The Bee Hive

I am prompted to write this posting as a result of a question I just received from a client colleague. He said there has been some internal dispute between his information systems department (IS) and his materials management people over the definition of on-hand inventory. Materials management, according to him, uses the term to reflect total inventory received and not consumed. Any current inventory, according to them, is therefore "on-hand." He goes on to explain that materials personnel in his firm had been taught that on-hand inventory is inventory that is available for production use. Therefore, it would not include floor stock, also known as work in process (WIP); quality, yet rejected, material; any material on the docks awaiting put-away or testing; or interplant transfer materials.

Here is where I will use the APICS Dictionary, Eleventh Edition that defines on-hand balance as "the quantity shown in the inventory records as being physically in stock."

My colleague asked if they need an updated definition? Or are they doing this incorrectly? They would like to have the MRP system changed to reflect their way of thinking.

It's time to face the fact - the first fact being that the dictionary is correct. An MRP system only sees the materials considered on hand in the inventory record, not those that are physically somewhere else. Secondly, it seems that management members need to decide who owns the system, manufacturing or information systems. And because the information systems department exists to support manufacturing - and not the other way around - this should be an easy choice.

It's also important to remember that every MRP system is unique. Some will show on-hand inventory as uncommitted, on the shelf, and ready to be put into production. There are also numerous types of stock, and which materials are considered on hand depends on the system. Still, some things do translate among MRP systems. The following information explains what is considered the norm.

If materials have been issued from the stockroom to the using department, they are considered WIP. However, if they have been removed physically, but not recordwise, then they are on-hand inventory.

WIP materials are definitely not on-hand inventory. They have been issued and are part of the manufacturing process. When the assembly or production is complete, WIP inventory will either be moved into finished goods inventory or, at least on paper, put on the shelf as ready to be issued to the next level of assembly.

Consigned inventory materials can go either way. Normally, they are physically resident in the using department, but still owned by the vendor until transferred into WIP or back flushed. Therefore, they are not on-hand. It is the vendor's responsibility, through visible inspection or other means, to make sure there is adequate inventory on-hand for the customer to use on site. Consigned inventory may be resident as floor stock as long as the inventory record shows the quantities that are actually there. If they have been issued in bulk to be consumed at will or replaced by visual inspection, then they are also not on-hand inventory. Instead, they are another form of WIP with their own accounting classification.

Staged materials are on-hand inventory - at least until they are assigned to a specific work order or flow center and transferred to WIP.

Materials in the assembly or sub-assembly areas that have not been inspected or put-away are not on-hand inventory, either. Only when they are received into inventory do they become on hand.

On-hand inventory also does not include any rejected materials. Those items that have been discovered to be unusable need to be sent back into receiving in the general ledger account. If and when they are re-inspected or determined to be acceptable if reworked, then they can become on-hand inventory.

On-order materials are not included as inventory until received; although, in the MRP algorithm, for reorder planning purposes, they are counted in the netting process.