{"id":2323,"date":"2016-03-24T13:26:56","date_gmt":"2016-03-24T18:26:56","guid":{"rendered":"http:\/\/flevy.com\/blog\/?p=2323"},"modified":"2016-02-24T20:37:34","modified_gmt":"2016-02-25T01:37:34","slug":"inventory-management-how-to-do-it-right","status":"publish","type":"post","link":"https:\/\/flevy.com\/blog\/inventory-management-how-to-do-it-right\/","title":{"rendered":"Inventory Management. How to Do It Right."},"content":{"rendered":"

Editor\u2019s Note: Vishnu Rayapeddi is a recognized pioneer of Lean Management and founder of Productivity Solutions.\u00a0 \u00a0You can view all of his\u00a0Supply Chain training materials on Flevy here<\/a>.<\/em><\/p>\n

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\"FEMA_-_24316_-_Photograph_by_Liz_Roll_taken_on_05-11-2006_in_Texas\"For accountants \u201cinventory is an asset\u201d and it is shown that way on balance sheets! Is inventory really an asset?<\/p>\n

Inventory is an \u201cidle resource\u201d and takes up space, consumes money and needs a lot of time to manage it! In Lean thinking, inventory is categorised as a \u201cwaste\u201d and is depicted with a \u201ctomb stone\u201d icon in Value Stream Mapping by Toyota!<\/p>\n

But, as a matter of fact, inventory is required in most businesses to satisfy their customers. So, the question is how much to keep? The answer depends on the type of industry you are in and what level of customer service level (DIFOT) you would like to achieve. Is 100% DIFOT practical? May be or may be not! Again it depends on the type of industry you are in. But, surely you would the DIFOT to be closer to 100%. The more inventory you keep, the better is the customer service level. In essence it is a balancing act.<\/p>\n

The question as to how much inventory to keep also depends on the type of environment your business works in, i.e., \u201cMake to Stock,\u201d \u201cMake to Order,\u201d \u201cAssemble to Order,\u201d and \u201cEngineered to Order\u201d and the expected Lead Times by your customers.<\/p>\n

Inventory Management and Inventory Control are the most widely discussed topics globally. Though businesses have been using computerised systems such as MRP, we still seem to get it wrong even today with advanced technology and ERP systems. The reason is simple…we don\u2019t stick to the basics!<\/p>\n

The fundamentals of MRP haven\u2019t changed in decades and MRP is still the heart of every ERP system along with many added bells and whistles.<\/p>\n

How does MRP work? <\/strong><\/h2>\n

The inputs to MRP are:<\/p>\n

    \n
  1. Stock on Hand,<\/li>\n<\/ol>\n
      \n
    1. Forecasts or Customer Orders,<\/li>\n<\/ol>\n
        \n
      1. Master Data and Inventory Parameters such as<\/li>\n<\/ol>\n