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Lean Manufacturing Articles

A FUNCTIONAL VIEW OF INVENTORY

 

   For the purpose of discussion and edification, we can aggregate our inventory by function. The most common definitions are cycle, safety, buffer, anticipation, hedge, and pipeline. By tradition, we usually call these "stock" rather then "inventory."

 

Cycle stock is the inventory we need to support opera­tions. For finished goods, it will be the inventory required to meet the expected demand until the next resupply. For WIP, it might be the partially printed page in my copier.

 

Safety stock is any additional inventory above cycle stock that we intentionally maintain to provide good service levels when demand is greater than expected but still within a normal distribution. My use of the word "intentionally" is not unintentional. Safety stock quan­tities are specifically planned to buffer against the un­certainty of normal demand. Any quantity above cycle stock plus safety stock must be considered excess in­ventory, even if it does provide us with additional pro­tection from backorders.

 

Safety stock is most commonly found in finished goods where demand is independent. For dependent demand

inventories, such as raw material or WIP, we normally don't have uncertainty of demand, but we may have uncertainty of supply, and safety lead time is used to buffer against this variable. The net result will be an increase in average inventory equal to the planned usage during the safety lead time. For example, I might keep an extra ream of paper on hand because I have found that my supplier is sometimes a day late with my order.

Buffer stock is used to "decouple" successive opera­tions that have different lot sizes. Imagine I wanted to produce 1,000 copies of a single page and staple them into packets of 10 sheets each. (I'm not exactly sure why we are doing this, but that's the way the sales de­partment wrote the order.) My copier can produce 1 page at a time, but my stapler is a batch process and requires all 10 pages before it can function. In other words, my copier has a lot size of 1 and my stapler has a lot size of 10. A buffer stock will develop between the two operations. The size of this buffer stock will fluc­tuate from 0 to 10 pages, with an average quantity of about 5. This buffer stock is required for a smooth operation but, like all WIP, it should be monitored. If the average gets much above five pages we need to in­vestigate as we probably have a problem in the stapler operation. An average below five would indicate a prob­lem with the copier.

Anticipation stock is inventory that we have deliber­ately purchased or built in anticipation of a relatively certain event. Given the slow speed of my copier, I be­gan producing the handouts well before you entered this room. Before this presentation began, my inventory was anticipation stock.

 

Hedge stock is similar to anticipation stock except that the probability of the event is less certain. For ex­ample, I might have considered the possibility of an­other presenter becoming ill and I would be asked to repeat this presentation tomorrow. If I thought that was likely, I might have produced additional handouts as a hedge against that possibility. Another example: I pur­chase a lot of paper for my copier. If I suspect the price of paper might increase, I could buy large quantities at the current price, and the quantity above my cycle stock plus my safety stock would be my hedge stock.

If I know for certain that the price of paper is going to increase next month, I can also increase the size of my purchase, but the additional quantity would be an­ticipation stock rather than hedge stock. It is not really important to distinguish between anticipation stock and hedge stock. What is important is to balance the degree of risk with the cost of the excess inventory if our as­sumptions are wrong.

If we think of our distribution system as a pipeline, then the inventory in transit is our pipeline stock. I have contracted with distributors to deliver my handouts to you. A handout moving from my location to one of my distributors is pipeline stock.

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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