CHAPTER 1

BEFORE COMPUTER SYSTEMS

INVENTORY CARD CONTROL SYSTEM

Before computer systems were available to companies to use for materials planning, the manual systems in use contained key elements of today’s current software-driven systems. Before the age of computer-generated inventory control systems, many companies used a card management system that contained columns for logging inventory information. The system, although simplistic, served the purpose: managing inventory.

The best control system used preprinted cards for logging daily inventory transactions. The cards generally fit into a tub file that accommodated at least 250 cards with metal separators for each row of 25 cards. Half-circle cutouts on the bottom of the control cards fit snugly into round vertical holding rods on the bottom of the tub, similar to some index file cardholders.

To conserve space in the tube file, the inventory control cards were placed on top of each other with only the part number showing in consecutive part number order. The part number was written or stamped on each inventory control card, and each card was cut on a 45-degree angle to make pulling cards out of the file easier.

Like today’s modern-day computer systems, control cards contained all the information required for the particular component. The card system provided columns for the date, the on-order quantity, received quantity in inspection, the amount issued to manufacturing, and the running balance on hand. Spaces were available on the top of the card to record the part number description, the minimum, the maximum, the reorder point, the lead time, the forecast, and the actual usage. Most card systems also provided areas for the usage by product.

The card system was managed entirely by posting all activities manually in pencil for every transaction. Pencil entries were preferred for ease of erasure.

With this system, copies of all transactions that required posting had to be available for the planner. The paperwork involved was high volume, considering the number of purchase orders, the receiving paperwork, and the pick tickets generated on a daily basis.

The process of reordering materials involved filling out a two-part form with all the pertinent information and then sending a copy to a buyer. The planner then had to match the paperwork with the completed paperwork from the buyer to ensure that the release was issued to the supplier. The release number and date of delivery was then posted to the control card.

The drawbacks to the system included posting errors, addition and subtraction errors, lost paperwork, and errors on the data received. In spite of these types of errors, the system provided a good management tool in those precomputer days.

Although using this manual system was time consuming, it did have an advantage over modern software systems: All of the information was kept in one place. The card system contained all of the information about a particular part number on one document. Computer systems contain all of the information that the card system contained and more; however, to access that information, multiple screens must be used or a report must be generated from the system.

ADVANTAGES OF THE MANUAL CARD SYSTEM OF INVENTORY CONTROL

Controlling inventory using a manual system provided another advantage that computer systems do not have. Since the manual system requires the constant posting of data, the planner was more in tune with the parts that were being controlled. With the advent of computerized inventory control, planners became more distant from the actual components being controlled. In many cases, planners are not aware of part numbers and inventory balances.

Using the computer system has removed some planners from the visual interfacing that took place before material requirements planning (MRP). Sometimes such separation from the components managed becomes a disadvantage, as when there is a crisis with a component shortage. If substitutes are available, the substitution is bypassed because the planner cannot recognize that another part is similar to the one that is required because the MRP numbering scheme is usually assigned in numerical order.

Before computer systems, many organizations used part number schemes that allowed users to identify components in classes of parts. Planners could relate to components so that they could make substitution decisions by comparing similar part numbers that would be associated with the same product that could be reworked as a substitution. With the advent of computer systems, many companies decided that the part number scheme was immaterial. The debate around restoring the part number schemes continues to this day, but the advantage to using such schemes is obvious, especially when planners do not visually manage materials.

The usage of a part by product line was always clearly written on the control card; in today’s control systems, the inventory management system is located on a separate screen from the inventory on-hand screen. With the card system, planners were more aware of the use of a particular part by product line and therefore more familiar with the product structure. This allowed planners to recognize potential part use issues.

For example, if there were three screws used for a product A and three screws used for product B, but product B was larger, the planner might question the usage for product B. A good planner would recognize a problem when calculating the minimum and maximum levels using the usage numbers and the forecast.

Modern computer systems bury the usage in multiple setup screens that planners need to consciously access. The computer system does not give planners the immediate visual opportunity to compare the use of a component across several different assemblies.

Computer systems automatically update minimum and maximum inventory level, which prevents planners from associating use to product lines. Most of the time, errors in bills of materials leading to usage errors are not detected until there is a shortage of material or a buildup in inventory because the usage for a part is incorrect.

BILL OF MATERIALS ACCURACY

The importance of entering bills of materials into the computer system accurately is not debatable; however, too many companies experience less-than-satisfactory bills of materials accuracy. This is why it is so important to verify all data entered into the system supporting the bills of materials.

Many companies rely on the corporate engineering department to enter the bills of materials correctly into the system. Without a visual verification of materials used in the actual production process, chances are high that there will be some mistakes. The materials department inherits these mistakes in the form of shortages or excessive inventory.

PICK TICKET SYSTEM

Before the computer system of inventory control, planners relied on pick tickets, which were generally completed by the warehouse personnel who moved the containers to the production line. As with any manual system, errors in calculating the total amounts taken and thus written on the pick ticket were fairly common. The overstatement of inventory caused by the understatement of parts withdrawn for the assembly line meant an eventual stock shortage. The computer system of inventory control has eliminated use of pick tickets to reduce inventory balances; the computer system reduces part number inventory balances automatically as finished goods are entered into the system.

ADVANTAGE OF COMPUTER-GENERATED INVENTORY CONTROL SYSTEMS

The overall advantage of computer systems is the automation and elimination of the manual postings and most of the paperwork. Computer systems are not free from errors, since the bills of materials and the reporting of finished goods have to be 100 percent in order to achieve inventory accuracy perfection.

Computer systems have created a new set of inventory accuracy issues caused by incorrect manual and scanned entries. Unless the human element is eliminated, changing from manual entries to a simple scanning system will not correct entry errors. The saying garbage in, garbage out is well known in regard to inventory inaccuracies with computer-managed inventory.

The basic computer-controlled inventory system eliminates the calculations that planners performed, but it does not eliminate the errors. With card-controlled inventory systems, planners had to calculate the use for every part number using forecasted numbers. They had to calculate the minimum and maximum levels in order to release materials from the supply base. The computer system is not capable of correcting inaccurate minimum inventory and maximum inventory levels generated by MRP when there is a usage error. This is because the MRP system does not display the usage on the same screen as where the minium and maximum are located.

What is the advantage of computer-generated inventory control systems versus manual systems? The real advantage of computer systems is the speed of information and the ability to collect real-time information in various formats.

There has been no real improvement in inventory accuracy with the shift from the manual card-controlled system to the computer-controlled system primarily because we continue to use manual input and output without controls and methods that ensure accuracy.

Some people believed that if manual scanning systems were added to inventory management, all of the inaccuracy issues would be solved. This is not true; a simple scanning process is manually driven and therefore error prone.

Adding a manual scanning process for receiving in components speeds up the process of data entry but does not guarantee correctness. No one can guarantee that 100 percent of all items received will be scanned correctly.

Nor does adding a manual scanning process for finished goods guarantee inventory accuracy. There is always someone who forgets to scan a box or someone who takes out finished goods boxes for quality review and reports the product into the system again.

A simple manual scanning process alone does not prevent the shipping of extra materials in error to the customer. There is always a chance that someone will leave a box off the truck or ship an additional box in error.

This book reveals how to use computer systems, scanning, and some other methods to gain 100 percent inventory accuracy.

CHAPTER 2

MATERIAL REQUIREMENTS PLANNING

FOUNDATION FOR MATERIAL REQUIREMENTS PLANNING

Material requirements planning (MRP) is a system that was designed to compute the material needs of the plant, internally and externally. It is not very different from one software system to another. The materials principles in all MRP software systems enable anyone to manage any brand of computer system that a company is using for materials management. The differences in the systems are the location of the planning, shipping, and release control information. Some software packages are more complex than others are because they contain more features supposedly designed to improve inventory control.

Some software packages are better than others because they have features that make the system quicker and easier to input and extract information. Any software package is only as good as the level of accuracy in the system.

MRP is neither the problem nor the root cause for inefficiencies in the material procurement process. The notion that MRP does not work is a fallacy. MRP is a super calculator that provides output data based on selected criteria that are placed into the system. Since MRP is a perfect system, it depends on perfect information in order to provide perfect results. MRP may not work for many companies because of incorrect input/output into the system.

MRP is the process of generating planned and firmed releases to suppliers, internally and externally. MRP reads the customer orders, forecasts, and the master schedule, or a combination thereof, and then processes the information through the bills of materials in order to generate the demand for the components and raw materials. MRP will calculate new planned releases every time it is generated, changing the delivery date and quantity based on the latest information in the system.

Once a release is changed to firm by the computer system or a planner MRP does not move the date or change the quantity. In order to increase or decrease the quantity or change the delivery date, the user must manually change the firm orders.

MRP will not place a new supplier release before the date of the first firmed planned order; therefore, all components placed with firm orders must be reviewed for MRP-generated action messages every time MRP is generated. Action messages are a part of the MRP system that are designed to give a planner suggestions to move the dates of orders forward or reverse in time. If a planner fails to review the message to increase a firm order, there may be a shortage in the near future.

In the early days of MRP, most companies generated new requirements once per week. This operation, generally performed at night, was referred to as the nightly job stream. Today computers have much greater efficiency and memory, so MRP can be generated on a daily basis. When MRP is generated daily, the releases are sent to suppliers daily. If releases change dramatically from one MRP to another, suppliers are going to complain and distrust the new shipping releases. As discussed, such problems mean that planning and inventory accuracy issues need to be resolved because there is no stability in the system.

When there is no stability in a system that shows minimal or no immediate changes to the supplier orders, releases should be sent to suppliers less frequently. In general, the materials management system should generate releases daily. In Chapter 20, a best practice addresses the issue of varying releases.

The American Production and Inventory Control Society (APICS), an organization dedicated to the training and education of people in the materials field, started out with a small membership and rapidly gained popularity in the 1970s through the 1980s. With the advent of so many changes in the manufacturing world, the leadership of APICS continued to evolve in the 1990s, changing its area of expertise to include operations management. Today’s APICS is dedicated to educating people in a wide variety of businesses, and the organization has evolved into providing insight into operations management.

In the past, many major corporations required materials management employees to have APICS certification. Today, although many companies still prefer to hire people with APICS certification, it is no longer a common requirement.

The certification process from APICS covers a variety of subjects, which a person must understand fully in order to pass a few very comprehensive tests. Upon passing all of the testing requirements, a person receives a written certification from APICS. Such APICS certification helps people understand materials principles but does not teach best practices. An APICS-certified person is not likely to outclass someone who has practical experience.

Oliver Wright, the developer of MRP, thought that he had discovered the perfect process to eliminate shortage and control issues with inventory management. What he did not realize was that the system was not error proof and that it was totally dependent on perfect information. Like other systems, any MRP system becomes practically worthless when lack of inventory accuracy causes supply and production issues.

A computer system is logical and depends on perfect information to provide the required results. If a company could provide its MRP system with perfect information, there would be no need to attempt to develop systems to augment inventory control. Since it is highly improbable that any company has attained perfection in data entered and retrieved from its MRP system, systems for controlling materials must be developed that have a higher level of accuracy. These methods are described in Chapter 20.

IMPORTANCE OF PLANNING PARAMETERS

The poor output of an MRP system is the product of two basic groups of information: parameters and data input/output. The term parameters here refers to all of the selections, options, and data required that is controlled by populating fields in MRP to generate order release and shipping information correctly. The phrase data input/output refers to all of the information fed into the system, either electronically or manually.

Since a vast number of planning parameters is required to control an enormous amount of information correctly, the odds that everything will work perfectly all of the time are near zero. Incorrect planning parameters in the system are directly related to component shortages, causing lost manufacturing time and possibly premium freight expenditures.

Some of the most important planning parameters are discussed in the next few paragraphs below. Planning parameters that control lead time from the supply base must be accurate in order to generate accurate releasing information to the suppliers.