Ramlee Ibrahim & Associates

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.

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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.

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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….

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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:

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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."

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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.

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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. (more…)

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.

That was pretty much the state-of-the-discussion when I was involved in a discussion of Theory of Constraints (TOC) with a person who had just returned from a seminar on the subject. He observed that TOC was basically JIT that focused on constraints and that it imposed JIT rules downstream and different JIT rules upstream from the constraint.I hadn’t thought of TOC this way before, and it seemed an insightful observation. Seeking more insight, I asked whether the plan/execute relationship between MRP/JIT remained the same between MRP/TOC. At the mention of MRP, he made a face of impatient disgust and replied that MRP would maintain its traditional function but added that, “MRP just has to go.”

As one who learned MRP at the knees of the late Oliver Wight in 1980, I defended it as a technique whose usefulness would certainly outlive either of us. He grudgingly agreed, and I commented that I hadn’t heard such strong anti-MRP sentiment since those early days of JIT.“It’s just that JIT is a more aggressive approach,” he offered. It was my turn to be insightful, and the suddenness of the insight even surprised me. “MRP is not aggressive at all,” I replied, making a point to myself as well as my discussion partner. “It’s the great enabler.” I continued to expand on that theme; organizing my own thoughts as I explained to him.

I think I finally understand why so many practitioners have grown uneasy with MRP, even as they continue to acknowledge its ongoing role as part of the planning process. While JIT and TOC force a company to face its problems and resolve them, MRP makes no such demands. Like the person who makes excuses and covers for a substance-abusing spouse, MRP covers for a factory’s abuses. It is, in the terminology of a substance-abuse counseling, an enabler.If the unfortunate reality for a given part is that it takes 10 hours to set up, MRP allows us to amortize that set up with a large lot size. JIT will demand we reduce the st up time significantly, as will TOC if the machine is a constraint. If we really experience a 10 percent scrap rate on parts, MRP allows us to attach a 10 percent scrap factor to ensure we purchase enough material. It accommodates the scrap history, while JIT and TOC processes will beat us mercilessly until we reduce scrap to a negligible level.

And when it comes to lead times, MRP does not care how long they are. JIT and TOC care very much. Likewise, MRP does’nt care if each routing requires 15 operations on non-dedicated machines and BOMs are 27 levels deep. No matter how much foolishness we impose upon our factories – order minimums, inspection holds, safety stocks – MRP can accommodate it. MRP accommodates the system for our insanity. JIT and TOC don’t; they are aggressive strategies while MRP is a passive tactic. And this distinction between strategic and tactical is vital to our understanding. JIT and TOC are strategies that must be initiated from the top of the organization. At minimum, they have counter intuitive consequences for accountants still embracing machine efficiency/utilization measures or least-cost-per-piece calculations. It’s even more likely that total culture change is required throughout the company.MRP, on the other hand, is a tactical survival kit that we should use as best we can until our companies come to their senses and begin conversion to JIT or TOC. Then MRP can fulfill its function as a planning tool and JIT/ or TOC can perform the execution functions they do so well.