Page 427 - Orlicky's Material Requirements Planning

C HAP TE R 24

Buffer Profiles and

Level Determination

Properly considering where to put inventory is necessary to eliminate the most com-
mon types of problems associated with inventory and materials management. However,
it is far from sufficient to eliminate these problems. Once parts have been selected that
merit a strategic position designation, the process of setting their respective buffer levels
begins.

INVENTORY: ASSET OR LIABILITY REVISITED

In order to better understand how to determine the buffer levels of strategic posi-
tions/parts, we must answer a question: Is inventory an asset or a liability? According to
the balance sheet, it is an asset. The 1980s and 1990s saw many large companies play
interesting paper games with inventory. Despite having no demand, many companies
continued to build inventory, realize the accounting value-add from that inventory, and
declare profits against it. In the process, the company was drained of cash and went
deeply into debt but according to generally accepted accounting practice (GAAP) was
profitable. Today, with the proliferation of methodologies such as lean and theory of con-
straints (TOC), in addition to the global economic meltdown starting in 2008, fewer com-
panies can afford to play these games. Wall Street also has become aware of this ruse and
the penalties of too much inventory.
With regard to inventory and planning, assume that the word asset means that
inventory is available in a quantity sufficient to capture a valid market opportunity and
nothing more. Extrapolating this definition further, it can be concluded that there is lia-
bility when a company has more inventory than is necessary to meet market require-
ments (overages) and when it does not have enough (shortages).
Figure 24-1 is a simple chart illustrating this principle. The Y axis determines
whether the inventory position is an asset or a liability, as defined earlier. Asset and lia-

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