Page 64 - Orlicky's Material Requirements Planning

CHAPTER 4 Inventory in a Manufacturing Environment 45

4. Disposition. Delivery of a manufacturing inventory item is always to an in-
house demand source. Demand is represented by a dependent demand produc-
tion requirement or a top-level production schedule. When an inventory item is
completed (or received from a vendor), it is earmarked for consumption in the
next stage of the material conversion process. If it is shippable on completion, it
enters a distribution inventory. Disposition includes
■ Purging (scrap and write-off of obsolete items or lost items)
■ Disbursement (delivery to source of demand)
While any system of inventory management can be described functionally in this
way, manufacturing inventory management has its own distinct characteristics and, com-
pared with nonmanufacturing inventories, shows a difference in the content of certain
key functions in every one of the four principal areas just mentioned.
The term manufacturing inventory management is really a misnomer. In a manufac-
turing environment, inventory management cannot be conceived of apart from produc-
tion planning, with which it is inseparably bound up. The function of a manufacturing
inventory system is to translate the overall plan of production (the master production
schedule) into detailed component material requirements and orders. This system deter-
mines, item by item, what is to be procured and when, as well as what is to be manu-
factured and when. Its outputs “drive” the purchasing and manufacturing functions. It
plans and directs purchasing and manufacturing activities because nothing will be pur-
chased and no component parts will be manufactured without a requisition or order that
generates it. The manufacturing inventory system determines (or rather should have the
capability to determine) order priorities and implies the capacities required. All in all, it
does considerably more than manage inventory. It is the heart of manufacturing logis-
tics planning.
Manufacturing inventory management can be put into sharper focus by dividing
business inventories into two categories based on purpose. The purpose of a manufac-
turing inventory is quite different from that of a distribution or marketing inventory such
as is found in a supermarket, a wholesale distributor, or a manufacturer’s finished goods
and/or service parts warehouse.

DISTRIBUTION INVENTORY

The purpose of a distribution inventory is to be available to meet customer demand (the
term customer applies to any recipient of items provided from distribution inventory),
which tends to be erratic and of limited predictability owing to normally expected ran-
domness in actual demand. Total demand over a given period (termed period demand) typ-
ically is made up of many unit demands originating from separate sources. Period demand
can be thought of as a sample drawn from a potential demand universe that is very large
or infinite. The inventory investment level is governed by marketing considerations.
In contrast, the purpose of a manufacturing inventory is to satisfy production require-
ments. Availability can be geared to a production plan, which means that demand is calcu-