Aggregate Inventory Management

This article is also available on our website:				regarded as an asset by most accounting and tax
PROACTION - Generating Best Practices. It is an				rules. Therefore, increasing inventories shows "profits"
excerpt of a paper originally written by George Miller,				and profits are usually taxed, usually by multiple
Founder of PROACTION. It has been modified and				government entities.
updated by Paul Deis, PROACTION CEO.				• Insurance - The cost of carrying insurance on
Overview				inventory needs to be considered, as well as insuring
In spite of the great advances in industrial				the space, equipment, people and other resources
management in areas such as JIT, Flow				needed to control it.
Manufacturing, Lean Manufacturing, MRP/MRPII, ERP				• Space - Costly storage space sometimes
and Supply Chain Management, and now, Electronic				occupies 25-30% of the total facility, when one
Commerce, inventory investment management				considers raw material warehouses, stockrooms,
continues to be a major issue for many organizations.				work-in-process storage, receiving, shipping, outside
Installing the latest software and mouthing the most				warehouses, MRB and residual storage areas.
popular buzzwords is no guarantee of good inventory				Inventory reduction campaigns can help companies
management. As with almost all Best Practices, it is				avoid the need to move to large facilities, or permit
the effective use of available tools by properly				them to shut down or cut back existing facilities.
educated and trained people that creates the desired				• Manpower - All of this inventory needs people
result.				to order, receive inspect, record, move, count, store,
This paper covers how to set up and maintain				retrieve, post it to the ledger, etc. People are the
Aggregate Inventory Management for improved				largest or second largest expense (behind material)
investment and operations management. It is a				for most manufacturers.
"macro," top-down approach that complements a				• Record Keeping Systems - Software,
company's "micro" SKU (part number) level				procedures, equipment and paper must be used to
management techniques.				track and control inventory.
Definition, Goal and Objective				• Material Handling/Storage Equipment -
• Definition—the APICS Dictionary defines				Conveyors, fork lifts, bar code readers, scales,
Aggregate Inventory Management as "Establishing				automated storage and retrieval systems, trucks,
the overall levels of inventory desired and				carts, bins, racks, shelves must all be purchased,
implementing controls to ensure that individual				leased, maintained and cared for.
replenishment decisions achieve this goal."				• Physical Inventories, Reconciliations - Must be
It includes:				conducted to ensure that inventories are properly
• How to assess overall investment levels and set				accounted for and maintained.
targets.				• Transportation - Must be provided to move
• How to identify inventory investment level				inventory in and out of the facility, to vendors, within
"drivers" and help control them				the facility, to different workstations and storage
• How to link aggregate inventory management				areas.
"macro" strategy to "micro" controls and develop				• Energy - Heat, light, humidity control, air
accountability				conditioning, refrigeration and fuel must be consumed
• Performance measurements				to make all this happen.
• Specific techniques, such as ABC analysis,				• Inappropriate Lot Sizing - In inventory formulae,
control parameters, inventory buildup charts, and				the carrying cost of inventory is often expressed as
input-output control.				a flat percentage of the inventory value, for
• Goal—Helps manage assets and make				convenience of computations, but that is an
money.				oversimplification of reality. For instance, consider
• Objective—Optimize inventory levels within				material handling/storage costs. Just because a dollar
the parameters of service, cost, logistics, process				of inventory is added, doesn't mean that carrying
and investment objectives/constraints. Inventory				costs go up, say, $.02. In reality the costs would not
management should be exercised to keep the lowest				usually go up in a direct proportion at all, but only
level of inventory consistent with achieving the				when we had to pay for an additional expense, or
objectives. Too much inventory reduces Return on				make the next capital investment in equipment or
Investment and Return on Assets (lower profits). It				space to accommodate the inventory. So actually,
also tends to increase expenses, in the form of				most of these costs are step functions, rather than
interest payments, handling and storage,				continuous curves.
management, damage, loss, obsolescence, tracking,				We urge caution in the use of so-called EOQ
taxes, insurance, etc.				(Economic Order Quantity) formulae in planning. While
Although most managers, accountants and taxing				these can be useful guidelines in some cases, they
authorities regard inventory as an asset, treating it as				can easily go awry and are hypersensitive to changes
such for operational purposes may create liabilities.				in carrying costs and order costs, which are usually
You have probably heard stories about factories				no more than guesstimates, at best. We smile in
working to "keep people busy" or maximize				amusement at PhD's made or lost on the study of
"efficiency" and other similar nonsense. If they are				such arcane calculations, often failing to consider basic
making inventory that is not needed now, they are				realities such as; how much space and money do we
often wasting money. If they work just to keep				have, anyway? You can refer to Paul's book,
people busy, they are still consuming material, energy				Production & Inventory Management in the
and other resources that may not earn adequate				Technological Age, pages 137 to 139 for a detailed
profits. They may use resources that could better be				explanation of why this lot sizing method is weak and
used for more immediate and profitable needs. If				should be used with caution.
inventory is deployed improperly, it may create				• Supply variation—refers to the reliability of
liabilities. A customer of one of our clients had branch				the supplier to deliver the desired units in the needed
managers who would "hoard" products at their				quantity, at the right time, at an acceptable quality
remote branches so that they "wouldn't run out."				level. If this can't be done reliably, then companies
This created an excess of material in the wrong				tend to carry a buffer (safety) stock to make up for
places.				the deficiencies in the supply system.
How to Assess Inventory Investment Requirements				• Demand variation - refers to the ability to
Survey				reliably forecast what the customer will require
First, understand market, customer needs and				(whether that is an internal or an external customer).
service expectations; your own company needs,				Lower reliability tends to encourage buffer (safety)
expectations, process, abilities; supplier abilities and				stocks.
mindset; industry norms and mindset; world-class				• Defects —Extra inventory is often carried to
best practices.				allow for probable rejections. This is just a specialized
From this, you should learn how fast and reliably				form of safety stock for supply and demand
customers expect to get their shipments, what is				buffering.
involved to get raw materials and production				• Logistics constraints/transportation costs - This
completed, what the best in the industry are doing				also sometimes falls under the heading of supply and
and plan to do, and what might be possible. For				demand variation and it certainly can affect it. For
instance, if all competitors are shipping from stock,				example, one of our clients transports parts by
then you will either need to duplicate that feat, or				ocean freight to a plant in Portugal, or at least they
determine how to manufacture very fast, or				do that if they don't have to ship by air to get them
convince customers that your product is so great or				there faster. Because ships traveling between
so cheap that it is in their interest to wait while you				economical ports only leave every few weeks, a 20
make it to order. Or, you might figure out how to				or 40 foot long container is the most practical
procure better or manufacture better in a way that				shipping size. A certain amount of time is required for
allows you to carry less inventory.				packing, transportation to the terminal, Loading,
The result of this step is to establish what industry				transport, unloading, customs and transport to the
inventory standards might be and what is possible.				consignee. These are very real logistics constraints
Make sure you have an "apples-to-apples"				that must be built into the "pipeline" portion of the
comparison: there may be significant differences				inventory model.
among companies. For example: One company might				Another company studied ships fresh flowers from
stock finished goods, another one may sell it to				Latin America to the U.S. Air freight is the only
another division or to a distributor.				feasible way to handle shipment, due to shelf life and
Measure Current and Historical Inventory Levels and				care issues. It results in a shorter "pipeline" and higher
Performance				transportation costs, which end up either directly
Measure current and historical company inventory				costed to inventory, or get rolled into overhead, or
levels and performance, not just overall statistics, but				cost of sales—same ultimate effect.
broken down into levels of responsibility, commodity,				As unit costs rise, so will inventory, but the turns, or
area, type (raw material, work-in-process, finished				days coverage, will remain the same.
goods, consignment) and market. Do this to help				How to set Inventory Targets
isolate figures down to levels of accountability and to				After considering the current situation, drivers, and
show inventory investment performance by market,				external situation, estimate what inventory levels
process or even product line. You may find that your				should be, given certain sets of circumstances. There
systems are unable to do that, meaning that it is				are impressive supply chain modeling tools to help
past time to make changes to them, whether that				you do this. Our experience is that developing an
be to replace them, modify them or put in separate				accurate detailed inventory behavior model is quite a
inventory tracking and control systems				chore to create and a major task to maintain, so we
(recommended as a last resort).				usually don't. Normally working on projects with
The result of this step is to establish how your own				limited budgets, we study past behavior and focus
company is doing and has been doing with inventory				on the main drivers, seeking to change a few with
management.				the greatest potential impact to achieve assigned
Establish Performance Metrics				objectives- sort of a "delta' approach.
Establish performance metrics - Inventory is usually				Don't let us talk you out of sophisticated modeling
measured in currency value, such as U.S. Dollars				tools, though. They have their place. When there are
($USD). Another, complementary way is to measure				very large amounts of money involved and/or tricky
it in velocity. For example, you might measure it in				constraints to work around, modeling tools will
"turns" which relates to how many times it moves or				sometimes help. Many of the detailed control
"turns over" per year. For example, if there was an				methods presented below contain elements of
average of $100 in inventory in the last year and				modeling.
annual cost of sales for the last year was $2000,				Warning: Calculating or modeling inventory behavior
that would be calculated as cost of sales ($2000)				solely by using the rules and parameters will nearly
average inventory ($100)= 20 turns.				always be wrong. Why: If, for example, you assume
More turns (or "turnover") is usually good, provided				that inventory will be an average of ½ times the
that cost, service or quality aren't unacceptably				order quantity plus safety stock, you'll most often be
affected. If they are, the answer is not simply to				wrong. Actual supply and demand variability will differ.
increase inventory, but to try to improve the				Defective items/customer returns may result in
underlying "drivers" influencing it instead, if possible				buildup. Unmatched sets of parts due to shortages
and cost-effective. There are variations of the				will result in buildup. Generally, it is higher than the
turnover (this term should not be confused with the				model would indicate.
European "turnover," which usually refers to total				Even the best laid plans can go off track if something
sales for a period) formula, mainly in addressing how				changes unexpectedly- a major customer cuts
to calculate average cost of goods sold or inventory.				orders, unexpected defects occur, requiring ad-hoc
Sometimes, turns are calculated by comparing full				reaction, rather than careful, deliberate, advanced
sales value with average inventory cost or even				planning.
equivalent sales value. To maintain easily comparable				There are two major directions to approach
figures, state all numbers in fully "burdened" costs,				inventory management from—Top-Down and
using industry standard overhead/burden calculations,				Bottom-Up. Most successful companies use a
unless this is contrary to the standards of your				combination of both.
industry or locality. Hopefully, future standard world				• Top-Down — this is the "macro" approach.
accounting practices may help to reduce confusion in				Start with a goal, objectives, ABC (Pareto) analysis
this area.				of estimated or historical usage, knowledge of overall
It is becoming more common to measure inventory				processes and lead times. Set overall targets, by
performance in days coverage instead of turnover.				business unit at a minimum, preferably at a lower
People seem to relate to it better.				level, so that middle managers or even individual
Inventory and sales may also be commonly				supervisors, work teams or administrative control
measured in more industry-friendly terms, such as				personnel might be held more accountable. It takes
tons (steel), bushels (corn), housing units				more effort as the control is moved to a lower level.
(construction or real estate) or ounces (gold).				Establish a tracking system, such as actual inventory
A further refinement is to stratify the inventory by				versus target level. Compare numbers to actual sales,
"Quality," as asserted by Gary Gossard of IQR				forecast. Monitor commitments and production plans
International. The idea of classifying inventory as				against targets... Hold managers accountable for
active, slow-moving or obsolete has been around for				results and make them come back with reasons why
a long time. Constantly track it, to highlight any				targets cannot be met and solutions to the problems.
change in inventory quality or condition, such as a				Motivate them to solve underlying problems. Help
new requisition for an item which is already in excess				them with problems outside of their scope of
or obsolete. The active, weighted "good" inventory				authority.
not exceeding your "days coverage" target, divided				Another good tracking tool is Input-Output Control.
by the total inventory, multiplied by 100, it equals the				Simply build a time-phased table of planned starting
Inventory Quality Ratio (IQR) number. 33-40% is				and ending inventories, showing starting, input, output
typical for mediocre companies. 66% is considered				and results. Then task employees to make the
pretty good.				"delta's" happen and track the actual values per
All of these numbers can be time-phased, to show				period.
changes over time, due, for example, to seasonal				• Bottom-Up—Look at each item- determine
supply and demand changes, or planned				cost, lead times, supply and demand reliability
improvements. These can then be applied in still more				variability, defect rate, transportation, storage, set-up
detail to the appropriate organizations, product lines,				batch size considerations, buffers, process, handling
trade channels, warehouses, planning groups or other				considerations. Then set the proper planning methods
responsible entities and then monitored for results.				and control parameters, to either default down from
The numbers should be capable of being "drilled"				the enterprise, product line, commodity or
down or up, from the entire enterprise level to an				department level to default down, or just establish
individual SKU (Stock-Keeping Unit) transaction or part				them at the item/part level.
number. Managers or employees should be able to				This takes a lot more effort than merely exercising
look at total figures for their areas of responsibility				Top-Down control, but it can deliver better results.
and readily identify specific problem areas down to				Educate and train people in inventory management
lower levels and finally to specific items, policies,				and control approaches.
orders and decisions that accounted for them.				How to Control Inventory
Here are typical Inventory System Metrics, which				After you do all your research and analysis, set
should be broken down by organization/responsibility,				targets and establish your control system, then you
area, type, commodity, market/product, and time				get to the hard part - actually making it happen.
phased, with targets and actual values:				Quick hits - Simply establishing the aggregate targets,
• Inventory Turnover or Days Coverage				understanding drivers, educating and training, setting
• Inventory value or other unit of measure, such				up responsibility, establishing accountability and
as tons				tracking results usually has significant effects. I have
• Inventory "Quality," including IQR and summaries				seen greater than 50% reductions from this alone.
of amounts of each type				This can be the cheapest, fastest way of making
• Customer service level, expressed how the				some change happen, but it has a limited effect,
CUSTOMER perceives it				because the approach lacks detail and won't make
ABC Analysis				major permanent changes in the ways that the
Perform an ABC analysis, a simple, common and				business works without additional actions.
powerful tool for inventory management. It is based				What is "Control?" - Control means to make
on Pareto's law of "80-20." The most common				something happen or to know why if it doesn't, so
approach is to calculate demand in units, preferably				that something might be done about it. Using that
for future periods, then calculate the total usage				definition, there is no such thing as an uncontrollable
value at cost for each item (total cost of sales				situation. Someone once told me that he couldn't
multiplied by units required) for a given future period.				control service inventory, because of unreliable
If future demand data are not available, the next				vendor lead times. Nonsense! Unreliable lead times
best thing is to use history, but this won't work well				might be controlled by several strategies, such as:
for items with major swings in demand over time.				multiple sourcing, re-sourcing, safety stock, exhorting
Sequence these in descending value. Typically, the				supplier to improve performance, ordering sooner,
top 10 to 15% of items account for 75-85% of value				improving your own planning and reaction times,
("A" items), the next 20-30% account for 10-20% of				changing designs, alternate routing, training customers
value ("B" items) and everything else accounts for				to order differently, having vendors stock raw
the rest, about 60-70% of the items, usually about				materials. At least some of these would work in
5% of the total value ("C" items). Your inventory				almost any situation.
should be less than these percentages for the "A"				Detailed Control Methods
items, because they are much more tightly controlled				Most of the detailed control methods that follow
and a little higher for B's and significantly higher for				have some inventory management rationale built in,
C's.				but it must be properly set-up and tuned for best
Then compare the list to actual values in inventory,				use. Provide and implement control tools such as:
plus actual and planned commitments. The answers				• Order on demand- Order only to fill customer
will often suggest immediate corrective actions!				orders. This is the most direct, intuitive method and
An ABC list suggests what to concentrate on to				tends to avoid excess inventory. It will only work if it
control most of the inventory investment. What it				can meet customers' lead time and cost
doesn't tell you is that being short of a $.10 screw				expectations. It works best for custom ordering and
might prevent the shipment of a $5,000,000 radar				when it will result in delivery service meeting
unit, so ensure that there are control systems for all				customers' expectations.
items, just control the expensive ones much more				In most cases, organizations must anticipate
carefully. Err on the side of caution for the cheaper				customer wishes to be successful. This often
items, allowing a safety stock coverage or "two bin"				involves committing inventory in advance, to be able
approach to avoid stock outs, but keep inventory				to deliver in time and to produce in economical
from getting out of control.				quantities. So other techniques are often used, such
Create an Inventory Buildup Chart				as:
Another good analysis tool is the inventory buildup				• Reorder point- Keep a certain amount available
chart. Use a standard x-y coordinate chart. Plot the				and on order to help ensure that it is available when
cost build-up over time, by product group, with cost				needed, but not in excessive quantities.
on the "y" (vertical axis) and time on the "x"				• Min-max- This is a modified form of order point,
(horizontal) axis. Normally, raw material cost				with upper and lower limits established.
accumulates first over time, followed by labor and				• Kanban- This is a more sophisticated type of
overhead application. Allow for safety stocks, lot size				reorder point. Instead of having a single order point,
inventory, transit stock, defects/rework/scrap, and				with a relatively large and lumpy order quantity, one
normal finished goods and distribution pipeline				replenishes a smaller quantity every time it is
stocking. Show the affect of consignment				consumed. This method was popularized by its
arrangements. Some people also treat accounts				success at the Toyota Motor Company in Japan.
receivable as sort of a de facto inventory, until it is				• MRP (Material Requirements Planning) -
paid for. Once this chart is completed, show it around				formalized in the 1950's by Dr. Joseph Orlicky, MRP
for shock value. Presented correctly, it will really				uses a master schedule developed from a demand
make people think about the effect of constraints				analysis of orders, forecast and production plans. It
and decisions (just another form of constraint) on				then considers available inventory, parts requirements
inventory. Then, work on changing the rules!				calculated from the bill of materials, then factors in
One company had a 14 month buildup curve, which				open purchase orders, lead times, logistical
was reduced to 4 months. At another company, the				considerations, safety stock and other ordering rules,
longest lead time material item accounted for only				to develop a materials purchasing and factory
20% of the product cost, so stocking only that item,				schedule to meet planned and actual demand.
instead of finished goods or instead of only reacting				In current times, a company's MRP system is often a
to orders, enabled them to radically reduce the				subset of its ERP (Enterprise Resource Planning) or
response time for orders by 70%. It also added the				Supply Chain Management System, which
flexibility of being able to use that raw material to				incorporates MRP as only one portion of an overall
make a number of different end items.				"Enterprise" level system. MRP is not always the
How to Identify and Control Inventory Drivers				most appropriate approach for all environments. In
Inventory drivers are things that tend to make				recent years, it has been modified successfully, by
inventory go up or down. Identify them and you will				incorporating techniques of Kanban, JIT, Lean
have some clue of why inventory changes.				Manufacturing, Repetitive Scheduling, Theory of
Understanding them is the beginning of gaining control.				Constraints and others.
I've stated things that would drive inventory up, e.g.:				• DRP (Distribution Requirements Planning) —
more SKU's. I refrain from stating the obvious: doing				this is a specialized form of MRP, for distribution
the opposite would reduce inventory. e.g.: reduce				networks. It uses the same principles, but may also
SKU's to reduce inventory.				consider the dynamics of multi-level distribution
Key Drivers are covered briefly, as follows:				networks, service level planning, cross-docking,
Number of SKUs				shipment staging, truck loading, inventory deployment
The more items you have, the more inventory you				optimization and other considerations.
will need, in most cases. If you sell 500 widgets a				• Supply Chain Planning/Optimization- This is the
year of A, then replace it with 250/year of A and				next level of sophistication for MRP and DRP. It
250 of B, you will probably need to carry more				creates a model of the supply chain, which may
inventory. Why: demand and supply variability and				include suppliers, manufacturing, various levels of
total economic order quantities are likelier to be				distribution and even monitoring of inventory through
higher for 2 items than for one.				one or more levels of customer ownership.
The more SKU's in a product, the harder it is to bring				• Repetitive scheduling- Designed for continuous
matched sets of parts together at the same time.				flow production.
Because there are multiple items, with multiple				• Process monitoring/control - Control of an
vendors, kept and routed through multiple places or				ongoing, often continuous, process, usually by
paths, with more opportunity for delays, defects,				monitoring and controlling process parameters, such
etc, more inventory will be needed.				as raw material properties, desired attributes,
The more operations there are and the longer that				temperature, pressure, speeds, viscosity, finish,
they take, the more inventory you will tend to have.				byproducts, etc.
More operations mean a longer supply chain. It may				• Safety stock/safety lead time - Most of the
also mean differing lot sizes per operation and more				above techniques might be enhanced by building in
places for delays and defects to occur. Process				supply and demand buffers to allow for fluctuations
simplification helps reduce inventory.				uncertainty of what will be needed and when and
The more facilities that inventory passes in and out				what supply will arrive and when. It can be done by
of, the further apart those are and the harder they				adding on a fixed quantity or time coverage. The
are to reach and pass material in and out of, the				trouble with this approach is that people tend to
more inventory you will tend to have.				make the wrong allowances, usually on the high side.
The more times inventory passes from the control				This inflates inventory, may actually confuse priorities
of one system or organization to another and the				and use up needed capacity, by working on things
less efficient the transfer is, the more inventory you				not actually needed. The best approach is to try to
will tend to have.				reduce process variation for supply and demand, so
Lot/Batch Sizes				that less safety stock is needed.
Lot/batch sizes greater than customer order delivery				• Vendor-Managed Inventory - a form of
sizes tend to increase inventory. If customers order				delegation that is proving to be quite popular and
a product one at a time, but economics, handling or				sometimes very successful. One provides the supplier
process considerations suggest that you make 1000				with demand and logistics data and makes him
at a time, then you will have more inventory available				responsible for ensuring that the right quantities are
than will be consumed per order, resulting in an				available at the right time and place for you to meet
accumulation of inventory. If you need to order				demand. It needs cooperation, monitoring and
things in cases, dozens, carloads, tons or weeks'				common interests and objectives to be successful.
supply, but they are needed downstream in the				• Input/Output - Don't forget to implement the
supply chain in smaller increments, you will tend to				input-output method, described earlier as a tool to
accumulate more inventory.				help make reductions.
The longer the lead time, the more inventory you				Pitfalls of using control parameters
tend to have. If something takes 16 weeks to get				With the use of MRP, MRPII, ERP and now "Supply
instead of 16 days, there is more inventory needed in				Chain Management " systems, there are more
process to cover the "pipeline" time. Whether it				opportunities to improve inventory management, but
belongs to you or your vendor, it is increasing				also more chances to lose control! Unless there is a
somebody's cost, which ultimately will affect your				clearly stated Aggregate Inventory Management
cost and your customer's cost. Longer lead time also				approach imbedded in the system, through education,
means more chance of running out or having				training and parameters, yes- I said parameters!, you
something go wrong out while waiting for it, which is				will likely fail.
usually dealt with by having additional inventory.				War story from George Miller: "Years ago, I worked
Carrying cost				for a specialty niche MRPII/ERP company. After I left
This refers to the cost of owning inventory. Let's				for the consulting world, a customer of that
look at what goes into inventory "cost of				company called to inform me that the "software
ownership", frequently called the "carrying cost" and				wasn't working" and summoned me to come and
expressed in terms of percent cost of inventory				help them. After only a day on site, I told them that
valuation per year of ownership. For example, a 25%				the problem was that the system was carrying out
carrying cost (typical) would indicate that it costs				their instructions at the speed of light, spewing forth
about $.25 to own each $1.00 of inventory each year.				recommendations to acquire inventory, based on
These costs consist of:				their unrealistic parameters. You see, most of these
• Cost of money - The cost of capital to the				systems have various ‘gauges' and "levers," to
company or, in some cases the "opportunity cost" or				set control parameters to tailor the operation of the
return that might be earned on the money by				system to the company, products and process.
applying it productively elsewhere. The cost of				These might be set, for example, system-wide, but
money has ranged anywhere from 6% to 18% in				can usually be overridden at the business unit, plant,
the USA in the last 25 years. Obviously, this has a				department, product line and/or part number level.
very significant impact on investment strategy.				Each level normally defaults down to the lower level,
• Obsolescence - The risk of inventory never				unless you override it.
being used, or needing rework to make it usable,				"For example, they used unrealistically long process
needs to be factored into the cost of owning				times in the item master planning records and had
INVENTORY. In theory (and practice), the larger the				safety stock and scrap factors planned at multiple
inventory is, and the longer it is held, the more likely				levels in the bill of material, "pyramiding" (increasing)
engineering changes, customer preferences and				demand calculations considerably. No surprise then,
technological changes will render that inventory				except to them, that they were well upon their way
unusable. In the clothing industry, it is not uncommon				to doubling their inventory investment in record time,
to see inventories depreciate as much as 90% when				without significant benefits. The prescription was:
styles change. Certain portions of the electronics				1.The management team to get personally involved in
industry have problems with inventory becoming				setting the system parameters.
obsolete very quickly, due to technological changes.				2.Educate employees in inventory management
• Shrinkage - A portion of inventory becomes				concepts and train them in proper use of system
unavailable to the owner due to loss, damage, theft				tools.
or spoilage. The longer inventory is there and the				3.Establish and monitor a special report to assess the
more there is, the more likely this is to happen. Steps				effect of "order modifier" parameters, such as
to prevent it only raise carrying costs in other areas,				safety stock, scrap and attrition factors, order
such as security, climate control, better control				planning method, order quantity rules, order multiples,
systems, recruiting policies, etc.				lead time, review time, inspection time."
• Quality Factors - Allowances for yield, attrition,				Conclusion: Inventory can be systematically managed.
scrap and rework. This is really more of a function of				It doesn't happen on its own. Needed is a rationale, a
the process than the amount of inventory invested				plan, education, training, organization, tools, policies,
and is more related to throughput, but is sometimes				procedures and management willpower.
included as part of the aggregate inventory carrying				References:
cost.				1.APICS Dictionary, 7th Edition, APICS, Falls Church,
• Technological or Price Obsolescence - Prices				VA
don't always go up. In fact, in industries such as				2.Production and Inventory Control, Second Edition,
electronics, prices often plummet due to constantly				George W. Plossl, Prentice Hall, 1985 (originally 1967)
improving designs, product and process technology				3.Production and Inventory Management, Second
improvements. Therefore, it is desirable to minimize				Edition, Fogarty, Blackstone, Hoffman, Southwestern
inventories in high-risk areas.				Publishing, Cincinnati, Ohio, 1991
• Taxes - There are two dimensions to this: 1) in				4.Inventory Reduction, George Miller, 1990.
some areas, a tax is levied on inventories, so the				5.
more inventory, the more tax is paid. 2) inventory is

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