Inventory Carrying Costs
The value of inventory can be argued but I
will assume it to be the investment value plus the costs to
maintain that investment. Thought of that way, the value is 25%
to 35% of manufactured costs per year. The cash flow
implications of this magnitude affect profitability
The tradeoff between setup costs (including
lost capacity) and inventory carrying costs is determined by the
timing of manufacturing relative to demand and the number of
campaigns. Finding the best cost position between these two is
the optimizing process. That's a homer.
Many things can be optimized in the
scheduling exercise—capacity, customer service, costs and
profitability. These optimization objectives are often in
conflict with each other. I would preferentially pick either
costs or profits to optimize.
Capacity only needs to be optimized when
there is not enough. Even then improving capacity should only be
done relative to profitability. In other words, the extra
inventory carrying costs could override the savings from setup
costs and extra generated revenues from more product.
Customer service insures the long term. The
net demand on manufacturing combines the sales forecast with the
change in inventory caused by a stocking strategy, which should
have been done with a fixed customer service level objective in
mind. Therefore, customer service was already taken into account
in the "Satisfying Demand" step.
Satisfying demand, feasibilizing and
optimizing the schedule together are the characteristics of a
quality schedule. These characteristics symbolize the traction
between the tires and the road. The best MRP system and JIT
program cannot operate without a quality schedule. This is the
qualification on MRP's doing the best with what you have.
Committing delivery to the customer from
inventory is fairly straightforward. Either it's there or it's
not. However, committing delivery based on the schedule assumes
that the schedule will not change. The schedule therefore
requires stability. Only a high-quality schedule can maintain
A Longer Plan
There are three dimensions to the job that
schedulers must be sensitive to since their time to do the job
is limited. The first is the quality of the schedule as detailed
above. The second is the number of products they are responsible
for. The last is, how far out in time they try to schedule.
There is a requirement for how far out the schedule should be
developed. It has to do with the lead times.
Commitments are made at various stages in the supply chain. In
the ideal world, the schedule would be developed and frozen for
the entire lead time. That is usually not practical. Optimally,
then, the schedule should go out as far as the majority of costs
that have been incurred.
Kanban should be incorporated into the planning process of
the supply chain as much as possible due to its simplicity,
thereby subsequent accuracy. Longer range MRP planning, driven
by forecasts, is necessary for putting in place incremental
resources in a timely manner. Finite scheduling can be complex
but is essential when we try to operate on minimum resources and
maximize market responsiveness. Therefore, each method has its
place in the process industry. The challenge is to apply the
right method in the proper circumstances to make the information
flow of supply chain planning as efficient and accurate as
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