A perspective and informative case study on TOC providing solutions for the Distribution Chain in FMCG Sector focusing on the “constraint” which, when improved, will benefit to enhance customer service and sales force performance of an organisation.

1. Research
Papers
Consumer
Goods
TOC solutions in
Distribution Chain in
FMCG Sector
A case study
by Kuldeep Singh Malik

2. TOC solutions in
Distribution Chain in
FMCG Sector
The paper presents Theory of constraints’ solutions in retail operations and distribution to ensure better performance in
a supply chain. A case study of TOC implementation in retail operations and distribution areas of a 200 Mn USD FMCG
businesses has been presented. TOC results in reduction in inventory levels increase in ROI of distributors and retailers,
improving customer service and sales force performance. A care is required in generalizing the results to the wider
framework of industries as the methodology is based on the case study approach. This study guides the managers of
an FMCG firms on how to utilize TOC solutions at retail to manage inventories, to ensure that the right stock is
available at the right time in the right quantity leading in improvements in retail services and customer satisfaction.
There is a scarcity of papers covering TOC. This paper presents several new insights in TOC implementation process at
retail and distributor level.
In today’s highly competitive environment it’s just not good enough to rely on experience and intuition to
know what’s right. Such a body of knowledge is found in the advanced management doctrine known as the
„Theory of Constraints‟. The TOC is a system’s management philosophy developed by an Israeli physicist
Eliyahu M. Goldratt. Goldratt states that a firm’s goal is to make money now and in the future. A company
will not exist if it is not making money. Any activity that does not help make money is a waste of time and
resources (Goldratt, Eliyahu M. (2004). TOC has been adopted globally by firms like General Motors, the
United States Air Force, Navy and Marines, Lucent Technology, Godrej Sara Lee, and Nike. The TOC
applications range from Project Management, Distribution, Production, Supply Chain, Financial
Management, Marketing, HRM, Sales & Buy-In, Managing People, and Strategy & Tactics, Healthcare and
Education sector.
1. Literature review
Majority of books and items on TOC claims increased throughputs, reduced inventories and lead-times
(Mabin, V.J; Balderstone S.J (2003), (Pophaley, Mahesh; Vyas, R K (2010) discussed the combination of TOC
and TPM. (Kohli, Amarpeet S; Gupta, Mahesh (2010) implemented TOC in Restaurants using a case study of
a small family-owned Pizza restaurant. (Roy Stratton, Alex Knight
(2010) reported improved patient flow in UK hospitals using Jonah
software and reported reduction in length of stay over 20%,
improvement in emergency and accident handling. ( Gupta,
Mahesh; Chahal, Hardeep Kaur; Gurjeet Sharma, (2010) suggested
a 3 M frameworks for small firm owners with a new mindset of
"Increasing Throughput rather than "Reducing Expenses". TOC and
A3 reports were implemented by (Chakravorty, Satya S (2009) in an
Aircraft repair project. The role of TOC in innovation has been
described by ( Dalton, Michael A (2009). TOC applications in retail
and supply chain were studied by (Andotra, Neetu; Pooja (2009) by
comparing a firm practices and its customers' perceptions on
supply chain links. ( Inman, Anthony R (2009) examined
relationships among TOC, expected results of TOC, and
organizational performance. (Larsson, Mats; Arif, Mohammed;
Aburas, Hani M (2008) discussed limitations of continuous
improvement philosophies and proposed nine ways of increasing
the system boundary. (Noriaki Aoki, Sachiko Ohta, Nobutaka
Kikuchi, Mariko Oishi (2008) presented TOC applications in
medicine, diagnosis and treatment field.TOC Literature was
reviewed by (Mahmoud, M Yasin; Czuchry, Andrew J; Kady, Rani A
(2008) and a field research revealed operational and customer
related benefits as a result of TOC implementation and emphasized
the need of systematic implementation, change management
techniques, the total system and Benchmarking. TOC for Green
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3. TOC solutions in
Distribution Chain in
FMCG Sector
Environment was discussed by ( Lockhart, Julie; Audrey Taylor (2007) the role of TOC has been highlighted in
the production of clean products with maximum benefits through a better mix of Earth-friendly products.
Supply chain management through replenishment has been discussed by (Mabin, V.J; Balderstone S.J (2003)
using a case survey to ascertain the real impact of TOC for improving lead time, cycle-time, and revenue.
Goldratt considered that points of sale generally operate with shortage levels of at least 20%.The TOC
distribution methodology decreases system stock (typically 50%),an increase in sales (typically at least
20%),an increases stock turnover (typically over 100%),decreases internal transferences between regional
warehouses, a decrease in obsolescence (typically to less than 50%),Operational Expense(OE) kept approx
the same and improvement in relationship between clients and suppliers. TOC applications in FMCG sector
has been described by (Malik, Kuldeep Singh; PK, Hemalatha (2011) to improve ROI of distributors and
retailers and described how TOC helped an FMCG firm to reduce stock pressures at retailers and
distributors.
2. Measuring performance of FMCG Sytem using TOC
Measurement of performance of FMCG system is carried out through the following performance indicators:
è Throughput (T)—the rate at which money is generated through sales or interest. It is computed as
revenue minus totally variable costs (TVC).
è Inventory (I)—all money invested in things intended for sale. It includes totally variable costs such as
material, plus resources used in production such as land, machines, trucks, and computers. The more
conventional term, Investment, is sometimes used instead of Inventory.
è Operating Expense (OE)—All money spent turning Investment into Throughput. It includes direct labour,
rent, plus selling, general, and administrative costs.
3. The five step thinking process of TOC
The TOC is based on the Thinking Process, a mechanism to analyze systems and
to identify and remove any constraints which act as obstacles by preventing the
company from achieving its goals. Constraints are the weakest links within
a system, in critical situations, are first to become sources of problems.
If they are not properly removed, they adversely affect the
development of the enterprise or supply chain.
Application of the Thinking Process functions as a
connector in the supply chain makes it possible to
establish robust standards to achieve economic efficiency.
The process is in the following order:
Step1: Determine the systems constraint
Step2: Determine how to exploit the systems constraint
Step3: Sub-ordinate everything else to the above
Step4: Elevate the systems constraint
Step5: Go back to step 1, as by definition another link turned into the weakest link
4. Theory of constraints applications at retail
To protect sales becomes necessary to avoid unavailability and the company needs to have high stocks,
while, on the other hand, to control costs the company needs lower stocks. But both 'control costs' and
'protect sales' are critical needs to have a profitable growth. If the next stocking is replenished by only what
is being sold by then, the stocking point can have near 100% availability. But, if the initial inventory of SKUs
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4. TOC solutions in
Distribution Chain in
FMCG Sector
at the stocking points is inadequate, then this replenishment cannot guarantee 100% availability at this
stocking point. As forecasts are never accurate and demands fluctuate, if there exists a reliable mechanism
to change stocks levels according to the trends in demands or changes in the supply conditions, then a good
enough starting stock is sufficient. This good enough stock levels is determined by- Good enough starting
stock level at a stocking point= average dispatch (or sales) per day x Total Replenishment Time (TRT) x a
factor of safety. TRT is the time taken from the dispatch of the SKU till it is received from the delivery point.
Due to the monthly planning horizon and that the plants produce in large batches to achieve highest
efficiency and utilization. The items are generally produced 2-3 times a month. So a regional CFA could
receive material 2-3 times a month. So from the time the monthly order is placed till the material is
received the time elapsed is over 30 days. Adding some factor to account for variability in demand and
supply reliability, the safe inventory will be over 45 days. Using TRT of 45 days does not reduce inventory. As
average demand is an external factor, the only parameter to be reduced to have lower inventories is TRT.
[Figure 1] illustrates the inventory level of regional warehouse ordering once a month from the plant.
Supply
Inventory
Order L.T.
Figure 1
Production L.T.
Transportation L.T.
Time
If the regional CFA orders every day, the OLT will be reduced to 1 day and the data can be easily transferred
to the earlier delivery point. If the supplies to the regional warehouse take place from a plant warehouse
which has 100% availability, the production lead time can be eliminated from the TRT. The plant warehouse
receives daily sales data from the regional warehouse and has near 100% availability of all SKUs, and then it
can fill up trucks with full load with an assortment of SKUs, rather than, as in the existing system with no
plant warehouse, wait for the large batch to be produced. The TRT reduction the OLT reduced to 1 day from
about 30 days, PLT reduced to zero from the normal 15-30 days, and TLT reduced to less than half. The
effect of these reductions on the inventory levels and availability is illustrated below in blue.
Supply
Inventory
Order L.T.
Figure 2
Production L.T.
Transportation L.T.
Time
The inventory to be maintained at the central warehouse / plant warehouse = average demand per day on it
x production lead time x factor for unreliability of the plant. The initial stock level is designated into three
colors- red, yellow and green for each 33% band. Stock at a level lower than 66% of the designated stock
level will be in red.
100% Green Level
66%
Figure 3 Consumption Receipt
33%
0 Units
Replenishment Time
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5. TOC solutions in
Distribution Chain in
FMCG Sector
With increasing demand trend, the stock level will continuously be in red as the supply is insufficient to
cater to the rising demand. If the stock remains in red for a period of time equal to the replenishment time
to that stocking point, the stock level is changed by 33% i.e. one color band. Any further change in stock
level is carried out only after observing the stock levels after the addition (33%) material has already arrived
at the stocking point. Similarly for decreasing demand trend, the stock level is reduced by 33% if the stock is
always in green.
5. The case study
The data collection and fieldwork was carried out at the distributor points and retail stores and also
includes participant’s opinion survey along with the collection of documents used, Monthly Sales Summery
(MSS), Sales force’s Daily Sales Reports (DSRs) and performance data.
5.1 The characteristics of the case organization
The case study is about 200 Mn USD Indian FMCG sector firm with market leader position in the relevant
category. It has about 1,000 direct distributors across the country of which Class-A distributors (business of
40 to`10 lakh and more) comprise about 30 percent of the total strength, Class B (`10 to 5 lakh) and Class C
(less than `5 lakh) distributors comprise the rest. The total numbers of SKUs handled are approximately100
in number. The case study firm is the only FMCG firm in India to implement a replenishment model based
on Theory of Constraints (TOC) in the SCM area. The firm has consistently worked on the consolidation of its
consumer portfolio by combining the operational synergies and scale of its consumer brands to stay at the
top.
5.2 The environment of the case organization
The case study firm’s factories supply to the firm’s plant warehouse. Goods move from the plant warehouse
to regional warehouses, thereon to the CFAs, distributors, and to retailers. For the small towns, the firm has
an alternate model. The CFAs supply to superstockists, who in turn, supply to sub-stockiest which are
situated in small towns to service the local retailers. This model distribution aims at increasing depth of
distribution. The firm has more than four thousand sub-stockiest to cover all the towns and the nearby
villages in India. The remote villages are covered by vans that make a trip once in 15 days and supply to the
local retailers. More than forty two percent of our sales come from the rural areas. The firms Supply chain
department uses the hub-and-spoke model to service each node on a daily basis by consolidation of the
products at the hub. In a case if a particular CFA functions properly the associated hub can be bypassed by
sending the material directly. The company chose MFG/PRO for its ERP to decentralized structure to beat
Internet connectivity issues so that each factory, each branch and each CFA could operate the ERP on its
own .The firm went live on all the applications simultaneously and connected downstream supply chain
members in phased manner using a middleware on a real-time basis to reduce lead times, increase order
accuracy, better quality of service and overall, and profit margins. For Upstream supply
chain management, the firm linked all its major distributors in a phased manner together through a
middleware. For the Downstream supply chain management, the firm customized and installed
downstream supply chain management tool developed by a south Indian IT firm - the market leader in the
Indian Downstream SCM market. The objective was to gain access to the periodic sales and stock data. The
firm uses information gathered on the middleware to decide the quantity to be produced at its
manufacturing plants. Similarly, the Downstream SCM tool helps the firm to gather data from its retailers.
The traditional system of pushing products was responsible for out of stock or excess stock situation. The
bottleneck was policy constraints in the form of fifteen days stock norms at distributor point and generally,
small quantities of orders could not be served. There was no policy on stock norms at retail points. The
sales volume of slow moving items was very low and the market was dictating the pace of production for
these items. The firm carried high dependency and stock pressure on a particular category and the stock
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6. TOC solutions in
Distribution Chain in
FMCG Sector
pressure needed to be reduced for this identified category. The high stock pressures on distributors due to
managerial policy resulted in lowering down the ROI of the distributors that needed to be changed to a
better replenishment system. The practice of focusing on only primary sales needed to be changed to the
secondary sales & off- Take oriented replenishment practices. Stock outs at retail points needed to be
controlled by monitoring stock at retail point periodically. A fast moving SKU stock shortage in the peak
season was a constraint that was to be changed to more reliable and responsive system of replenishment.
Low productivity, range selling and bills productivity of the salesmen needed to be improved by fulfilling all
the orders booked by them in retail outlets by addressing the stock shortages.
5.3 Why TOC - the other approaches would give different results
Whereas Lean sees the case study firm as a sum of parts which can be improved individually, TOC focuses
on that one area (the “constraint”) which, when improved, will have the greatest holistic benefit.
Improvements elsewhere are then made, but the priority at all times remains the constraint resource. Lean
could have reduced lead time and inventory and thus costs by eliminating waste; TOC has reduced lead time
and inventory in order to gain capacity, increase Throughput and provide a competitive edge – thus enabled
the business to grow. Lean could have promoted maximum resource efficiency, whilst TOC promotes
maximum resource flexibility. Lean could have eliminated excess inventory, idle capacity and variability; TOC
has recognized that in practice, variability can never be completely eliminated - but its effects can be
protected against by the use of time buffers, whilst protective capacity and inventory can safeguard
Throughput against variability of supply.
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7. TOC solutions in
Distribution Chain in
FMCG Sector
Though, the implementation of Lean could also prove to be a success, yet Lean has serious limitations in
terms of long time taken, high cost involved, slow execution and fewer improvements in the bottom line.
Lean doesn’t guide from which weak area to start in terms of reaching goal of perfection thereby, creating
priority conflicts among different department. On contrast, The Theory of Constraints provides a clear cut
methodology for identifying the priority area and focusing improvements locations having the maximum
impact on the entire organization in totality
Supply
Chain
5.4 The implementation of TOC in the case organization
There were seven steps taken for TOC implementation. Firstly, Strategic plan was formulated wherein TOC
was incorporated in the mission statement, "The Viable Vision" was included and organization was
restructured from TOC perspective. Tactical and Operational planning were formulated in the second and
third stages respectively. In the next stage, under “Train the trainers” programs, training was imparted to all
the 31CFAs of the firm and later on, all the 980 distributors, 470 Sales officers, and 1698 salesmen were also
trained. In the fifth stage, a survey of the concerns/opinions of the related entities on TOC was carried out.
In the sixth stage, TOC rollout took place in the target beats as per the operational plan. Finally, Continuous
feedback and control ensured continuous improvements. The TOC Five Step Thinking Process was used in
the firm to identify certain bottlenecks which were constraints on the performance of the entire system.
Several bottlenecks had appeared while applying the first step of the TOC based Thinking Process, such as
Material constraints (Source: High stock pressures on one category), Management constraint (Source: Policy
of 15 days stock at distributors), Measure constraint-sales (Source: The excess focus on primary sales),
Measure constraint-sales force performance (Source: Sale force evaluation based on sales volume only),
However, the actual constraints was Market constraints. The firm switched to a complete replenishment
model with a new mindset to give away forecasting and work with replenishment. A complete
replenishment model depends on the information flow on a daily basis in the supply chain dynamic. Every
day, till midnight, the firm collects sales and stock data from its distributors through the IT network. This
information flow continues till midnight. Then from midnight to early in the morning, the firm runs the
replenishment engine that shows t how much stock needs to be supplied between particular nodes in the
chain along with the required quantity of stock to be manufactured. The daily processing of
information keep inventory costs low and save on storage, loading and unloading costs for these products.
As per the TOC guidelines, replenishment model had negligible requirement of forecasting demand.
However, the firm did not do away with the forecasting of demand and forecasting is done for the SKUs
exhibiting high seasonality in demand .The purpose of demand forecasting in such a case was to analyze the
market trends. The TOC based replenishment engine does not need dependency on forecasting. On a day
today basis, TOC based replenishment system points out the behavior of the sales in a market with respect
to each SKU in respective territories of the distributors. The TOC based replenishment approach helped in
inventory cost-control. The firm could clearly see the benefits in the coming months wherein, there was an
improvement in the availability of all the SKUs and the inventory levels actually came down. The result of
the lower inventory was reduction in cost. The firms distributors had a concern that TOC implementation
was a risk for their business as it involved of the unknowingness of future results and a strong element of
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8. TOC solutions in
Distribution Chain in
FMCG Sector
complexity. Majority of the respondents felt that TOC might lead to loss of control over system because it
being a new process. However, the sales department was found to be more concerned about the potential
loss of Primary and Secondary sales in short runs.
5.5 Results of TOC implementation
As described by ([12] Malik, Kuldeep Singh; PK, Hemalatha
(2011); the average inventory per distributor reduced from
15 days to 2 days, ROI of distributor increased from 13 to
38 percent, salesman bill productivity increased from 41%
to 88%; ,Average TLSD per sales man, per day, per beat
increased from 44 to 72,the focus shifted from the push
system to the pull system, An increase in TLSD indicates a
new focus on range selling, the improvement in ROI of the
distributors led to increments in salaries of salesmen,
retailer’s performance indicators also exhibited remarkable improvements due to availability of right stock
,in the right quantity and at the right time . TOC resulted in increase in sales of retailers and distributors,
strengthening the relationship between various links in the company’s sales of retailers and distributors
system.
5.6 The managerial implications of TOC implementation results
There could be several challenges in front of managers of the TOC implementation firm. As per the cases
study in this paper, some challenges were namely; initial loss of sales volume due to transition from a
traditional system to the TOC system. There could be loss of man days as the sales team must attend the
TOC Workshops. There could be a resistance to change from several entities within the organization or the
distribution channel members. To provide TOC training for all the distributors and sales force could become
an extremely challenging task for the management. Retailers’ excess stock in the inventory pipelines needs
to be managed and this excess has to be bought back by the firm to set stock norms for retailers on TOC
guidelines. The TOC implementation firm’s sales force has to do regular monitoring of physical stock at retail
with the increasing database; accuracy becomes a challenging task for the sales force. The distributors must
supply all the order generated at retail and if the purchase order size is small then it becomes very difficult
to recover their costs. Retailers must be briefed on TOC inside their stores and in this in formal training is
very tough to be conducted. The top management must support the initial loss of sales to clean
excess stock piled up in the Supply chain. The loss of man days of
sales force in TOC training should not be factored as a loss. All the
concerns and doubts in the minds of distributors, retailers,
managers and employees must be resolved prior to TOC
implantation in order to get buy-ins. Sales force should be trained
on TOC appropriate training methods. Retailers should be
motivated by offering additional margins on the basis of adherence
to the TOC norms set for them by their respective Sales Officers.
The adherence to the TOC norms at retail leads to improved
product visibility at the POS. A retail audit should be made by the
managers to correct the non-cooperating TOC outlets. TOC outlets
can serve as the Key outlets for launch of new products.
6. Conclusions
Theory of constraints’ solutions in retail operations and distribution ensure better availability at retailers
with reduced inventory in supply chain for FMCG firms. The reduction of inventory of retailers and ensures
stock availability with an increase in TOC. The result of this study can be tested quantitatively to generalize
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9. TOC solutions in
Distribution Chain in
FMCG Sector
for different industries .This study is unique for the reason that there is a scarcity of papers covering TOC
applications through case studied. This paper is unique to cover new insights into TOC implementation at
retail level to guide the managers of FMCG firms on how to utilize TOC solutions at retail to manage
inventories, to ensure that the right stock is available at the right time in the right quantity leading
realization of the "The Viable Vision" conceptualized by Dr.Goldratt.
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Kuldeep Singh Malik is Head of Research at Vector Consulting Group.
Vector Consulting Group (www.vectorconsulting.in) is the leader of ‘Theory of Constraints’ consulting in India. Vector has been
working closely with some of the well known retail chains, FMCG, fashion products, custom manufacturing industry and auto
after market companies to improve their overall profitability through supply chain effectiveness.
Kuldeep Singh Malik can be reached at kuldeep@vectorconsulting.in
Vector Consulting Group www.vectorconsulting.in