32nd International Conference of the

TOC Practitioners Alliance - TOCPA

www.tocpractice.com 23 March, 2017 Milan, Italy

Selling and implementing the TOC

Distribution Solution in Italy
an on-going experience
Carlo Buora, Nous srl, Italy
23 March, 2017
 Your logo
Carlo Buora

Carlo Buora has been an IT expert, salesman and

operations consultant for many years, and worked
as a manager in Andersen Consulting and Roland
Berger & Partner.
In 1995 he started a consulting company Nous
with a two-pronged approach: operational
improvements, mainly lean based, and IT
improvements mainly web based, and established
working partnership with IDEA LLC to develop an
Office: +39(02)3490035
integrated TOC consulting and delivery capability.
Mobile: +39(335)381874
They translated the Do-It-Yourself books by Rajeev Skype: carlo.buora
Athavale into Italian. Web: www.nousconsulting.it

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 Promising companies to Your logo

make more money

The TOC Distribution Solution presents

companies with the possibility of making more
money and profit systematically while decreasing
inventory.
This can be achieved by avoiding lost sales (in a
season, in a year), an underestimated and
neglected ever present opportunity.
How do we know how big an opportunity this is?
Analyzing past sales, receipts and inventory history is one way
Proving the concept by insuring total availability for a small
group of stores and seeing sales grow and local inventory
shrink, is another way

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 Your logo
Pushing the solution

Our experience in selling TOC has been

one of learning the hard way.
We tried over the years

Personal contacts and acquaintances

Participation to educational events
Proposing partnerships to: consulting companies, software
companies, services companies (logistics,)
Academia (even supporting a master thesis)
Cold calls
None worked, except the first and then only when the acquaintance really
had the trust of the company CEO/owner. And yes one cold call also did
work. All, though, did generate a lot of promotional work
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 Your logo
Our target

Our target have largely been brick-and-mortar consumer goods

distribution chains. These come in two flavors:

A. Those that procure/manufacture and then sell

directly to the end customer through own or
franchised stores
B. Those who procure/manufacture and then sell
to wholesalers who then sell to retail stores,
mainly single independent ones

The B group is the traditional retailing still strong in Italy, the A group are
the branded stores. We didnt particularly pursue online sales although
they are a growing C group. A and B groups each are roughly 50% of
the retail marketplace in Italy. Group A is growing of course and B is
shrinking

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 Your logo
TOC Distribution essentials

The Core Dilemma in Distribution

D
B
Hold less
Reduce Costs
Inventory

A
Manage well

C D
Protect Hold More
Throughput Inventory

To protect Throughput, we need to add stock. But how to

take both actions must we compromise?

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 Your logo
TOC Distribution essentials

The preferred Solution

D
B
Hold less
Reduce Costs
Inventory

A
Manage well
?
C D
Protect Hold More
Throughput Inventory

If we stock less, how do we get good enough availability to

sell more?

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 Implement a centralized Your logo

Pull Distribution
Pull replenish stores from a centralized Warehouse
OLT daily OLT Daily OLT Daily PUSH
Inventory
SLT = 1-4 wks SLT 1-4 Days SLT 1-2 Days

# of Days of 1-4 wks 1-4 days

Inventory

PLANT CENTRAL WHS REGIONAL WHS STORES

Flow of Goods PULL

Inventory

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 Implement a Flow Your logo

Distribution
Reorder daily, replenish as often as possible

Replenishment LT

Order Suppy
LT LT
100

Efficiency Gap
(surplus)

ROP
25

Effectiveness Gap (stockouts)

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 Implement a Dynamic Your logo

Buffer Management
DBM protects sales without unduly increasing inventory

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 What is still missing from Your logo

the solution?
The preceding steps insure that
goods are delivered centrally where demand variability is smallest
and consumption highest
goods flow to stores pulled by demand in a balanced way
buffers adapt in size to protect sales from variations in demand

This would be fine if products didnt have seasons, production wasnt

done in faraway countries with long production and transportation
lead times and large minimum order quantities

The above situation is that of our MidBrand client

whose logistic configuration you can see in the
next chart

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 MidBrand is a very typical Your logo

Italian Fashion Retailer

MidBrand logistic configuration serving two seasons: PE and AI

7 weeks
Near East 95%
Far East
Delivery two
5% 1 week Italy months before
In season delivery - start of season
two months before
the end of season

90%
10%

Replenish Deliver 1 month

in season before start of season

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 MidBrand is a business Your logo

success, still

MidBrand is very good at purchasing, quality is good, shipping is

staggered so that products show up in the stores at the right time
No large warehousing is required centrally as only 10% is retained
as backup inventory
A large color variety is present to attract the customers and provide
alternatives in case of missing products
Visual Merchandising provides a common look to stores based on
richness and depth of display
Products are delivered in kits with a varying number of items per
size
Stores vary in size very much and all SKUs are present at the
season start sometimes with a very thin inventory

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 could MidBrand be Your logo

making more money?

Sizes and colors are often missing from the stores
All stores need a local support warehouse, sometimes even two
Unsold quantities are pretty large at the season end and discounting is
very heavy in the end-of-season crash sales
The area sales manager is the king, setting flash promotions all the
time to push sluggish products and moving products around the stores
They have tried pull replenishment once with no distinguishable results

This little story helped them to decide: Two cars leave Rome for Milan, a
FIAT compact and a Ferrari. Which one gets to Milan first?
They both get to Milan at the same time because they stick to the
maximum speed rule
Meaning: no advantage from Pull Replenishment if the business policies
are not changed accordingly

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 So they agreed to run a Your logo

Proof of Concept project

5 stores
Spring-Summer 2015 Season
An internal single-piece Distribution Center created ad-hoc to feed the
stores twice a week
The single-piece DC being fed in real time by de-kitting enough
additional inventory
Test performed on 20% of SKUs that could sell additional inventory (up
to 300% of the overall budget)
Pull Replenishment for stores and warehouses managed by Elucidate
a web application by IDEA LLC, our partner

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 What exactly is Proof of Your logo

Concept ?

A Proof of Concept, or POC for short, is a low risk effort a company

makes to know how much they can improve if stock is always available
The risk is low because the inventory used is small compared to total
company inventory and the stores involved also are very few compared
to all stores
The POC output is a precious piece of knowledge about how much the
company can immediately improve if near perfect availability is achieved

Two conditions
In order to actually improve the company must be ready to adopt the
subordination principle (see next chart)
The company must agree that perfect availability is a decisive
competitive edge for their retail business

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 Why subordination is so Your logo

important?

Subordination means that all the company parts work to attain more of
the goal - perfect availability in our case
In practice this means that all main functions, production/purchasing,
discounting, product packaging, visual merchandising, logistics,
warehousing, even IT, must be revised to comply with the subordination
requirement
One key result of subordination is, a bit surprisingly, more harmony in
the company. When instead each function is striving to attain
independent optimization, almost all steps in this direction are causing
undesirable effects elsewhere
In our POC there were many undesirable effects due to the resistance
to subordination. The POC results though were very comforting

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 What results were Your logo

obtained

In the five stores the selected POC SKUs sold 35% more pieces,
the baseline being the store budget

Some item-store
exhibit even an
explosive behavior!

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 What if we had true Your logo

infinite availability?

The 300% availability still left many time periods with no

inventory. The five stores could have sold up to 40%-45% more
pieces if inventory never ran out
For clarity only first
1000 item-store
shown. The brown
jagged lines show the
additional sales with
perfect availability

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 Would have been difficult to Your logo

attain such goal?

Yes and no. No, they already had suppliers not further away than two
trucking days which could replenish fast enough. This change would
not involve the Far East suppliers and would have been relatively easy
to test
Yes, in time, they had to change not simply Purchasing, but some
other functions that had better align themselves to the new
environment
And, Yes they had to really want to achieve exceptional results so in
the end it was the CEOs vision of the company future that was
important
During the discussions one issue stood out, namely the difficulty of
procuring the died fabrics required for the additional sales
Curiously in one next project we found a solution for the died fabric
problem wed like to share

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 Why is the died fabric a Your logo

problem?

When additional products are needed fast, died fabrics pose a

problem because they have long lead times and it is difficult to
replicate their color
Each died fabric though is used in a number of different models
in various sizes
The problem is that the died fabrics are completely used up in
producing the forecasted quantities
So for a fast supply one would need to keep an expensive
reserve of all died fabrics used in a collection an impossible
proposition

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 How are sales distributed Your logo

in a collection
In a collection typically 33% of the SKUs sell all their budget, another
33% sell passably, and the last 33% do not sell much
We can reasonably assume that same died fabric items share the same
distribution
If this is true, why ship all
Ratio consumption vs budget, all sku-store
items in one single batch
when we know we wont
sell the whole batch?
Why not ship an initial
batch of 50% of forecast
without cutting the
remaining fabric?
Our fast supply
capability will allow us to
replenish to avoid stock-
outs
See the results next chart
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 The one single batch is the Your logo
norm in fashion
The seven models have many SKUs and all share the same fabric
Here is what happens if the supplier delivers the forecast in one single batch
Season Actual Total season
Unsold
forecast monthly sales sales

2 fast models
700 / 600 1000

2 avg. models
7 models 600 400
1000 x 150
4 months
season model 3 slow models
100 400 600

7.000 items 4.400 items 2.600 items

Items sold in season are 4.400, 63% of forecast. Unsold quantity is 37% of forecast.
These are typical retail numers

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 Split the initial batch and Your logo

replenish sales fast

Monthly 1 batch Potential Actual extra

Forecast Unsold
sales sales extra sales sales*

2 fast models 1840

500 2300
1000 x 700 / 600 500 1900 1520
model

1 delivery 50% 2 avg models 2 models 2 models

150 80
500 100
60
500 x
3 slow models 3 models
model 100 400
400 ZERO 100

* The unused died fabric allows only 3500 4.400 3.500 300 items
more items. Actual sale rates set at 20% less items items
First batch sales amount to 3.200. The slow sellers leave 300 items unsold. Total sales
are 6.700 items, 96% of total production and unsold quantity is 4%.

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 You sell more and with Your logo

much less inventory

Average inventory is less than a half the previous value, while sales
increase more than 50%. The results is a sharp increase in inventory turns

More turns
+279%

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 Your logo
Purchasing split batches and fast
replenishments
is what a retail company needs to be enormously
profitable. The supplier would become much richer
as well!
If we want our win to be bigger, we have to insure
that the other sides win will be bigger.
Is it always possible to find a win for the other side
that is bigger than what the other side is explicitly
going after?
If there is why doesnt the other party ask for it?
It will not ask for what it really needs because it
doesnt believe that there is a way to get it

Excerpt from the The Choice, by Eliahu M. Goldratt, The North River Press, 2008

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 Your logo
Questions ?

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