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Lean Manufacturing Articles

Inventory Types and Aggregation

When managing inventory , it is often useful to aggregate or consolidate, our inventory into different types based on some common characteristic. We have already discussed two types of inventory real and perpetual. A list of other aggregations might include common problems, traditional types, functions, and relative importance.

The traditional types of inventory, which you will find in production operations management textbooks and APICS exams, are raw materials, finished goods, work-in-process, semi-finished, and maintenance repair and operating supplies, usually simply called "MRO."

Manufacturers purchase raw material, or extract it from the earth, and transform it into a product. Value is added during the transformation process and, if done properly, a customer will perceive enough added value in the finished goods to willingly pay for the raw mate­rial and the costs of transformation plus a reasonable profit for the manufacturer and everyone else in the supply chain. Blank paper, staples, and a little toner are the raw materials for my finished goods handout.

Finished goods are our most important inventory. From a customer's perspective, you don't care about my raw material, my WIP, or my MRO. What you care about is that I am out of my finished goods, my handouts. Finished goods are the primary way we convey value to our customers. They are also the most costly of any in­ventory type and the least liquid of our liquid assets. Further finished goods represent our greatest ongoing inventory risk.

Semi-finished inventory can sometimes be packaged and sold as replacement parts, in which case they are planned and managed as finished goods. An example might be a module, or section of pages, for my hand­out.

Work-in-process, usually called WIP, is literally hard to define. At one time we had raw material. We could count it, calculate the cost of it, and label it with a unique part number. Later we will have finished goods, which we can also count, cost, and identify. But WIP is mov­ing. It is being transformed before our eyes. If I value a blank page at one cent, and a page fully covered with my words of wisdom at ten cents, what is the value of a page as the words are being applied to it? What part number can I assign to a page that is halfway through my copier? I certainly need to manage my WIP inven­tory, but I cannot use the same tools that I would for other types of inventory. For WIP, I might rely on visual tools. WIP being processed is good whereas WIP wait­ing to be processed is bad. Big piles of WIP are bad whereas small piles of WIP are at least better, if not good.

As we saw when we discussed assemble-to-order, the production process may not always result in finished goods. We might find it convenient, economical, or even competitive, to produce semi-finished material. We can plan and schedule its production and, once produced, we can assign a part number to it, calculate the cost of it, store it in a safe place, and issue it as required. My copier produces a batch of one page and then, after I change the setup, it produces a batch of another page. My semi-finished inventory of pages is stored by part number in my storeroom. When I have sufficient inven­tory in my storeroom, I can issue pages to the stapler. I will have one production schedule for the copier that produces my semi-finished inventory of pages and an­other schedule for the stapler that transforms the semi­finished pages into finished handouts.

Weekly the copier requires an adjustment and a drop of oil. Occasionally the load tray breaks, and I have found it efficient to keep a spare tray on hand. I use grid paper and color pencils for scheduling. The oil, load tray, and office supplies are examples of maintenance, repair, and operating supplies, or MRO. Like any inventory, MRO needs to be managed and controlled. A dollar of MRO costs the same as a dollar of finished goods. We are prob­ably not talking about a lot of dollars, but the cost of lost production, if we run out of MRO, could be significant. A simple periodic or reorder point replenishment system will ensure that we don't run out, but that is not our only exposure to inventory risk. A loosely managed MRO system will quickly accumulate a large amount of excess inventory. If I upgrade my copier, my spare loading tray will be obsolete, and if I install an ERP planning system, I might find I have a lifetime supply of grid paper and color pencils. The keeper of your MRO needs to have good communication ties to the rest of your business, and that could be said for all inventory managers.

To Be Continued

For balance of this article, click on the below link:

Lean Manufacturing Articles and click on Series 14

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