Applying TOC on a High Demand Variability and Short Market Life Environment: A case study in the largest beach souvenir retailer in Mexico
Avenir America, Mexico
September 8, 2015
1) What needed to be changed?
- Stock outs of high selling items & Excess inventory of slow moving items.
- Ununiformed inventory across the different regional warehouses - excess inventory of Finished Goods in some and stock outs of same items in others.
- Excess of obsolete/surplus inventory and discounting to finish them thereby reducing throughput.
2) What was the intended future state?
- Improve inventory days of total supply chain to 90 days.
- Improve availability of products from current to 95% rate.
- Improve share of obsolete products from current to 15%.
3) How was the transformation accomplished?
Buffers were built in stores considering replenishment time of ONE day and maximum daily consumption. Similarly buffers were built in regional warehouse – considering maximum consumption and replenishment time. We increased the frequency of raining orders and implemented buffer management to replenish the buffers.
We implemented plant warehouse (PWH) and to do so we divided the SKUs into - fast selling were defined as Made to Availability (MTA) and slow moving were defined as Made to Order (MTO). However, we did some modification in the manufacturing process. We created buffers of Semi-Finished products and implemented PWH there (In the earlier process raw material was directly processed into finished product). This step was a paradigm shift for the client and it further helped in reducing the inventory.
Buffer Management was introduced in operations to prioritize orders and process them accordingly. Similarly buffers were built in raw material section and buffer management was implemented to raise purchase orders to suppliers.
Buffer management could NOT be implemented as we did in Graphic T-Shirts because life cycle of the product is only 4 months (16weeks) and lead times from the suppliers is between 8 – 10weeks. The internal processing of design and names of the city takes additional 2 weeks. Hence, whatever was ordered, it had to be sold within the season. So we analyzed the entire catalogue and divided it into: head - body – tail
- Items that were finished product (design & ´name´ of city printed) were shipped directly to regional warehouse and replenishment model was implemented between stores and the regional warehouse.
- For others garments were purchased as raw material and stocked in raw material warehouse. First order size was filling of chain or 6 weeks of sales whichever is higher.
- Then buffer management would function as in case of made to order in Graphic T-shirts.
There were items that were finished product (´name´ of city printed), replenishment model was implemented between stores and the regional warehouse. There was no point stocking these items in Plant WH.
For others, buffer management could NOT be implemented as it is – the lead times are very high (16 weeks) while variability on market side happens within weeks. Hence, solution had to be a mix of pull and push mechanism between stores and raw material WH.
We devised a ´Basket´ concept on an Apple vendor model – apple vendor ensures that he sells all the apples he bought in the morning, by late evening. Using this logic, we had to ensure we sell all the items purchased for a season within the season even if there is a slow demand for them.
4) Obstacles faced
- The souvenir nature, force to print the name of the city in each garment. Increasing FG inventory and makes the products nontransferable.
- The year is broken into three seasons – Spring, Summer and Winter and each season has extreme peaks and long purchase lead times from suppliers (as high as 16 weeks).
- Significant share of regional tourists creates the need for innovation, so products need to be renewed every season (Almost 80% of the catalogue gets changed every 4 months).
- Store managers decide purchase orders for the season based on experience and personal appreciation of the catalogue.
5) Results obtained
- Overall financial result in 87 days a 20% reduction in days of inventory
- Availability of SKU’s in stores at 95% rate
- Obsolete inventory share of total inventory at end of season reduced from 40% to 10%
- The client gave us a recommendation letter (enclosed separately) for the results obtained.
- We will also submit the video of the client – where she would endorse the results achieved.
PRIYARANJAN SINGH has a total work experience of 13 years. With almost 7 years of experience in consulting, he has worked across many sectors - ceramic, retail, garments, food processing, airport operations, agriculture, construction, restaurant chains, hotels and distribution. He has led several consulting engagements in different cultural milieu and is credited with delivering sustainable results.
Currently heading consulting practices at Avenir America, Mexico as Chief Operating Officer (COO), he helps clients in developing compelling business strategy to increase sales and profits by multi folds , improving inventory turns through redesigned supply chain and re-engineered flow in operations, enhancing productivity and conversion rate of sales team to significantly improve sales, working with organizations to bring in cultural transformation, re-engineering processes to deliver On Time and In Full and improve customer service, managing complex and multi-projects environment to deliver before schedule and under the budget.
Priyaranjan holds an engineering degree from TIT&S, Bhiwani, India and an MBA degree from Asian Institute of Management, Manila, Philippines
DR. CLEMENTINA RENDON works as COO – Chief Operating officer – with Green Co. for last 4 years. She has an experience of more than 25 years - largely working as professor and running her own business consulting. She has worked across various sectors in Mexico and has contributed significantly to the industry.
Dr. Clementina has a PhD in Management from the New Port University, Mexico. She also holds master's degree in International Tourism, University Las Palmas and management sciences, Tecnológico de Monterrey, Mexico.
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