Page 79 - Orlicky's Material Requirements Planning

60 PART 2 Concepts

enough?” The answer is, “How much is needed because inputs and outputs don’t match?”
Even more important is the question, “Where can inventory be leveraged to compress
overall response time?”

Inventory: Asset or Liability?
Financial managers have always challenged amounts of manufacturing invento ries.
Although they are assets on the balance sheet, executives and top-level managers have
viewed and treated them as liabilities. Improving inventory turnover has been the peren-
nial goal of management. Only finished-product inventories have been accepted, albeit
grudgingly, as necessary to serving customers under the belief that more inventory will
yield better customer service.
This abhorrence of inventory now is seen as being eminently correct but for differ-
ent reasons! In itself, some inventory is needed in manufacturing; some is even beneficial,
earning an adequate return on the investment. Such inventory is an asset, but in most
firms it is a very small fraction of the total.
One of the most important performance measures of the overall health of a manu-
facturing business is thought to be inventory turnover ratios. In the United States before
1980, these ranged from below one to as high as six. Management thought they were doing
well to increase the figure by 50 percent in one year. Many who did so simply fell back to
previous ratios the next year, indicating successful crisis management and actions but no
permanent or sustainable improvement in performance. Many found that lowering inven-
tories harmed customer service and caused higher costs, indicating a lack of understand-
ing of how manufacturing should work and failure to use sound planning and control.
With the advent of lean techniques, inventory turns commonly are in the double or triple
digits. But is inventory turnover always an indicator of excellent or optimal inventory per-
formance? High turns and high shortages can coincide. This happens frequently when
companies lean out too much and reinforces the inherent dilemma with inventory.
In most manufacturing environments, stock in some form is a requirement. As men-
tioned previously, a primary reason to hold inventory is that customer tolerance times are
shrinking. Customers will no longer tolerate long lead times. However, most manufac-
turing companies and certainly every supply chain cannot be a pure make-and-purchase-
to-order system. Would you wait at the grocery store for a quart of milk if you knew the
cow had not even been milked? What about at the gas station if the oil had not yet been
drilled? Holding inventory is a reality in the modern world. In most cases, companies
cannot address the issue effectively because they have only antiquated stock practices
and tools.
Carrying inventory is a requirement. Inventory is waste only if it is located in the
wrong places and in the wrong quantities. The key is to determine first where the right
places are to stock and only then to determine the amounts to be stocked. Next, the
process must allow those places and amounts to change as the environment and condi-
tions change. The effective management of inventory is a dynamic closed-loop process.