Understanding Root Cause Analysis (RCA)
Imagine your company’s biggest client calls with a complaint about product defects. This isn’t the first time and if we’re being honest, you’ve ’fixed’ this issue more times than you care to count. Each time, it feels like you’re putting a Band-Aid on a bullet wound, hoping this time will be the fix that keeps […]
Reliability and Redundancy in Production Management
Introduction Product quality determines the success with the product. One of the key drivers of quality is the performance of the product over a period of time. Performance of product is determined by the reliability and redundancy. Reliability increases the efficiency while redundancy increases the current capability and expectations. Any production organization sets a goal […]
Growth and Evolution of Organizations
It is very interesting to study how Organizations and Businesses grow, evolve, change, mature and also decline over a period of time. Organizations are very similar to living entities that respond, react and evolve in relation to the external and internal environment that surrounds them. The survival and growth is entirely dependent upon the continuous […]
Recovery Time Objective and Recovery Point Objective
The concept of insurance came about in the business field to cover the risk of loss of assets due to natural and manmade disasters as well as other calamities. In the current times, Organizations especially those which are dependant heavily on IT systems have begun to look at preventive steps as well as plan for […]
Recording the Results of a Six Sigma Project
Closing a Six Sigma project is an elaborate exercise. One of the biggest parts of this exercise is the explicit documentation of the project. However given its importance to the projects that maybe executed at a later date, its importance is unquestionable. Here is a checklist of the activities that need to be performed while […]
Inventory Management deals essentially with balancing the inventory levels. Inventory is categorized into two types based on the demand pattern, which creates the need for inventory. The two types of demand are Independent Demand and Dependant Demand for inventories.
An inventory of an item is said to be falling into the category of independent demand when the demand for such an item is not dependant upon the demand for another item.
Finished goods Items, which are ordered by External Customers or manufactured for stock and sale, are called independent demand items.
Independent demands for inventories are based on confirmed Customer orders, forecasts, estimates and past historical data.
If the demand for inventory of an item is dependant upon another item, such demands are categorized as dependant demand.
Raw materials and component inventories are dependant upon the demand for Finished Goods and hence can be called as Dependant demand inventories.
Take the example of a Car. The car as finished goods is an held produced and held in inventory as independent demand item, while the raw materials and components used in the manufacture of the Finished Goods - Car derives its demand from the demand for the Car and hence is characterized as dependant demand inventory.
This differentiation is necessary because the inventory management systems and process are different for both categories.
While Finished Goods inventories which is characterized by Independent demand, are managed with sales order process and supply chain management processes and are based on sales forecasts, the dependant demand for raw materials and components to manufacture the finished goods is managed through MRP - Material Resources Planning or ERP - Enterprise Resource Planning using models such as Just In Time, Kanban and other concepts.
MRP as well as ERP planning depends upon the sales forecast released for finished goods as the starting point for further action.
Managing Raw Material Inventories is far more complicated than managing Finished Goods Inventory. This involves analyzing and co-coordinating delivery capacity, lead times and delivery schedules of all raw material suppliers, coupled with the logistical processes and transit timelines involved in transportation and warehousing of raw materials before they are ready to be supplied to the production shop floor.
Raw material management also involves periodic review of the inventory holding, inventory counting and audits, followed by detailed analysis of the reports leading to financial and management decisions.
Inventory planners who are responsible for planning, managing and controlling Raw Material inventories have to answer two fundamental questions, which can also be termed as two basic inventory decisions.
Answering the above two questions will call for a lot of back end work and analysis involving inventory classifications and EOQ determination coupled with Cost analysis. These decisions are always taken in co ordination with procurement, logistics and finance departments.
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