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261
12
Manufacturing ControlsIntegration
R.T. “Chris” Christensen
12.1THE BASIC PREMISE OF INVENTORY
Ever since the pharaohs built the pyramids, humans have been faced with the problemin production management of how inventory should be used to maintain, balance, andlevel load production. In the case of the pharaohs, they needed to have a big pile of bigrocks on hand to maintain a continuous production schedule. And since the time of thepharaohs, we hadn’t made any significant inroads into the pile-of-rocks theory of manufacturing and inventory control until 1959. That was when Joe Orlicky of IBMdeveloped the matched sets of parts relationship required to get the right parts to theright job at the right time. He called it materials requirements planning (MRP).Although we had the tool, we had only a very limited application of MRP. Althoughthe work required for processing information in an MRP environment is ideally suitedfor computer processing, the limiting factor in the early 1960s was our limited andexpensive computer power. The repetitive work required to process the information anddo the calculations was cost prohibitive. This left us with finding the cheapest way tobalance the matched sets of parts. We found the method necessary to minimize ourmanufacturing cost and called that tool
inventory
. Like the pharaohs, we now have our
“
pile of rocks
”
 
—
the cheapest way to do it. From this point on in the development of manufacturing theory, all we have really done is add tools to accomplish the task of controlling the matched sets of parts. The primary tool that we use is the computer, sowe can do the calculations needed to control our operations. As we continue to increasethe level of computer involvement as our tool, our processing time becomes cheaperthan that pile of rocks. When computer power becomes cheaper than inventory, wereduce inventory and add power.This new and cheaper information processing power has brought us to today,where our goals are to run a quicker and leaner operation using the information wehave gained from tools such as the theory of constraints (TOC), takt time, andadvanced planning systems. Today
’
s quick-response manufacturing facility is aninternal cog inside the supply chain, bringing the goods and services to the industrialor retail consumer at the right time and the right place with the right product. To dothis we must use these tools so that we can be
“
 just-in-time
”
to meet our customers
’
needs. Though holding inventory in the past helped to speed up the delivery cycle toget product to our customers, we must remember that inventory adds no value in itself.This chapter shows how we can eliminate inventory and at the same time meetthe customer
’
s rapid demands
—
essentially having only one Big Mac ready just as
© 2002 by CRC Press LLC
 
262
The Manufacturing Handbook of Best Practices
you open the restaurant door. This chapter identi
fi
es advanced and economicallyviable techniques that now involve the use of e-manufacturing, Web-based informa-tion systems, and integrated control systems.
12.2NEED FOR INVENTORY IDENTIFIED BY DEFINITION
The following different de
fi
nitions of types of inventory will help you get an ideaof why you have inventory and what it really is. Once you understand why you haveinventory, you can determine what you need to keep on your shelves. The reasonthat we de
fi
ne the different inventory groups is so that we can apply various toolsto control and manage that inventory based on the reasons that cause you to haveinventory. The de
fi
nition of inventory is
 Material
: In the traditional sense, inventory is the parts and material stocked tomeet your short-term and long-term sourcing requirements.
 A decoupling activity
:
 
Inventory is the tool that decouples the customer
’
s demandfrom production capacity to enable the organization to
fl
at load the plant.
 A fixed investment 
: If you have $2 million in inventory now, you
’
ll always have$2 million in inventory. You use parts and materials from your inventory supply, butyou immediately replace them with new stock upon consumption.
 Insurance
: What is insurance? It
’
s being reimbursed for an incurred loss. Insur-ance minimizes your loss if disaster strikes. So, isn
’
t inventory just that
—
insuranceagainst an inability to get the parts needed to meet the production order?
 A bet 
:
 
Similar to insurance. When you carry auto insurance for your teenager,you
’
re placing a bet that he or she will wreck the family car. The insurance companyis giving 10-to-1 odds that it won
’
t happen. As a manager concerned about inventory,you
’
re like that insurance company. You bet there will be no downtime, and youstack the odds in your favor by the amount of inventory you carry.
 A buffer stock against use
: Inventory is a hedge against the unknown. If youknew exactly when a part was required, you wouldn
’
t need to carry it in stock. You
’
dbuy the part and have it arrive exactly when needed. This sounds good in theory,but because you don
’
t know exactly when you
’
ll need that part, you carry it.
 A buffer stock against delivery
: Inventory also protects you from the uncertaintiesof delivery. If you knew exactly when a supplier would deliver your order, you
’
dnever need inventory to cover for erratic delivery schedules. Hey, suppliers haveproblems, too.
Safety stock 
: How big a risk taker are you? What are you willing to risk by nothaving parts on hand? We
’
re always being asked to reduce inventory and we comeup with excuses for not meeting the reduction goals. The
fl
ip side is, if you reduceinventory and then run out, you are past the excuses point in defending your inventorypolicy. That
’
s when you get yelled at.
CYA stocks
: We all know what
“
cover your a--
”
inventory is and why we haveit. See above.
 A quantitative measure of your inability to control yourself 
: I can always tellhow well a person is able to run his or her operation by looking at the amount of inventory. The better you manage your operation, the better you control your inven-tory level.
© 2002 by CRC Press LLC
 
Manufacturing Controls Integration
263
“
Unobtainium
”
: There is a layer of parts that fall into the category,
“
must have,can
’
t
fi
nd.
”
These are rare, almost impossible-to-obtain parts; or the lead-time toacquire them is so long, it just
seems
like you can
’
t get them. These sit on yourshelf awaiting your need, and there is little you can do about it.
 Hidden stock 
: This is the inventory your production people stash under convey-ors, under stairwells, inside parts cabinets, or in their lockers and toolboxes. This isthe stuff you call
“
lost
”
each year when you do physical inventory. It
’
s a real problembecause you don
’
t know the condition of those parts. This happens a lot in anincentive environment that allows the worker to turn in work for pay while themachine or line is down. The operators make this material during breaks, at lunch-time, between shifts, and at other times when they are present and can
’
t get paidfor their time. This not only presents raw material and
fi
nished goods problems butalso is a serious safety and quality issue.
 Rogue parts
: These are the parts you don
’
t list in your system. You have errorsin your bill of materials that your schedulers know about, which forces the schedulerto make manual inputs whenever the problem arises. These parts may be good andthey may be useful, but many times you can
’
t
fi
nd them when you need them. Themechanic has misplaced them, is on vacation, or has quit or retired. The parts areout there somewhere.
 Anticipation inventory
:
 
This inventory allows an organization to cope with theanticipated changes in demand. Vacations, shutdowns, peak sales periods, salespromotions, or strikes are situations that can lead an organization to produce orpurchase additional inventory.
“
Cheapest way to do it 
”
inventory
: There are many ways to get the parts you need,but what it really comes down to is,
“
What is the cheapest way to get those parts whenyou want them?
”
However, you get these parts, there is a cost. There is a balancebetween the cost of acquiring and keeping parts in inventory, and your ability to planor forecast needs. But somewhere along the line it will become clear that the overallcheapest way to get parts is to just carry them in inventory. This won
’
t apply to all yourparts needs, but you
’
ll
fi
nd a group of parts here that falls into this category.
 Lot size inventories
:
 
This inventory comes about when it becomes inef 
fi
cient toproduce or purchase goods at the same rate at which they are consumed.
Fluctuation inventories
:
 
These inventories are used to provide a buffer for bothdemand
fl
uctuations and supply
fl
uctuations. These inventories help smooth out theproduction cycle.
Transportation inventories
:
 
These inventories are used when stages of the pro-duction cycle are not always adjacent to each other. This is true for multiplantoperations; the general rule is that the farther apart the plants are, the more inventorywill be required to keep the system running.
 Reasons for inventory de
 fi
nitions and answers.
 
We must know why we namethese different groups. If you look at the goals and objectives top management givesyou each year, you will invariably see items such as
•
Reduce inventory
•
Lower inventory costs
•
Improve on-hand availability of parts
© 2002 by CRC Press LLC
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