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How to build capacity buffers in Supply Chain?
Business constraints typically manifest in the areas of demand, capacity, supply, or cash. In case a resource capacity becomes a constraint, it’s important to debottleneck it urgently so that the overall system performance improves. TOC provides good tools for enhancing effective capacity of resources.
A far better approach is to prevent any resource from becoming a constraint. How do we do that?
This is done by monitoring the utilisation of resources to check if they have adequate buffers. While buffer calculations should be more detailed, a good starting point is to ensure capacity buffer (also called protective capacity) of at least 20%. If a resource is nearing 100% utilisation, it should ring a major alarm bell.
Protective capacity is important to ensure timely servicing of demand spikes. If we have a good demand sensing engine, effective replenishment process, and enough protective capacity, we can protect availability with lower system inventory to provide fresher stocks to consumers.
A supply chain system with low protective capacity typically results in poor availability, inventory mismatch, and delayed customer service.
One of the ways to augment protective capacity is to invest in more capacity. However, this should be the last resort. We should instead work on releasing the hidden capacity of these constrained resources through TOC tools. In my experience, we have been able to build the requisite protective capacity with zero investment in most cases.