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Roll no. 307

Materials Management & Stock Control

This article provides an overview of current inventory management and materials managementprocesses with reference to other techniques. It covers "push" and "pull systems", Just in Time(JIT) systems and associated Kanban systems, MRP1, MRP2, ERP systems, AgileManufacturing, simple visual processes, and other less well known, but equally effective,processes and systems. It also puts them into a logical and historical context.

IntroductionBefore commencing, it is worth spending a few minutes describing the environments to whichthese processes and systems are addressed. They range from simple stockist typeenvironments to highly complex manufactured products, manufacturing processes anddistribution networks. They also range from intermittent / low volume, or one-off complex

assemblies or mixtures, to very high volume mass produced products of varying complexity. It isnot surprising therefore that a wide range of techniques have been developed to accommodatethis range of applications. So let us start by simply listing the techniques available:

The techniques fall into two themes:

1. "Push" systems (triggered by interpretation of the expected demand and scheduling ofsupply to meet that demand)

2. "Pull" systems (replenishment systems triggered by the usage or depletion of stock)

Push Systems Pull Systems

All Time Buy Replacement

Project Manufacturing Top up point of use / Vendor ManagedInventory

Period Batch Control Input / Output Control

Materials Requirements Planning (MRP1) Two Bin

Manufacturing Resources Planning (MRP2) Three Bin

Drum Buffer Rope (although the "rope" itcould be argued is pulling, the "drum" is

pushing)

Kanban

Advanced Planning & Scheduling (APS) Reorder Point (ROP)

There is however a third grouping which we call complementary, in that they utilise, or are anadaptation of, some of the above techniques, (principally but not exclusively in repetitiveenvironments), but apply them in a unique way. These include:

Complementary

y Consignment stocksy Outsourced Warehousingy Kittingy Milk-round

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y Visual control systemsy The use of bar code reading / RFID in stock movementy Electronic Data Interchange (EDI) / Internet enabled supplier integrationy The use of "Back-flushing" techniques in MRP systemsy ERP systems

As a final part of this introduction it is worth positioning "Just in Time" (JIT) in these groupings.The supply of items just in time for their immediate use is an objective ofall materials planningand control systems. It could be said that most of the techniques described above have thisobjective, except perhaps "all time buy". However JIT has become associated with "Kanban"Systems, which are described in detail elsewhere on the site.

Follow the links on the left of the page forfurther detailed articles for items coloured red. Nowto an overview of each:

Pull SystemsDealing with the Pull systems first, they are a group of techniques that aim to ensure that whenstock is used, it is replenished. It is important to note at this point that pull systems do notplan, they react! This is fine if your processes and logistics are infinitely flexible, uncomplicated

and do not vary. If they are not, some degree of capacity or materials buffering will benecessary! For example, there is a need to reduce buffer stock for declining demand and primestock for sales initiatives. In addition the new product introduction process and product changeprocess must somehow feed in the new and feed out the old.

Secondly most of these "pull" techniques except reorder point operate principally using visualcontrols rather than computer systems and are therefore well aligned to "lean manufacturing".

Replacement(Also see Previous Technique T015: Replacement Systems)In it's simplest form there is "Replacement", which simply replaces used items. This technique isstill very common for many simple applications and is commonly used for maintenance spares,grocery shelf restocking, stationery and my partner's re-supply of our bathroom consumables,

and was probably used by cave dwellers to replenish food stocks.This is also the underlying principle of all pull systems.

Vendor Managed InventoryIt is now very common for suppliers to manage customer's inventory by managing the stocklevels themselves as a value added service to customers. Usually this replacement is based onsimple top up to predetermined levels or by a "Fax-Ban", (see Kanban).

Top up point of useAlso it is now very common for suppliers to manage customer's inventory, replacing used itemsby delivering directly to point of use, avoiding the stores management process, as a valueadded service to customers. Alternatively this method can be used by stores personnel toreplenish line-side stock from a central stores for items in repetitive / continuous use.

Input / Output Control(Also see Input / Output Capacity Control)This simply delivers (inputs) to a process what has been produced (output). When applied toWork in Process as a whole, this technique has come to be known as a "Conwip" (ConstantWIP) Kanban system.

2 Bin Systems(Also see Previous Technique T010: Two Bin Systems)

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Again an ancient technique for which confusingly there are 3 "bins" in the system, 2 bins at thepoint of use and a third elsewhere, (a "bin" can be any fixed quantity container including aplastic bag, work trolley, or kitting tray):

y Bin 1 is in use in the shop.y Bin 2 is held adjacent to bin 1 (but is not in use) and is used to replace bin 1 by

operatives when bin 1 is depleted, without formal authorisation.y Bin 3 can be somewhere else (maybe in a stores, WIP, or at the supplier) and is used to

replace bin 2 when it is swapped for bin 1.y Bin 1 is then refilled to become bin 3 and held waiting for the depletion of the bin in use,

for the system to recycle.

When feeding several points of use, the 3rd bin can be a central stores stock.

3 Bin Systems3 bin systems operate in the same way as 2 bin systems except that a safety stock (perhaps ahandful of items in a plastic bag) is stored separately in bin 2. Breaking into this safety stock, ifthe system has not recycled in time, triggers an expedite request and a review of bin sizes. To

maintain stock rotation the safety stock must be refreshed on replenishment, which means thatto enjoy the opportunity of an expedite signal you need a bit more administration.

Kanban Systems(Also see Kanban Systems)

Attributed originally to Toyota in the 1980's, Kanban systems are an extension of 2 bin and 3 binsystems, where there is a semi-fixed number of Kanbans (typically but not necessarily primedcontainers) in the system, which may be spread throughout the system and which arereplenished when depleted.

Reorder Point Systems(Also see Previous Technique T014: Reorder Point Systems)"Reorder-point" systems, invented by operational researchers, in the Second World War, made

more sophisticated the previously simple replenishment processes by taking into account:

y The variability of supply and demand (introducing "safety stock", calculated usingstatistical probability)

y Lead-time to replenish, which orders replacements at a point (the "reorder-point") whereallowing for the lead-time and recent historical demand, replacements would beavailable before depleting the safety stock, with statistical certainty.

Later various forecasting algorithms were introduced to more accurately reflect usage withinfuture lead-time rather than recent history. (Trend, Seasonality, Seasonality with Trend,Intermittent etc.) (We select from 6 methods in our training course SSC03 AdvancedForecasting and Inventory Modelling.)

Push SystemsAll Time BuyPerhaps the original method of ordering, you buy everything you think you are likely to need.The obvious disadvantage being that it is difficult to forecast all time requirements. However foritems which are likely to be difficult to acquire in the future and are of low value, this is still awidely used technique, particularly in the aerospace and electronics industries towards the endof original equipment production.

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Project Manufacturing(Also see Previous Technique T004: Chunking)Very different in concept to MRP systems (below), and much better suited to small volumeproduction, job shops, engineer-to-order environments, or capital / development projects, thissystem schedules both parts and processes. Bills of material are created for each "chunk" (work

package) of the project, and capacity planning may include technical / engineering resource aswell as manufacturing resource. Items are made and purchased ("multi-level pegged") forindividual projects / final products. Actual costs are accumulated during manufacture, withestimates to completion (time and cost) routinely calculated. The more sophisticated versionsemploy "critical path" ("PERT") network or APS scheduling.

Period Batch Control (Cyclic Re-ordering)In the 1930's, but more famously during the second world war, the first simple schedulingtechnique to adopt a JIT philosophy was introduced by RJ Gigli to deliver to the next stage inthe process all the parts required for the next period's work in a UK aircraft manufacturing plant.This technique ("Period Batch Control" by the late Jack Burbidge) synchronised the arrival ofcomponents for sub-assembly and sub assemblies for final assembly by allowing a fixed periodfor the production of all the parts required for the next stage.

Using a weekly period as an example:Week 1: Order parts from supplier

Week 2: Deliver to the component manufacturing process by the end of the week

Week 3: Make components by the end of the week

Week 4: Make sub assemblies by the end of the week

Week 5: Make final assemblies and deliver to customer by the end of the week

In this example the lead-time is fixed and is 5 weeks.

The technique was a huge step forward in coordinating the supply of parts for "A", and "X" typeproducts (see Postponement & Mass Customisation. It required a Bill of material (parts-list), todrive the schedule for the preceding stage. This concept was later adapted by Lucas Industriesin 1991 to incorporate variable work packages of fixed duration (without Bill of Materialrestructuring) in their JIT / MRP project which integrated the two concepts in a singlephilosophy.

In the automotive industry, computer based scheduling based on multiplying demand byexploded Bills of Material was starting to be used to produce forward fixed weekly schedules forsuppliers by the mid 1970's, using commercially available computers. These fixed cycleschedules, are still the most common method of communicating medium term demand (advisoryschedules) to suppliers in the automotive and aerospace industry today, and the technique hascome to be known as "cyclic re-ordering". Also although this technique has largely beenovershadowed by the wide adoption of MRP systems by software suppliers (see later), it is nowenjoying a comeback due to its simplicity and the ability to live comfortably with Kanbansystems. (See below.)

MRP1(Also see MRP1)Chronologically Materials Requirements Planning (MRP1) came next in the late 1960's, initiallywith fixed period lead-times ("bucketed" systems). This was the scheduling engine required forPeriod Batch Control, which utilised the Bill of Material within it and the scheduling rules(periods) to produce a schedule for the preceding stages, using the example above, five weeksin advance. At this time computers began to be used commercially to generate these schedules.Later variable lead-times ("bucket-less" systems) and safety stocks were accommodated.

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MRP2(Also see MRP2)This was followed in the 1970's by Manufacturing Resources Planning (MRP2) ("ManufacturingResource Planning: MRP2 Unlocking America's Productivity Potential": Oliver Wight), whichcombined MRP1 and capacity planning together with a control system. Whilst widely

implemented, the faulty implementation of MRP systems became a scandal, with little regard fordata accuracy, ownership, and accompanying (new) management processes.

One of the major criticisms of MRP is the concept of a staged Bill of Material, which representedthe stages of manufacture and which also enshrined that into a sequential process, whichignored the potential for parallel working. Work by Burbidge, showed that by flattening the Bill ofMaterial, and parallel working not only simplified the administration of production but alsoreduced lead-times. However this created tension between the engineering view of the productand the logistics view of the product which "phantom bills of material" did not fully resolve andwhich also complicated the question of bill of material ownership. This difficulty remains today inmost commercially available ERP systems. (See Previous Best Practice B014: "Effective Bills ofMaterial Design", and Previous Technique T038: "Bills of Materials Simplification")

However MRP is still the dominant technique used by most computer "ERP" software

commercially available today. Whilst the concept of MRP2 is sound, the advent of "Just in Time"(JIT) and it's control system "Kanban" created an attractive and significantly simpler mechanism.This for a while in the early 1980's seemed to provide an alternative to the concept of MRP, toan extent where the leading gurus of the time predicted the demise of MRP, in favour of themore pragmatic approach. This was unfounded and in fact ignored the requirement to plan "A"and "X" type product (See "Postponement & Mass Customisation") production in advance fromboth a materials and capacity viewpoint, which JIT did not provide. Even "I" and "T" and "V" typeproduct production require a forward view to provide a planning ability. This led the computersoftware suppliers to attempt to integrate the two approaches with so called "ElectronicKanbans" (a replenishment signalling mechanism sent electronically). Although rarely neededfor internal company signalling, this mechanism has found later usage in the inter-companyreplenishment signalling involved with "agile" communications.

The commercialisation of computer packaged software, incorporating the mathematicalapproaches of MRP and later ERP / APS systems, unfortunately ignored the inherent weaknessof computers, in that it is notoriously difficult to change computer programs quickly and reliablyin the event of requirements, suppliers, or system changes and the lack of visibility of theprocess. This led to the expansion of parameters held within the computer system that could bechanged to reflect different environments. This has now led to a process of "configuration"where the software can be "configured" to reflect different circumstances. Presently andunfortunately the process of reconfiguring can often be difficult and does not reflect the need insome cases to reflect hybrid requirements. (For example some items are repetitive whilst othersare not.) Another trap that the software suppliers have fallen into, in the race to provideincreased functionality, is to add complexity to the configuration process. This has resulted inmany horror stories of incorrect configuration, and a demand for highly skilled "configurers"

which for a time outstripped supply. These factors combined to constrain sales of the software,and has led to the sale of preconfigured or cut down versions of complex software. However thiscompletely ignores the "KISS principle" (Keep It Simple Stupid). (See "Implementing ERPcomputer systems", and B018. Production Planning and Control The KISS Principle (Overview)(Or how to live without the computer))

MRP and JIT have now resolved into split roles. In a mixed MRP/JIT environment MRP isprimarily used for long term capacity planning and forward ordering of indicative materialrequirements with JIT pulling the next job when the previous one is finished or stocks depleted.In the absence of JIT, MRP schedules may be treated as firm.

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In mixed mode operation MRP can provide firm schedules in parts of the supply chain notcovered by JIT replenishment signals, and indicative schedules in parts of the supply chainwhere JIT replenishments are used as shown below. (See "Kanban".)

Drum, Buffer, RopeThe terms were defined by Goldratt and Cox in their book "The Goal" the early 1980's. The"Drum" is the schedule for the bottleneck (drumbeat for the whole system). The "Buffer" issurplus stock put in front of the bottleneck to make sure it never runs out. The "Rope" is thecoupling mechanism for ensuring that inputs (release of raw materials) do not exceed the

bottleneck capacity, avoiding build-ups of unnecessary WIP.The mechanism later became confused with the software "OPT" and its successors "AdvancedScheduling Systems" (See APS). Here we have deliberately separated the two.

Drum, buffer, rope can be implemented in its own right manually. In this case:

y The Drum is an MPS for the system based on a rough cut capacity plan for thebottlenecks

y The Buffer needed can be calculated using statistical approachesy The Rope can any one of five methods of making work flow (See Workflow Management

/ Scheduling)

Advanced Planning & Scheduling(which are probably best generically described as, multiple constraint, finite capacity, network,planning systems (Also see APS systems))This type of system originated with the increasing availability of high speed computers in the1960's to perform combined, complex, materials and process, scheduling calculations forcomplex environments. They incorporate highly mathematical optimisation approaches toscheduling and are therefore intellectually appealing. (Research on the ideal schedulingalgorithm is still going on.) Perhaps because of this, they have enjoyed, (based on our ownexperience and research), unjustified commercial success. But if your environment cannot be

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simplified, they have application. We have identified 11 different levels of sophistication in thesemodels, but each software has its own methods and cannot simply be paraphrased, so I will notattempt to do that here. Suffice it to say that this methodology is:

y Sophisticated, (some would use the word complex)y A computer based modelling system which is principally based on Bill of Materials,

Routing, & Costs, but can be based on more complex scheduling / optimisation rulesand parameters such as space, profitability etc.

y Uses critical path networking or optimisation routinesy JIT but not very lean

Complementary ProcessesIn this group, developments include:

Consignment StocksOriginally this technique was adopted by customers who wanted to lose inventory from theirbalance sheet, whilst still having it available, giving rise to bonded warehouses, where the stock

was available but still belonged to the supplier until issued for use in the shop. Howeversuppliers then recognised that this gave them more opportunity for increasing value addedservices by maintaining this stock for the customer. It also locked in the customer to a long termarrangement. It is now widely recognised that the benefit is largely in the supplier's hands ratherthan with the customer. Also care must be taken to ensure that the financial transfer ofownership from supplier to customer is auditable, and that liability for risk of obsolescence in theevent of change is agreed.

Sales and purchasing departments continue to use consignment stocks as a bargaining chipand a way of losing stock from the inventory respectively. Depending if the accountant belongsto the customer or supplier, each will argue: "a way of reducing stock and deferring payment", or"increased administration" respectively.

In a lean organisation and to the inventory planner, the arguments are irrelevant, the stock is

still there and it should be minimised to improve the whole supply chain.I wrote in the year 2000, in the first version of this article: "A logical extension of this concept isthat the major retail outlets become property owners rather than retailers with their aisles ownedby the supplier!" I think we have deviated from this concept now where the supplier still ownsthe stock due to extended credit terms and payment on use, and sophisticated off-balancesheet accounting of buildings is used to make the retailers tenants, so they do not own anything!

Out-sourced warehousingAgain, in the year 2000, I wrote that off-site, (out-sourced) warehousing was an increasingtrend. At that time it applied to Distribution Centres (DC's) to consolidate supplies for just in timecustomers for onwards delivery to point-of-use destinations, primarily in the major automotiveassemblers. This alleviates the logistics congestion which can arise in feeding hundreds of

different items per day to an assembly line. However, now, out-sourcing is applied to many pre-assembly stores, most distribution networks and is also being applied to raw materials. Ofcourse there has also been a massive growth in warehousing to accommodate increasinglyimported goods. (We will cover this in a future article.)

3rd Party KittingSince the late 1990's we have seen the out-sourcing of kitting from assembly operations. Thereare a few important considerations here, but in principle this is a perfectly valid method ofmanaging inventory. Often combined with 2 bin systems (where the kit is a bin), one kit can be

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prepared, whilst the previous one is being delivered. Kitting suppliers are either suppliers withdominant kit content, specialist kit consolidators, or increasingly part of a wholly outsourcedstores operation.

Milk roundUnlike the USA, delivery of goods in the UK was principally the responsibility of the supplier.

The increasing use of third party carriers has given rise to significant economy of scale byhaving a full load on the return journey. "Ex-works costing" has facilitated a carrier to create amilk round, delivering and collecting goods on a daily or weekly cycle, ensuring full loads at alltimes. Also an in-house customer can often arrange to collect raw materials in the vicinity oftheir important customers, or other suppliers, to gain economy of scale. However the lateststatistic I have seen for the UK, still suggests that 25% of all vehicles are running empty on ourroads.

Visual Control Systems(Also see Previous Technique T036: Visual Control Systems)

Along with the introduction of lean thinking has come the re-introduction of visual controlsystems, whereby the control of stock is now becoming genuinely achievable through "eyeballcontrol", rather than sophisticated computer systems and heavy reliance on "Perpetual

Inventory" stock checking.

Bar coding / RFIDStock recording and stock movement recording has been greatly simplified and improved by theautomation of the data entry by bar coding. If used as a common identifier between sales outletand first tier manufacturer this becomes a significant element of "Agile" manufacturing. RadioFrequency Identification (RFID) has now made an entrance into this arena. RFID is capable ofidentifying an item at radio frequency distances, as opposed to bar code scanning. However thismay be distracting us from the simplification of stock control which can also be achieved byvisible control systems, and 2 Bin / Kanban replenishment systems.

Electronic Data Interchange (EDI)(Internet enabled supplier integration (Also see E-commerce: "E-nabling" Your Business)The use of computers to communicate demands between organisations has grown significantlyfrom the introduction of faxes which were used to send schedules, then Kanbans, to the use ofelectronic buying via the Internet and electronic payment settlement towards e-commerce. It isnow common to communicate the output of a delinquent MRP system to a supplier, withmuch greater speed via electronic means! Genuinely seamless, fully integrated customerordering, to supplier sales order processing and onwards through their manufacturingscheduling and out into the next tier of the supply chain is still rare but is becoming aninteresting development area, but I feel that the technical barriers are much less significant thanthe commercial barriers.

Back-flushingThe computer technique of deducting component parts from stock based on the arrival of a sub-

assembly at some key measurement ("deduct") point has been developed in response to theneed to automate the stock issuing process in conjunction with the introduction of JITtechniques. This has also been used as a basis for paying suppliers. By doing this, a situationhas been created where the Bill of Material accuracy for these inexpensive parts must be totallyaccurate. Often these parts' usage is probabilistic anyway rather than deterministic (withselective assemblyyy shims for example), with average usage entered into the Bills of Materialmaking the usage approximate. But, these parts require minimum administration and suppliertop up or two bin systems are usually more appropriate than issuing MRP schedules for theseparts which are notoriously unreliable. (See Malpractice M007: The Cost of the Costing System)

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Enterprise Resources Planning (ERP) Systems(Also see Implementing ERP Systems)These systems grew out of MRP and / or Inventory Management and / or Accounting systems inthe early 1990's depending on the pedigree of the software supplier into a "total" businesscontrol system, integrating the functions and data from various areas. For example: a goods

receipt would automatically update outstanding purchase orders, reduce requirementsgenerated by MRP, update the stock balance, create a creditor in the Purchase ledger andeventually update the general ledger with the new asset. Many ERP systems incorporate MRP2planning processes. Fewer incorporate Project Manufacturing. Many also incorporate links to

APS planning systems as an optional extra avoiding the MRP module of the software.

ConclusionIn 1986 it was concluded by a European conference of leading MRP guru's, which I attended,that the logical solution to the problem of Manufacturing Planning and Control was anappropriate use of techniques to match the circumstances. Unfortunately there are a numberof inhibiting factors here:

y

No one method is universally applicable!y Any one business has an array of circumstances and the situation will change with

product life cycles, product mix, volume changes, and process changes.y No one except us has yet catalogued the control systems available in a logical way

such that the strengths and weakness of the techniques are apparent and can be usedin a mix and match way to solve an individual problem. (See "What control systems doyou need" or workshop SSC02: "Material Control Process Selection".)

y It is not a simple task to change the technique.y Each new technique is often viewed as universally applicable and betterthan the last!?y It is easier to blame the system rather than the implementation and move on to the

latest fad. In particular the success rate of MRP implementations is very poor, such thatit may be replaced when it could have been easily corrected. (See Implementing ERPSystems).

y There are a number of vested interests and significant sunken investment.y No method is "fit and forget"

Choosing a manufacturing control system to suit yourenvironment

This poses the question, in what circumstances is an approach valid? The correct choice isprimarily determined by an individual operating environment. In fact in any one company there islikely to be a diverse range of requirements. (See: What control systems do I need?). You canoften make a technique work in less than ideal circumstances (in an inefficient and ineffectiveway), but the correct choice of technique, implemented and maintained well is the key to

realising ongoing bottom line benefits. A strategic, periodic review of the appropriateness ofyour current application of a technique is essential to avoid degeneracy! We call this process"reimplementation".