Editing Theory of constraints (section)

===Supply chain and logistics===
In general, the solution for [[supply chain]]s is to create flow of inventory so as to ensure greater availability and to eliminate [[wikt:surplus|surplus]]es.

The TOC distribution solution is effective when used to address a single link in the supply chain and more so across the entire system, even if that system comprises many different companies. The purpose of the TOC distribution solution is to establish a competitive advantage based on extraordinary availability by reducing the damages caused when the flow of goods is interrupted by shortages and surpluses.

This approach uses several new rules to protect availability with less inventory than is conventionally required.

# Inventory is held at an aggregation point(s) as close as possible to the source. This approach ensures smoothed demand at the aggregation point, requiring proportionally less inventory. The distribution centers holding the aggregated stock are able to ship goods downstream to the next link in the supply chain much more quickly than a make-to-order manufacturer can.
# Following this rule may result in a make-to-order manufacturer converting to make-to-stock.  The inventory added at the aggregation point is significantly less than the inventory reduction downstream.
# In all stocking locations, initial inventory buffers are set which effectively create an upper limit of the inventory at that location. The buffer size is equal to the maximum expected consumption within the average Replenishment Time ("RT"), plus additional stock to protect in case a delivery is late. In other words, there is no advantage in holding more inventory in a location than the amount that might be consumed before more could be ordered and received. Typically, the sum of the on hand value of such buffers are 25–75% less than currently observed average inventory levels
##Replenishment Time (RT) is the sum of the delay, after the first consumption following a delivery, before an order is placed plus the delay after the order is placed until the ordered goods arrive at the ordering location.
# Once buffers have been established, no replenishment orders are placed as long as the quantity inbound (already ordered but not yet received) plus the quantity on hand are equal to or greater than the buffer size. Following this rule causes surplus inventory to be bled off as it is consumed.
# For any reason, when on hand plus inbound inventory is less than the buffer, orders are placed as soon as practical to increase the inbound inventory so that the relationship on Hand + Inbound = Buffer is maintained.
# To ensure buffers remain correctly sized even with changes in the rates of demand and replenishment, a simple recursive algorithm called Buffer Management is used.  When the on hand inventory level is in the upper third of the buffer for a full RT, the buffer is reduced by one third (and don't forget rule 3).  Alternatively, when the on hand inventory is in the bottom one third of the buffer for too long, the buffer is increased by one third (and don't forget rule 4).  The definition of "too long" may be changed depending on required service levels, however, a rule of thumb is 20% of the RT. Moving buffers up more readily than down is supported by the usually greater damage caused by shortages as compared to the damage caused by surpluses.

Once inventory is managed as described above, continuous efforts should be undertaken to reduce RT, late deliveries, supplier minimum order quantities (both per [[Stock Keeping Unit|SKU]] and per order) and customer order batching. Any improvements in these areas will automatically improve both availability and inventory turns, thanks to the adaptive nature of Buffer Management.

A stocking location that manages inventory according to the TOC should help a non-TOC customer (downstream link in a supply chain, whether internal or external) manage their inventory according to the TOC process. This type of help can take the form of a vendor managed inventory (VMI). The TOC distribution link simply extends its buffer sizing and management techniques to its customers' inventories. Doing so has the effect of smoothing the demand from the customer and reducing order sizes per SKU. VMI results in better availability and inventory turns for both supplier and customer. The benefits to the non-TOC customers are sufficient to meet the purpose of capitalizing on the competitive edge by giving the customer a reason to be more loyal and give more business to the upstream link. When the end consumers buy more, the whole supply chain sells more.

One caveat should be considered. Initially and only temporarily, the supply chain or a specific link may sell less as the surplus inventory in the system is sold.  However, the sales lift due to improved availability is a countervailing factor. The current levels of surpluses and shortages make each case different.