Managing a protective capacity in make-to-availability

environment
by Eli Schragenheim and Amir Weisenstern

The need for protective capacity

The core of the logistical solution for managing a make-to-availability is TOC
replenishment where the company frequently replenishes upon consumption and
dynamically adjusts stock buffers.

Creating an initial buffer

In many situations, there is a need to convert a product from a make-to-order to a
make-to-stock and then a stock buffer must be filled with stock before commencing
replenishment.

Demand fluctuates
In a make-to-availability environment, the company reacts to a fluctuated market
demand. When the demand suddenly increases, buffers are depleted rapidly.
Therefore, to ensure availability, we need to produce and replenish the stock buffer
immediately

Demand grows
One of the characteristics of TOC replenishment is that the availability of a product
becomes higher which leads to more sales. When demand gets higher for a certain
product, there is a need to increase its buffer size and replenish to the buffer
increment. In addition, as the company capitalizes on the replenishment solution and
creates a marketing order, the demand for products becomes even higher.

Since production must react quickly to all demand increments it must maintain
sufficient protective capacity. In different wording, production must not commit to all
its capacity but rather reserve some.

The amount of protective capacity that is required

A correlation exists between the load on production and the ability to deliver reliably
on promise. When the load is below 80% there are very few problems to deliver on
any promise given. However, when the load crosses the 80% mark, the level of
troubles starts to climb up. When crossing the 90% the trajectory is steeper, and when
crossing the 100%, there is no way to deliver on promise
 Probability of
missing due
date
commitment
100%

80% 90% 100%

Load on system constraint

The conclusion is that in order to cater for sudden increase in market demand, it is
recommended to have approximately 20% protective capacity and never to go below
10%.

Exploiting the protective capacity

The protective capacity may be used in 2 ways:
1. Not producing anything and when market demand increases, serve it fast. or
2. When not needed, produce an item that can be sold later

When the organization is in a situation that it has a real bottleneck (i.e. it can sell
anything it produces), option #2 is the preferred1 option and we name this protective
capacity "market buffer."

Market buffer usage

Since we cannot know in advance when production will use the market buffer, it is
impossible for sales to commit on it. The market buffer can be used to produce a
product to stock, and only when it is available, sales can offer it to the market.

In order to decide what items to produce using the market buffers, Sales and
Operations should have an open dialog. Some of the parameters that should be
considered are:
• Every CCR in Production has its own market-buffer-products.
• The products can be easily sold, for a good price, upon availability.
• The potential price of the product when sold under no obligation.
• The ability to segment the product without cannibalizing other products or
other offers.
• Note - there is no need that all products would have a certain ratio for the
market buffer. Actually it’d be simpler to have distinct product for the market
buffer, but this is not a strict requirement.

1
See "market buffer" document for more elaboration
 • Note - once Sales and Production decide what products should be used for
market buffer, Sales would NOT commit to deliver those products unless
Production notified that so-and-so quantity is going to be available very soon.
In other words, the initiative to produce those items lies solely on Production.

Putting the market buffer into practice

Whenever there is an opportunity to produce a new order, we check the total load of
the Capacity Constraint Resource (CCR) for a certain horizon into the future. If the
load is less than the maximum load expected before it we use the opportunity to
produce a product for the market buffer.

Maximum
load Work orders for
expected market buffer
before the
CCR
Load before the
CCR

Time

There is a second check before putting a market buffer order – if there is an indication
that the system is in a need to expedite then it is better not to produce and keep the
capacity free in order to have better response.

Calculating the load

The main parameter of the load calculation relates to the horizon. We would like to
take the longest possible horizon without going into forecast mode (i.e. guessing the
load).

There might be cases in which the chosen horizon is longer than our existing
knowledge about the actual load from existing orders. In that case we will need to
factor some reservation due to the unknown load.

Partial visibility to the horizon

Maximum Work orders for market buffer

load
expected Reservation due to
before the partial visibility
CCR
Visible load before
the CCR

Time

Let's examine some examples

 1. A typical production buffer is 10 days and we are on a pure make-to-order. A
horizon of 10 days has full visibility and is clearly an adequate one.

2. A typical production buffer is 10 days and we have a hybrid environment of

make-to-order (MTO) and make-to-stock (MTS). The production has no
dependant setups. In this case we can use all existing MTO and MTS that
exists in the system. There is an option to add artificial MTS orders to the top
of the buffers (in case the production orders do not fill the buffer in full) since
we are pretty sure that these orders will be released to the shop floor soon2.
However, since they are not part of today's load we can also ignore them and
relate to them when they will enter the system.

3. Production is going through a repetitive sequence (known sometimes as

"wheel" or "campaign") of 16 days mainly due to dependant setups. A typical
recommendation for a horizon is 1/2 of the cycle (i.e. 8 days), include the
missing portion to the top of the buffer for the products scheduled for these
period3 and also leave some reservation for new orders that will come in and
will have to be served in the current schedule.

Preventing a vicious cycle

Market demand might rise due to better availability and new clients coming in. As a
result the protective buffer will be reduced and performance will deteriorate when it
becomes too little. Therefore, there is a need to monitor the system load4

Maximum
load
expected
before the
CCR

Time

When the system load trend peaks continuously and eats into the protective capacity it
is imperative to
• Elevate the capacity or
• Decide how to reduce the regular load 5

2
We cannot be 100% confident since buffer size might be decreased during this time
3
It is also okay to add an artificial order to cover for the missing portion for the next link in case that
the next delivery is within the horizon.
4
Taking into account all orders (including artificial ones) and the reservation factor. Excluding the
orders served for market opportunities
5
There are mechanism such as increasing price, dumping non-profitable clients, etc.