The Bee Hive

Pundits will continue to predict economic recovery or decline. But the only certainty is that economic conditions will change in the future (for better or worse). How manufacturers react to such changes can have a significant impact on the service levels provided to their customers and the amount of working capital they have tied up in finished goods inventories (FGI). Periodic and practical reviews of FGI levels, based on item performance can yield significant benefits to manufacturers and their customers. Given the impact this can have on customer service levels and a company's balance sheet, it goes beyond being simply an operational best practice and deserves the attention of senior management.

System complexity, an inherent element of most modern production and inventory control systems, creates a plethora of direct and indirect costs. To attack complexity, the manager must attack its effects and then identify and address root causes.

Complexity shows up in excess inventory, increased lead times, and falling quality levels (yields). Lets be clear, though, about one thing. There is nothing wrong with complexity if that's what the customer - especially the critical customer - wants and is willing to pay for. But complexity is wrong if it results from our attempts to satisfy customer demand at all costs or from our tendency to view and attack problems in isolation without drawing on past solutions.

I happen to look through the analytics of this blog and was amazed at the number of hits on my article of December 15 entitled Distribution Resource Planning (DRP). I had no idea an otherwise "dull" topic could generate so much interest out there. So I thought a few more offerings on this topic wouldn't do much harm since DRP is the place to start if you want to solve the inventory management woes of your company.

Many companies that I worked in usually attributed their inventory management problems to poor forecasting. And in all those companies that started DRP actually found that their problems were caused by a multitude of other issues, least of which was inaccurate forecasting! In this article, I would like to share a very important element of DRP - safety stock. Let's recap….

Today, many firms are trying to concentrate on the "core competences." They want to outsource minor tasks and activities when it is cost effective to do so.For a distributor, an example of one of these tasks is the replenishment of less-expensive products. For a manufacturer, it may be the procurement of MRO (maintenance, repairs, and operations) inventory. A popular way to outsource these procurement activities is a vendor-managed inventory (VMI) agreement. Under a VMI agreement, a supplier takes full responsibility for maintaining stock of its products at a customer's facility. VMI agreements differ from traditional consignment agreements in that the customer is billed for material when it is delivered, not when it is consumed or issued. When establishing a VMI agreement, the supplier and customer must agree on:

Most distributors spend a lot of time developing sales projections and budgets for expenses. Each month these forecasts are compared to actual sales and expenses. If sales are lower, or expenses higher than what was projected, management will usually take corrective action to ensure that the company remains profitable.

Budgets are good management tools. Unfortunately, few distributors maintain budgets and projections for what is probably their largest asset, inventory. It is critical to the success of your inventory management system, and your business in general, to develop a budget for the value of stocked inventory maintained in each warehouse. This budget is referred to as the "target inventory investment."

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.

Dear Santa,

I know it's way too early to pen my Christmas wish in September, but I want to make sure I give you sufficient lead time so you can keep those elves run your MRP early.

I’ve been a warrior in the manufacturing wars for more than 30 years and always have been a very good boy. Of course, there was the incident of the cost accountant’s hard drive, the one he used to calculate efficiency/utilization percentages. But no one could prove I was the one who slipped glue into the RAM slots because I was far away by the time it hardened and fused the PC’s innards.

MRP: The Great Enabler?

Some years ago, when Just-in-Time (JIT) was a new and shiny concept, I went through a brief period of choosing sides in the philosophical argument over which was best: JIT or materials requirements planning (MRP). Leading thinkers in our field quickly diffused the conflict by pointing out that, while JIT was the better tool for managing the factory execution, MRP was still needed for planning of purchased material and analysis of capacity requirement.Shortly thereafter, I resolved that when a company becomes a JIT manufacturer and buys components and raw materials from other JIT manufacturers, it will need MRP only for capacity analysis. And if a company ever reaches a point where all parts are manufactured in syncronoulsy-linked cells, capacity analysis will be simple enough to no longer require a computer and MRP may be eliminated completely.