• Chainbalance

Isn't it obvious

by Eliyahu M. Goldratt



Abstract of a management book

This article is based on Eliyahu Goldratt's book Isn't It Obvious. Together with Ilan Eshkoli and Joe Brownleer, Goldratt explains how his Theory of Constraints (TOC) can be implemented in a retail supply chain. The goal of this article is to reveal the essence of a responsive supply chain. As it is impossible to forecast sales at store article size level per day of the week, a responsive supply chain will deliver high value to fashion supply chains. The services of ChainBalance are developed with the responsive supply chain in mind. Like in the book, the essence will be explained step by step; the changes that will have to take place at store-level, regional warehouse-level, central warehouse-level and at supplier-level.


Enjoy reading this article.

Ben Vermin, Managing Director ChainBalance BV


Store-level

In the story, a shop manager is forced to move the stock of his storeroom to the regional warehouse. He is not very happy about it, he is convinced to lose grip on his stock. Surprisingly enough, it turns out to be a smart move; financial records soon show that his store improves dramatically. Suddenly the shop has the highest sales of the region and within a couple of months even of the whole chain. Because the stock moves from the store to the regional warehouse, the replenishment process has to change. Replenishment has to switch to an ‘order daily and deliver frequent' schedule. Per SKU (stock keeping unit), there will be an amount that is equal to twenty times the average daily sales. The store has to verify per day what is sold. To enable this, the store implements a method that uses three color-codes to indicate how the SKUs are doing. A SKU will get the priority red when the inventory turns are higher than expected. If it remains red for a week, there will be an alert to raise the target. When a SKU is green, it means that the inventory turns are too low. If a SKU is green for over two weeks, the store will have to reduce the target inventory. The zone between red and green is yellow. Yellow means the replenishment process is under control. The SKU has got the right amount of inventory to satisfy actual demand in the store.


Regional warehouse-level

Not only store operations will have to make some changes, the regional warehouse also has to adjust. Until recently, whole cartons of one product were transported, but if they would continue to work this way, the shop manager will have the entire inventory back in his store in no time. Therefore, the regional warehouse will only ship what the shop needs. The regional warehouse will have to start order-picking per piece. The regional warehouse will change from a wholesale business to a retail warehouse. In chapter 18 of Isn't It Obvious is clearly shown the difference between the way the shop described above operated at first, and how it will operate with the method the shop discovered by accident.


In graph 1 is shown the situation as it was before. The starting point of each vertical line (left) indicates the starting inventory in the store. As the store sells, the inventory gradually goes down. Once it reaches the predetermined level of minimum inventory, the system generates an order for replenishment. It takes time before the goods arrive, but when they do, the inventory jumps back and the cycle will repeat itself. Unfortunately, in practice it is very different. In graph 1 the new shipment always arrives before the store runs out of inventory, though in reality this is frequently not the case. The shipment often arrives too late from the supplier. That means that the graph can be at zero for long periods of time (graph 2).Insight into the true damage of out of stock starts in the store. Other entities in the supply chain have proof that they are not the weakest link. Integrity of out of stock data on retail level is still very hard to find. More focus on this KPI will clearly close the gap between current statistics and our intuition as a shopper. Availability is the decisive factor to turn a shopper into a consumer. Whether out of stock is a showstopper for the consumer in 9% or 59% of its planned purchases will differ from store to store. The investment to improve the store replenishment process could very well be paid back before the next collection hits the shop floor.


With the new system, the shipment only has to come from the regional warehouse. This decreases the supply time to no more than a few days; in most cases just one day. Moreover, the shop immediately informs the regional warehouse when something has been sold. The graph will look something like graph 3.


The graphs prove that stores can sell more with less stock. There will be higher inventory turns and articles are less often out of stock. Furthermore, less capital employed will be needed. As more is sold against lower costs the profit will increase and since the inventory turns also increase, the return on the investment raises too.


Central warehouse

Since the new way of operating is such a success, they will try to implement this method on several other stores with the same regional warehouse. Because of this, the regional warehouse has to be organized completely different. Every shop's stock will be aggregated in the regional warehouse. The shops do not have their own stock in their storeroom anymore, but there is only one inventory for all the shops within the regional warehouse. Now no cross-shipments will be needed between the shops within the region of the regional warehouse. It will not be the case anymore that one shop has too little inventory of a product while another suffers from excessive stock on the same SKU. There will be replenishment based on the actual needs of a shop. The regional warehouse will transform into a retail warehouse. The process of receiving goods from the vendor and shipping boxes out now moves to a higher level in the chain. A central warehouse is created. The central warehouse performs an important function in the chain; it keeps inventory of all SKUs that will be sold in more than one region and the inventory that is slow moving on regional level. In a previous stage, no cross-shipments were needed between shops within the same region of the warehouse; with a central warehouse there are even no cross-shipments needed between the regional warehouses. The orders of the shops and the regional warehouses are not based on weekly orders anymore, but will directly be triggered by the daily sales in the shops.


Additional notes

The book 'Isn't It Obvious' could have been clearer about the impact on the transportation costs. One could expect that the transportation costs will increase significantly. This is not the case:

  • The content of the truck load / container changes; instead of filling the trucks with pallets of a limited number of different products, they are now filled with cartons of several different products;

  • Daily order creation and frequent replenishment runs will have a stabilizing impact on the spikes in the supply chain meaning less rush orders. Capacity planning will become more efficient thanks to the automated flow of orders;

  • The store to store shipments will decrease considerably, which will save costs. It certainly is possible that the extra costs for frequent order picking will be covered by the reduction of cross shipments alone.