Book Order Form | Table of Contents | Preface | Chapter 1 | Chapter 2 | Chapter 3 | Chapter 4 | | Chapter 5 | Chapter 6 | Chapter 7 | Chapter 8 | Appendix A | Appendix B | Glossary

     Almost every manufacturing company has an inventory problem of one degree or another. Whenever top management recognizes an inventory problem; there will be resistance from within the organization. Actually, there is a recognizable process of denial before the message cycles through the organization. It is even difficult to get the message across when the walls of the stockroom are bulging. As I mentioned in chapter one, inventory gets loaded up with wrong sets, odd numbers of components and unneeded parts that no one wants to claim or deal with. Also inventory can be a dumping ground for many parts and components not needed or controlled by manufacturing.

    Unfortunately, Manufacturing management seems to be the last to recognize the inventory problem. Initially, there is surprised disbelief of the accounting numbers. Seldom will a Manufacturing manager admit to an inventory problem. Since inventory is under his control he will strenuously deny the problem exists. In a mode of denial their comments against Accounting include standard refrains, "Bean Counters cannot accurately count physical things" and Max’s favorite line is, "If there was a problem, we’d be solving it."

    To be safe and to prove the Bean Counters wrong, the Manufacturing department will take an inventory count on its own, which is bound to have numerous discrepancies. There will be a long period devoted to proving that no problem exists, rather than trying to understand the problem and to start finding its solution.

    After acknowledging the problem, or reluctantly accepting the need to reduce the inventory, the commitments finally appear. All kinds of get-well programs are promised, but as a rule initial commitments for improvement are over-stated. Near term dramatic promises for solutions are made, only to have the bubble burst almost instantaneously after the first month. In many cases, the inventory initially goes up.

    Any complex manufacturing inventory which is made up of sets of material will contain wrong parts and incomplete sets—the leftover bits and pieces or components which could not be used because odds and ends do not make a complete product. Before the inventory can be brought into balance, the missing parts need to be purchased so complete sets can be counted, and so the already bulging inventory increases dramatically.

    A frequent suggestion, "Sell back the excess material," seldom materializes or if it does, the dollars received are far lower than the original cost or projected value. Material that was purchased to fulfill specific company needs has considerably less value to the outside world.

    When reality finally sets in, and everyone finally gets the message, people are assigned specific tasks and responsibilities, goals are set, existing controls are strengthened and new ones get established. Things start to happen, but very slowly.

    Inventories always possess an incredible amount of inertia because seldom, if ever is any attempt made to balance them. The imbalance can create material that is not used for several months at the current shipping rate. As a result, even when a company already has too much inventory, key material is still needed to fulfill the build plan.

    First, all parties must come to a clear understanding of what constitutes the inventory, and which items can be controlled by Manufacturing. Then, to solve the problem, it is necessary to understand the relationship between the commitments for purchased material and the material already in place relative to the Cost of Goods Sold (COGS) required to support shipments.

    My Law of Management Physics # 1 applies here. Inventory can not be reduced unless the goes-innas to the inventory (Costs of Material Received) are less than the goes-outtas (Cost of Goods Sold), therefore all the projections and graphs are useless, until manufacturing management can institute controls on material purchases and inventory back-stock usage.

    To track inventory on a monthly basis during recovery, management should monitor and graph all material receipts, the new purchase order commitments aged by month, and the projected COGS. If more material comes in than needed to meet shipping requirements (Graph 6), stop the process and redo the manufacturing plan.

Graph 6

    So long as you receive less than you ship, inventory goes down.