Professional Inventory Management

Authors: Geoff Relph; Witek Brzeski, Gail Bradbear

It can be difficult to determine when stock is at the optimum level as this is influenced by numerous factors including batching policies, the work centre capability, safety policies and production methods.  The result is that despite the use of sophisticated MRP / ERP systems, manufacturers typically keep overall inventory levels too high without really achieving high parts availability.  In many cases the response in production to poor availability is to over produce with intent to safeguard against future shortages.  This paper is the second in a series of three that looks at the alternative options available to optimise inventory help at an aggregate and part level by considering the steps necessary to move towards inventory optimisation.  The intent of these papers is to provide a guide to enable managers within manufacturing industries to advance their organisation to the next level.

In our first paper “The First Steps to Inventory Management” we looked at the basics beginning with the concept of control and a simple ABC classification system.  This paper builds on the concepts developed in “The First Steps to Inventory Management” and assumes that inventory is under control and thet basics have been established by implementing a 3-class (ABC) system.  Here we develop the options for managers to improve inventory performance by introducing the concept of overage, extending inventory analysis to 6 or more classes and considering the use and calculation of safety stock.  The third and last paper “Advanced Inventory Management” looks at K-Curve theory and the impact of system parameters on stock levels. Each paper is structured along similar lines and contains background theory, the requirements for operating at the level under discussion, a worked example using data from the manufacturing industry and a concluding summary.

Good and bad inventory

In the first paper we introduced a simple view of inventory consisting of batch and buffer stock. Here we add a further concept, overage, as shown in Figure 1.
Total inventory can thus be viewed as composed of three elements; batch, safety and overage, each of which is required or occurs for a different reason and necessitates different techniques to manage.  At a high level inventory can also be viewed as good or bad for the business. Good inventory is that which is required to run the business, while bad inventory is the difference between the actual and the maximum inventory.
Too little inventory, also known as an underage, is any stock deficit below the minimum planned level and can impact manufacturing efficiencies and customer service levels. We discuss later how to manage the risk of underage through a planned use of safety stock. Overage is bad inventory in the form of excess stock above the maximum planned level and is a reality of business operations. Overage ties up capital and cash and arises from imperfections in MRP systems and management processes, combined with the need to be reactive to all changes. Many factors can contribute to overage; concerns with stock-outs, over-optimistic forecasts, lost material, time-fences, damping rules and manual intervention. For example, overage can occur when supply arrives earlier than planned or when demand is less than planned and supplies cannot be delayed. Murphy also argues that there is a relationship between inaccurate data records and excess stock.
Research has shown that a significant proportion of the inventory held by businesses is in the form of overage, which commonly ranges from 10% to 90%, with an average around 40% above the required stock level. Few managers outside of Finance worry about overage because it does not stop production or impact negatively on service levels, and furthermore requires resource to manage. In most businesses overage is thus an overlooked opportunity. Managing overage in a formal manner is addressed in more detail in the third paper. At this stage it is sufficient to recognise that overage exists, how it can arise and that it presents an opportunity to decrease inventory at little risk to operations or service levels.

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