MANAGING THE CONSTRAINT INVENTORY BUFFER
There should be an inventory buffer ahead of the system constraint. The purpose of the inventory buffer is to keep the system constraint productive at all times. Time lost at the system constraint due to working to produce defective material or working to produce unsold product for inventory is time never recovered. Supply chain throughput is maximized when the rate output from the system constraint is matched with market demand and when the mix output of the system constraint is matched with firm, ship-released customer orders. Be prepared to quickly establish a new constraint inventory buffer at another trading partner when market changes in demand rate or mix cause the system constraint to shift.
The system constraint buffer should hold enough inventory for about three days of supply at maximum throughput. This allows two days to resolve any upstream issues, while the system constraint completes one day of jobs at its maximum throughput. The buffer should be run in a daily first-in, first-out (FIFO) mode with jobs color-coded green, yellow, and red. Each day's list of green jobs should be se-quenced from the highest contribution margin first to the lowest contribution margin last. A yellow tag indicates that some kind of additional work is required before that job can be started, but this condition is expected to be resolved within the next two days. The rare red tag indicates that this job should not be run. A red tag
could be caused by the loss of the ship release status on an order or by a quality defect upstream in the supply chain.
It is uneconomical to try and synchronize operations for every SKU in a supply chain. Vendor-Managed Inventory (VMI) is a good strategy to manage B SKUs. C SKUs should be built-to-stock based on a monthly forecast except where it can be shown that a particular C SKU is always included in the sale of an A SKU. Then that C SKU should be reclassified as a B SKU. At a minimum, VMI should be structured for a weekly review period.
Under VMI the selling upstream trading partner places consignment inventory on the premises of the buying downstream trading partner. For example, the supplier (seller) services the factory (buyer), and the factory (seller) services the distributor (buyer), etc. The seller is authorized by the buyer to periodically check inventory levels on the buyer's site either electronically on their inventory control system or by sending someone on site to count inventory. When the seller detects that the SKU inventory level has fallen below a minimum level, the seller is authorized to replenish the SKU inventory up to a maximum level. The seller owns the inventory until it is consumed by the buyer. The buyer and seller agree to settle accounts once a month with a single purchase order and a single invoice that includes separate line items for each SKU managed under VMI.
INVENTORY MANAGEMENT UNDER SYNCHRONIZED OPERATIONS
Under synchronized operations, there will be some inventory at every node of the supply chain and some inventory within every pipeline. When customer demand is light, node inventory will be large and pipeline inventory will be small. When customer demand is heavy, node inventory will be small and pipeline inventory will be large. In fact, the sum of the total inventory in equivalent SKU units of all the node inventory plus all the connecting pipeline inventory will be constant. If it is at all possible to eliminate some nodes in the current supply chain, then do this optimization before starting synchronized operations. This is because the total supply chain inventory investment is driven mostly by the number of nodes.
Then, before synchronized operations can begin, enough inventory must be put in place at each node to support one synchronization cycle at maximum throughput. A synchronization cycle is the time between the broadcast of one demand signal from the system constraint until the next; this is typically one day. From then on each node must manage its inventory on a first-in, first-out (FIFO) basis to ensure stock rotation.