Page 80 - Orlicky's Material Requirements Planning

CHAPTER 4 Inventory in a Manufacturing Environment 61

This is necessary to leverage the working capital and/or capacity commitment inherent
in inventory effectively to maximize the company’s overall financial performance.
At the same time, it is also extremely wasteful to not carry inventory. When compa-
nies lean out too much inventory, they frequently experience shortages. When companies
experience shortages, they are forced to spend additional time, effort, money, and capital
to make up for it, and they can miss significant market opportunities. The question to ask
is if all inventory is waste? We don’t think so. Inventory can be a waste under two con-
ditions. First, when there is not enough inventory in the right place there are disruptions
and flow breaks down. Second, when there is too much inventory in the system, lead
times expand as materials and capacity are tied up, expedites begin and, once again, flow
breaks down. Effectively positioning and managing inventory (planning and execution)
is vital for flow. Minimizing the cash and capacity we have consumed in inventory while
promoting flow is vital for good return on capital.
Agility is not synonymous with zero inventories. Remember, the key to effectively
leveraging the working capital and capacity commitment inherent in inventory is to find
the places where that inventory can make the biggest impact and therefore provide the
greatest return. Inventory can decouple otherwise dependent events so that the cumula-
tive effects of variation are not passed and/or amplified between the dependencies. Thus
inventory can be a breakwall against the variability experienced from either supply
(externally and internally) or demand variability. However, as with any breakwall, it is
effective if it is placed and sized properly.
Today’s companies must think systematically across the supply chain and not just
within their own four walls. Putting inventory everywhere is an enormous waste of com-
pany resources. Eliminating inventory everywhere puts the company and supply chain at
significant risk. Strategically positioning inventory ensures the company’s ability to
absorb expected variability with the smallest possible investment. Unfortunately, today,
most tools, training, and educational material are oriented toward determining the answer
to the questions “How much?” and “When?” with little to no attention to answering
“Where?” Properly determining where to place inventory is a strategic, concerted, and
constant effort that should involve key personnel that represent a relevant crosssection of
the company. It is primary and necessary to managing the investment in inventory effec-
tively for the best return. There are six critical positioning factors in determining where to
properly place inventory.

The Critical Positioning Factors

■ Customer tolerance time. The time the typical customer is willing to wait. Customer
tolerance time also can be referred to as demand lead time. The APICS Dictionary 1
defines demand lead time as “the amount of time potential customers are willing to

1 APICS Dictionary, 12th ed. (New York: Blackstone, 2008), p. 32.