABB” Dilemma

22 22 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 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 global “One-Simple-ABB” objective?

23 23 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 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 & Test Collaboration of ABB, TOC & SAP Experts Roll-out & Validation Cont. To validate robustness & results Project Start “TOC in SAP” Intro W/Shop In Zurich TOC Solution Design SAP Blueprint Experts convert Solution Design into Functional Reqs “Go-Live” At Pilot Site In Brno “TOC in SAP” Project at ABB Getting Agreement & testing TOC Solution Design & 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/Shops In Brno to specify the solution

24 24 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Finding a simple & robust SCM solution for ABB that is generic enough to be used by all factories “The best solutions start with the right questions…” 2.1 Reliability/Avail ability Competitive Edge 2.2 Rapid Response Competitive Edge 1 1 ABB Goal: Profitable Growth ABB Goal: Profitable Growth Remarkable Due Date Perf & Availability Selling Reliability/Availabi lity Selling as Comp. Edge Coping with Sales Growth Remarkable Rapid Response Protective Capacity for RR orders Selling Rapid Response as Comp. Edge Expanding RR Client Base Using Goldratt’s Strategy & Tactic tree method to find a simple & robust Planning, Execution & Cont. Improvement solution…

25 25 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Current Performance Potential Performance Over- / Under-committing Capacity Releasing Too much / Too early Materials / Purchased Parts not available Unsynchronized Priorities in Operations Other “Hidden” Disruptions to Flow What really causes low Tput, poor DDP / Availability & Long LT? Finding a simple & robust SCM solution for ABB that is generic enough to be used by all factories 2.1 Reliability/Avail ability Competitive Edge 2.2 Rapid Response Competitive Edge 1 1 ABB Goal: Profitable Growth ABB Goal: Profitable Growth Remarkable Due Date Perf & Availability Selling Reliability/Availabi lity Selling as Comp. Edge Coping with Sales Growth Remarkable Rapid Response Protective Capacity for RR orders Selling Rapid Response as Comp. Edge Expanding RR Client Base

26 26 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 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? Finding a simple & robust SCM solution for ABB that is generic enough to be used by all factories 2.1 Reliability/Avail ability Competitive Edge 2.2 Rapid Response Competitive Edge 1 1 ABB Goal: Profitable Growth ABB Goal: Profitable Growth Remarkable Due Date Perf & Availability Selling Reliability/Availabi lity Selling as Comp. Edge Coping with Sales Growth Remarkable Rapid Response Protective Capacity for RR orders Selling Rapid Response as Comp. Edge Expanding RR Client Base Sales How to QUOTE reliable due dates with internal Constraint? i.e. Not over-/under- commit 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?

27 27 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects (Sales) TOC’s PLANNED LOAD (PL) for Quoting Safe Due Dates TOC’s PLANNED LOAD (PL) for Quoting Safe Due Dates (Buying) TOC’s DYNAMIC BUFFER MGT (DBM) & TOC Replenishment (TOCR) for Inventory Mgt TOC’s DYNAMIC BUFFER MGT (DBM) & TOC Replenishment (TOCR) for Inventory Mgt (Planning) TOC’s RELEASE CONTRO (S-DBR) to control WIP and improve Flow TOC’s RELEASE CONTRO (S-DBR) to control WIP and improve Flow (Execution) TOC’s SINGLE PRIORITY SYSTEM Buffer Mgt (BM) to keep priorities synchronized TOC’s SINGLE PRIORITY SYSTEM Buffer Mgt (BM) to keep priorities synchronized (Improve) TOC’s BUFFER ANALYSIS to Focus Process Improvements & Capacity Elevation TOC’s BUFFER ANALYSIS to Focus Process Improvements & Capacity Elevation Finding a simple & robust SCM solution for ABB that is generic enough to be used by all factories 2.1 Reliability/Avail ability Competitive Edge 2.2 Rapid Response Competitive Edge 1 1 ABB Goal: Profitable Growth ABB Goal: Profitable Growth Remarkable Due Date Perf & Availability Selling Reliability/Availabi lity Selling as Comp. Edge Coping with Sales Growth Remarkable Rapid Response Protective Capacity for RR orders Selling Rapid Response as Comp. Edge Expanding RR Client Base

28 28 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 2.1 Reliability/Avail ability Competitive Edge 1 1 ABB Goal: Profitable Growth Remarkable Due Date Perf & Availability Defining, communicating & validating the proposed ERP changes using S&T structure (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 Load 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

29 29 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects NEW ORDER Quoting Safe Orders Due Dates using CCR(s) Planned Load CCR Back Orders Overdue WO #112 WO #132 WO #114 WO #111 WO #131 WO #15 WO #116 WO #117 WO #120 WO #118 WO #119 WO #122 WO #123 WO #113 WO #114 WO #124 WO #125 WO #126 WO #15 WO #127 WO #128 WO #130 WO #129 WO #133 WO #134 WO #135 WO #136 WO #137 WO #138 WO #139 WO #140 WO #141 WO #142 WO #111 WO #131 WO #15 WO #116 WO #117 PLANNED MAINTENANCE Material Release Date Safe Due Date ½ PTB Production Time Buffer (PTB) Supply Time Buffer (STB) Material Order Date Tactic 1. 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

30 30 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Identify CCR Overload Identify Next Avail slot on CCR Quoting Safe Orders Due Dates using CCR(s) Planned Load Tactic 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.

31 31 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 2.1 Reliability/Avail ability Competitive Edge 1 1 ABB Goal: Profitable Growth Remarkable Due Date Perf & Availability 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 Maintaining Optimum RM & PP Inventory Levels 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 (Buying) TOC’s DYNAMIC BUFFER MGT (DBM) & TOC Replenishment (TOCR) for Inv Mgt Defining, communicating & validating the proposed ERP change using S&T structure

32 32 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 300 Month 1Month 2Month 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 demand TOC Feedback Rule: Re-size buffers based on red-zone penetration TOC Replenishment & Dynamic Buffer Management Rules What are the New TOC Planning, Execution & Feedback Rules… Stock in Pipeline Stock on Hand Maintaining Optimum RM & PP Inventory Levels with DBM / TOCR Tactic 1.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 Actual Demand

33 33 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 1.SAP TOC DBM & Repl. GUI 2. Graph showing resizing of Stock Buffers Maintaining Optimum RM & PP Inventory Levels with DBM / TOCR Tactic 1.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)

34 34 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 2.1 Reliability/Avail ability Competitive Edge 1 1 ABB Goal: Profitable Growth Remarkable Due Date Perf & Availability 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 TOC Release Control to prevent Over-production 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 (Planning) TOC’s RELEASE CONTROL (S- DBR) to control WIP and improve T, DDP & LT Defining, communicating & validating the proposed ERP change using S&T structure

35 35 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects MP1 PP2 RM1 RM2 PP 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 = ORDERS Part # Qty Due Date Buffer FG /3 66% FG /3 23% MANUF PARTS RELEASE Part # Qty OD DD Buffer Type M /2 04/3 66% ATO M /2 07/3 20% Cust Part sales to customers GREEN ZONE RED ZONE YELLOW ZONE Shipping Buffer for MTO GREEN ZONE RED ZONE YELLOW 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 Type P /2 04/3 66% Time P /2 07/3 30% Stock Definitions Buffer Status = (Buffer Time – Remaining Duration) / Buffer Time Red Zone = Time req’d for expediting a medium-sized order Controlling the Release in Manufacturing (MTO/ATO) “Customer” Orders GREEN ZONERED ZONE YELLOW ZONE S-DBR Planning (Release Control) Solution Quote LT’s on Planned CCR Load Tactic 1.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

36 36 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 2.1 Reliability/Avail ability Competitive Edge 1 1 ABB Goal: Profitable Growth Remarkable Due Date Perf & Availability 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 Single Priority System to Synchronize Execution 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 (1 st Black, 2 nd Red, 3 rd Yellow, 4 th 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 (Execution) TOC’s Buffer Mgt (BM) as synchronized SINGLE PRIORITY SYSTEM Defining, communicating & validating the proposed ERP change using S&T structure

37 37 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Stock Replenishment Orders do not have “Due Dates” Customer Production Orders do have “Due Dates” Sample Screen for showing Buffer status (Priority) of each order and enabling capturing of reason codes for “black” and “red” orders Single Priority System to Maintain Execution Synchronization Tactic 1.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

38 38 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 2.1 Reliability/Avail ability Competitive Edge 1 1 ABB Goal: Profitable Growth Remarkable Due Date Perf & Availability 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 Focusing Mechanism for Process Improvement/Elevation 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 (Improve) TOC’s BUFFER ANALYSIS to Focus Improvements & Capacity Elevation Defining, communicating & validating the proposed ERP change using S&T structure

39 39 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Focusing Mechanism for Process Improvement/Elevation Tactic 1.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.

40 40 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects TOC in SAP at ABB “TOC in SAP” solution design: Order Processing Part I

41 41 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects TOC in SAP at ABB “TOC in SAP” solution design: Order Processing Part II

42 42 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects TOC in SAP at ABB “TOC in SAP” solution design: Determination of Earliest Due Date

43 43 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects “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 & 3 rd 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 ABB Results from Brno (Czech Republic) and Vaasa (Finland)

44 44 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects TOC in SAP at ABB Next 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…

45 45 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Research 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….

46 46 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Acknowledgments to Project Team 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

47 47 © 2004 TOCICO. All rights reserved. THEORY OF CONSTRAINTS CASE STUDY 2 Finding & Testing a solution to SHORTAGES & SURPLUSES within Book Publishing Presented By: Dr. Alan Barnard (CEO Goldratt Research Labs, TOCICO Chairman ) Date:27 th August 2009

48 48 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Presentation Outline 1.Generic Research Problem 1.Extent and Consequences of Shortages & Surpluses 2.Cause(s) & Direction of Solution 2.Case Study: Random House Publishing 1.Publishing Industry Background 2.Random House Company Overview 3.Phase 1: Quantifying the Extent, Consequences & Causes 4.Phase 2: Finding a Solution 5.Phase 3: Testing the Solution 3.Research Findings 4.Future Research

49 49 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Research Problem Extent & Consequences of SHORTAGES 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: BANK SUPPLIER CONSUMER SHOP

50 50 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Consequences of SHORTAGES on Profitability For Book Publisher and Retailer… Quantifying impact of 1% Lower Sales Volume on Net Profit INSIGHT: 1% Lost Sales = 10% reduction in Profits BELIEF: 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?

51 51 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 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 Sales 8 to 9% OOS x (9+31=40%) Consumer Response = 3 to 4% Supplier Lost Sales 8 to 9% OOS x (9+26=35%) Consumer Response = 3 to 4% Impact on Lost Sales & Profitability INDUSTRY RESEARCH: Extent, Consequences & Consumer Response to SHORTAGES But at 1:10 Leverage, 3 – 4% Lost Sales = Lost Profitability of 30 to 40%

52 52 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 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 Problem Extent & Consequences of SURPLUSES BANK SHOP SUPPLIER CONSUMER ?

53 53 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Consequences of SURPLUSES on Profitability For Book Publisher and Retailer… Quantifying impact of 1% Discount (Lower Price) on Net Profit INSIGHT: 1% Discount in Price = 20% reduction in Profits BELIEF: Consumers are VERY sensitive to pricing...and discounts is necessary since lower prices = more sales FEAR: 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)?

54 54 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 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 Problem Another important consequence of SURPLUSES

55 55 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 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 Problem Previous attempts to solve the problem

56 56 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 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 Problem Challenges 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?

57 57 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 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 Month 1Month 2Month 3 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 Problem Cause(s) of SHORTAGES and SURPLUSES

58 58 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Case Study Publishing 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

59 59 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Case Study Random 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?

60 60 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 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 Study Random House Key Facts

61 61 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Random House Income Statement in € millions Revenues 1,721 1,837 1,947 1,828 1,791 Operating EBIT EBIT % of Sales8.0%9.4%9.3%9.1%7.8% Employees (in absolute numbers) 5,779 5,764 5,804 5,395 5,383 Case Study Random House Publishing The Pressure to improve…. What would be the impact of a significant reduction in Surpluses on profitability …?

62 62 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects IMPACT of Reducing Returns on Profitability For 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…

63 63 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Random House Publishing Research 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?

64 64 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Lost Sales (Stocked) Potential Current Surpluses Shortages PROFITABILITY AVAILABILITY Profitability GAP Potential Current Availability GAP Lost Sales (Non-Stocked) Avoidable Discounts Cost of Avoidable Returns Impact of Shortages and Surpluses on Publisher and Retailer Profitability But how do we quantify the impact of Surpluses / Returns (and Shortages) on Profitability? Price lower than PoV

65 65 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 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 stocked 2)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…

66 66 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Feb 2008 March 2008 April 2008 June 2008 July 2008 Nov 2008 Project Start Conference Call to share real damage & extent of Surpluses & Shortages Random House Research Projects 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 Evaluation Share generic TOC analysis & solution to shortages & surpluses Simulation Develop simulation to validate damage of PUSH and benefits of PULL Customized S&T Dr. Goldratt with Exco construct customized S&T and plan Test Test Test impact of “Less more Frequently” with 12 Test Shops and with B&N data Analyse Test Results Analyse Test Results for 12 Test vs. Control Shops and agree on next steps

67 67 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Case Study Book Publishing Research Challenge #1 What 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?

68 68 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Quantifying the Opportunity for reducing SHORTAGES & SURPLUSES Benefit of “flagging” the stock-outs in red...

69 69 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Quantifying the Opportunity for reducing SHORTAGES & SURPLUSES Stock-out Lost Sales = Stock-out Days x Sales Velocity/day = 8% Surpluses Lost Sales = Surplus Days x Replacement Sales Velocity/day = 7%

70 70 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Typical Book Store – Concentration Analysis 70 NOTE: Above Data for period of 185 Weeks (1/1/ /18/2008) 10% of Titles generates 65% of Total Sales 95% of Titles sell at less than 1unit/wk 25% of titles had ZERO sales over the 3 year period VERY Large opportunity to replace “SURPLUSES” Where “Surplus” = Zero Sales Titles and Titles with Sales Velocity of 1unit

71 71 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Overcoming the challenges to reduce shortages & surpluses in Book Publishing Book Publishing Research Challenge #2 What 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

72 72 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 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 Month 1Month 2Month 3 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 Problem Cause(s) of SHORTAGES and SURPLUSES

73 73 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects PUBLISHER CDC PUBLISHER RDCs or RETAILER CDC RETAILERS PUSH Inventory Profile PULL Inventory Profile No. of Days of Inventory in Supply Chain 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)

74 74 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 300 Month 1Month 2Month Auto Upsize Buffer based on level of Red- zone penetration Keeping correct inventory levels 4:25 Auto Downsize Buffer based on lack of Yellow zone penetration Sizing Stock Buffers with Uncertainty and variability in demand 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 Goal Units Time / Stock Buffer Feedback Rules: Adjust Target Level (Buffer Size) based on Level of Buffer Penetration

75 75 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Launch Event Special Event Seasonality Events Stable Sales Testing Robustness of TOC’s Dynamic Buffering regardless of Demand Pattern

76 76 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 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: IndustryOfficial Lost Sales Availability before TOC Availability after TOC Avg Increase in Sales within 1 st 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- Consumption (RTC) Implementations

77 77 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Testing the Solution with 12 Test vs. Control Shops Research 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 78 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects 78 Similar level of “Stock- outs” before and after the Launch of Test Impact on Shortages (OOS) Typical Control Shop – Before vs. After

79 79 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Impact on Shortages (OOS) Typical Test Shop – Before vs. After 79 Zero “Stock-outs” after the Launch of Test !

80 80 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Results Achieved and Lessons 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 % −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

81 81 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Achieving Viable Vision 2:1 High Availability 2:5 Sales per Shelf (SPS) BASE GROWTH ENHANCED GROWTH 2:3 Word-of- Mouth 2:4 Resurrecting Dead Horses 2:2 The Digital World 2:6 Editorial Section RANDOM HOUSE STRATEGY & TACTIC L1-5 4:11:1 Define test sample 4:11:2 Launch Tests 4:11:3 Analyze the results 3:1:1 RH Test – Impact on Book Shops 3:1:5 Change Chains & Wholesalers’ order patterns 3:1:6 Spread to all Non-Bookshop Outlets 3:1:3 Rollout to directly serviced Shops in CDC area 3:1:4 Spread to all Book Shops 3:1:2 Parallel Test - Impact on B&N 3:1:7 Achieving Ongoing Improvement Strategy: RH has good enough* estimate of the resulting benefits from providing better availability ( “Good Enough”: The reliability of the estimates enables a clear decision) Tactics: RH carries out a carefully monitored test of “high availability” on a statistically representative sample Strategy; Book titles are always available at the stores in which market demand exists for those titles Tactics: The Co. provides replenishment to daily consumption to the shops it services directly and persuades the intermediate carriers* to provide such services its customers Results Achieved and Lessons Learned so far? NEXT STEP

82 82 © 2006, Alan Barnard, Goldratt Group. All rights reserved. TOC Research Projects Always Remember… “Your FOCUS (or lack of it) will determine your reality…” Thank you! For more information…. visit


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