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Why holding Inventory

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Let’s start with the main concepts around inventory:

The wish company without inventory

All the well known Japanese principles are: no stock, no default, no failure, no delay, no paper…

All these ideas are nice but obviously not realistic. Indeed inventories are used to streamline a process to keep the “throughputs” at a constant pace or to anticipate a change in demand. That what we call - well known again – the”uncoupling reasons”.


No stock would mean that all the replenishment leadtimes are faster than the manufacturing throughputs: materials are coming faster on the line than they are consumed! Is it really true or not?

Obviously not…otherwise your company has a dammed low efficiency manufacturing process and you even might be fired long time ago!

Inventories or not?

So we should have lots of inventory to make sure we sustain the throughputs and serve our customers on time?  My dear accounting friends may have a heart attack reading this…as they really hate inventory.
They hate that because it is a pure financial waste to hold any inventory and moreover they are scared on any potential discrepancies and obsolescence.

No one wish stock but every basic manufacturing process requires “some inventory” to fulfill the orders on-time, otherwise the customers go away and company is bankrupt.

It’s a question of balance – which means “optimization” - but we will focus on it during specific articles.

Main Inventory concepts

Here are the main “uncoupling reasons” to hold inventory:


1. Manufacturing leadtimes greater than consumption at the next stage due to faster manufacturing cycle or batch process (lots manufacturing)
2. Work in Process (WIP) planned to optimize the overall equipment efficiency (less changing dies for more wip throughputs)
3. Demand uncertainty or variability to need to be covered by inventory


Then here are the main inventory types:

1. Raw material inventory
2. WIP inventory
3. Finished goods inventory

Finally we can list the main holding inventory functions:

1. Streamlining the flow in case of different leadtimes, downturns, maintenance, equipment failures, strike, accident…
2. Getting savings when purchasing materials in greater quantity (significant price breaks, favourable exchange rates, freight savings,...)
3. Optimizing the overall equipment efficiency with increasing manufacturing lots
4. Anticipating a change in demand or in case of a seasonal demand (raw materials and finished goods)

 

Here are we finally:

Last modified on Wednesday, 29 August 2012 15:04
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