Throughput/inventory dollar-days: TOC-based measures for supply chain collaboration

Abstract

As the semiconductor industry moves away from vertical integration, performance measures play an increasingly important role to ensure effective collaboration. This paper demonstrates that the theory of constraints (TOC)-based measures, Throughput and Inventory Dollar-Days (T/IDD), induce autonomous supply chain (SC) links to function as a synergistic whole and thereby, improve the performance of the whole SC network significantly. We model an SC network of a well-known TOC case study using discrete event simulation and discuss managerial implications of these measures via a set of scenarios. The scenarios explain how these measures – without sharing sensitive financial data – allow members of an SC network to monitor both the effectiveness (TDD) and efficiency (IDD) of SC members and lead them to create win-win solutions following well-known TOC-based planning and control concepts. We conclude this paper by discussing some limitations of the proposed research and provide directions for future theoretical research.

Keywords:

• theory of constraints
• semiconductor industry
• simulation
• supply chain coordination
• performance measures
• throughput/inventory dollar-days

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. In this paper, the final selling price is used because that is what the lateness will cost the entire supply chain if the order is not delivered. (Note: Although some researchers (e.g. Schragenheim, Dettmer, and Patterson 2009) have suggested SC throughput instead of final selling price, we used final selling price as originally proposed by Goldratt (1990) for a variety of reasons such as unwillingness on the part of SC members to share sensitive financial data e.g. throughput value. More importantly, we observed that the results and conclusions in this paper do not differ even if we used throughput to calculate TDD.

2. In this paper, the raw material value of the first SC member is used. As such, every company that processes raw materials for FGF will incur the same amount of IDD penalty. This way the IDD level correlates to the number of products in inventory. Note that it would be possible to use the raw material price + throughput of subsequent SC members and reach the same conclusion.

3. Throughput per constraint unit is calculated by subtracting the cost of all raw materials from the sales price of a finished good, and then divide this number by the processing time on the constraint.