To many companies, inventory reduction is always a desirable objective. Inventory ties up cash, takes up space, tends to deteriorate and sometimes becomes worthless. It must be stored, protected, managed and counted. And there’s always too much of it — or so it would seem. One may wonder, then, why have any inventory at all? Of course, there are two important reasons, which are
- to decouple supply and demand
- to compensate for variability or fluctuation with safety stock.
Decoupling is particularly important to accommodating the different timing and quantity characteristics of supply and demand. If a plant could produce the exact quantity needed within the customer-expected lead time to meet demand, no finished-goods inventory would ever be required. Likewise, if suppliers could deliver exactly what is needed when it is needed, there would be no raw materials or component inventory. And if there were never any variations in supply or demand, then safety stock would be a thing of the past. Obviously, none of these conditions exist in the real world, so inventory is a necessity. Inventory enables a plant to continue to operate and satisfy customers in a less-than-perfect reality.
Most companies manage inventory using what could be kindly described as an empirical approach, which is more of a seat-ofthe-pants method than anything scientific or logical. When these businesses experience shortages, inventory is added. When the warehouse is full or finance complains that there’s too much money tied up in inventory, cuts are made — often in an acrossthe-board, haphazard manner. As a result, these organizations swing back and forth between high inventory with few shortages and lower inventory with more shortages.
Interestingly, most plants could lower inventory levels without increasing shortages by approaching inventory management carefully and with an understanding of what inventory is for: replenishment.
Demand consumes inventory, and inventory management is responsible for acquiring the right quantity of replacements at the right time to ensure there is enough to meet the next demand. The replenishment process can be viewed as a set of policies that drive that acquisition activity.
Counting on MRP
In most companies, the hard work of mapping out the replenishment plan is accomplished by material requirements planning (MRP). With MRP, each item is controlled by a set of codes. Most of these codes are item-level data fields that are part of the item definition or item master file but usually can be set and managed for groups of items for convenience. Think of these control fields as the way to define replenishment policies to the software.
Inventory managers should separate inventories into high, medium and low groups that represent the common demand and variability characteristics for finished goods and raw materials. (Work-in-process inventory is directly related to production lead time and not relevant to this discussion.) For each group, workers should establish policies including order quantity and timing controls, safety stock, and other parameters that determine replenishment and thus inventory levels. It’s also important to monitor performance and adjust parameters as needed to achieve minimum inventory with acceptable availability performance. Along the way, be aware that situations change, so watching these measurements and continuing to refine the groupings and the parameters are necessary to keep inventory in control.
This sounds like a lot of work, but it is time and effort well spent. This disciplined approach to inventory management enables businesses to optimize inventory levels and improve performance.
Dave Turbide, CFPIM, CIRM, CSCP, CMfgE, is a New Hampshire-based independent consultant and freelance writer and president of the APICS Granite State Chapter. He also is a Certified in Production and Inventory Management and Certified Supply Chain Professional master instructor and The Fresh Connection trainer. Turbide may be contacted at email@example.com.
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