INVENTORY BUFFERS

Inventory can be successfully used as a strategy to meet the market demand with an acceptable response time. This is similar to a breakwall that is placed in front of a marina to protect the boats. The more violent the waves and weather, the higher the breakwall. The calmer the water, the smaller the breakwall. The company must ask where it desires to meet the market demand: finished goods, work in progress inventory, or raw materials. As collaboration with customers increases, the improved visibility of requirements can significantly reduce the variability of demand for the supplier and provide better service for the customer.

A make-to-stock company may consider a safety stock of finished goods to buffer the uncertainty of the demand from customers. The level of this buffer is directly dependent on the response time to customer demand and the level of demand variability from the customers. If the company is able to quickly convert raw materials into finished goods, this end item inventory buffer can be relatively small. This is because in the event of any unexpected demands, this agility provides that recovery can be accomplished fairly quickly. This requires flexible capacity resources. Unfortunately most make-to-stock companies are asset-intensive industries and do not enjoy flexible capacity. Having

appropriate buffers of finished goods is necessary to assure acceptable customer service. A make-to-order company may consider buffering its customer demand variability at the level of common component raw materials. This strategy works especially well when the product designers keep the number of raw materials to a minimum through a design for manufacturing focus. The lead-time and reliability of the supply base also directly affect this inventory investment. The less reliable the supplier’s performance, the higher the level of safety stock that will be required. Conversely, for those suppliers who can deliver raw materials consistently on time or within a short lead time, very small buffers are necessary. Internal capacity resources should be flexible and the schedule requirements well understood.

To improve response time with a wide variety of goods without investing heavily in finished goods inventory, many companies have moved to an assemble-to-order philosophy. In this strategy, a small variety of semifinished goods are inventoried followed by the final assembly of a wide product variety being accomplished quickly after customer demand by choosing from the list of alternatives.

These different manufacturing strategies have also been referred to as VAT strategies. A “V” plant is one that takes relatively few raw materials to make a wide variety of end items. This type of plant typically practices a make-to-order approach to manufacturing. An “A” plant is the exact opposite. This type of plant takes a wide variety of raw materials and assembles them into significantly fewer end items. This enterprise is normally a make-to-stock company. The “T” plant holds to a minimum the number of combinations possible until the very last moment. This type of industry is typically an assemble-to-order company. Sometimes references are also made to an “I” type company. This is a plant that can be considered a make-to-stock/assemble-to-order company. This enterprise is more vertically integrated. Many different raw materials are combined into significantly fewer semifinished goods from which a wide variety of end items can be assembled. The rule of thumb is that the inventory buffer should be placed at the narrowest point—the bottom of the V (raw materials) for the V plant, the top of the A (finished goods) for the A plant, and just under the top of the I and T (semifinished nished goods) for the I and T plants.

A single correct resource buffer answer for every type of enterprise does not exist. The enterprise must first understand its market response strategy to determine its overall resource buffer strategy. This strategy must also include the product design policies as well as the inventory planning policies. Decisions made early in the design process can make effective production and inventory management easier or impossible. For example, the desire is to stock inventory at the raw material level in a make-to-order company. The customer does not need to wait for the supplier to order the raw material and then fabricate the parts. If the designers insist on frequently using non-standard materials or sizes for every part that is designed, this investment in inventory will sit on the shelf tying up scarce financial resources while the customer waits for the finished parts. This is a lose-lose proposition even though the designer may have a perfectly logical reason for desiring that particular raw material. The overall implications of these choices must be considered from an enterprise perspective and not just from the functional area perspective.

return on investment items for an Enterprise Resource Planning (ERP) implementation. An effective ERP implementation should be expected to reduce inventory and improve capacity utilization in the entire supply chain by providing higher quality planning information more quickly. Capacity should only be used to build those products that will be sold immediately. However, this inventory reduction strategy can be taken too far and leave the enterprise in a position of noncompetitiveness since it cannot ship product when required by the customer. If product cannot be shipped, then revenues are not realized and the enterprise does not make money. You can try this for yourself on the Management Interactive Case Study Simulator (MICSS) in this book. The right answer is the Goldilocks Inventory Management approach—not too much inventory, not too little inventory, but just the right inventory at the right time.