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INVENTORY CONTROL WITH MRP II SYSTEM IN PLACE by CHEUNG CHI-LEUNG STANLEY, HA WAI-HUNG MICHAEL 張志良 夏偉雄 MBA PROJECT REPORT Presented to The Graduate School In Partial Fulfilment 广 of the Requirements for the Degree of MASTER OF BUSINESS ADMINISTRATION THREE-YEAR MBA PROGRAMME THE CHINESE UNIVERSITY OF HONG KONG May 1994

CHEUNG CHI-LEUNG STANLEY, HA WAI-HUNG … · 》公、、dY SYSTEJ},/^yy ... manufacturing of switching power ... (mini-, personal, and notebook), photocopying machines, telecommunication

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INVENTORY CONTROL WITH

MRP II SYSTEM IN PLACE

by

CHEUNG CHI-LEUNG STANLEY, HA WAI-HUNG MICHAEL 張志良 夏偉雄

MBA PROJECT REPORT

Presented to

The Graduate School

In Partial Fulfilment

广 of the Requirements for the Degree of

MASTER OF BUSINESS ADMINISTRATION

THREE-YEAR MBA PROGRAMME

THE CHINESE UNIVERSITY OF HONG KONG

May 1994

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i s t ^ / / ( I f So

c u ( p

U/统系館書圖v\ Lf

I , 2 3 JAN 1995 M \\ \— — —• _•——JJ

UinVERGiTY j 》公、、dY SYSTEJ},/ yy

APPROVAL

Name: Cheung Chi-Leung Stanley Ha Wai-Hung Michael

Degree: Master of Business Administration

Title of Project: Inventory Control with MRP II System in Place

(Dr. T. S. Lee)

Date Approved

iii

ABSTRACT

Manufacturing Resources Planning (MRP II) system is

widely considered as a means to reduce inventory. Yet,

not many companies can achieve first class user of MRP II

system. Inventory is still a major problem in some

companies with MRP 工工 system installed. Are these users

unable to tap all the benefits from the MRP II system or

are the MRP II system has some imperfections that cannot

solve their users' real life business problems ?

This study tries to make use of a real-life case to

look at the causes of the inventory problems in an

electronics manufacturing company. Solutions will also

be suggested in this report to the company in the case

study.

iv

TABLE OF CONTENTS

ABSTRACT iii

TABLE OF CONTENTS iv

LIST OF ILLUSTRATIONS vi

ACKNOWLEDGMENTS vii

Chapter

I. INTRODUCTION 1

Company Background . . . . . 3 Objective and Methodology 9

II. WHAT IS MRP II 12

III. MRP II SYSTEM IN XYZ COMPANY 15

IV. THE INVENTORY PROBLEMS 22

High Level of Excess and No 23

Current Use Inventory Engineering Changes 23 Forecast Fluctuation 26 Customer Order Cancellation • • • • 28 Management Reluctant to Write Off • 29 Long Lead-Time of Components • • • 30

Active Inventory Level Higher • • • • 31 Than Management Expectation

Incorrect Purchase Order 33 Time Bucket

Inefficient Re-scheduling • • • • 35 Activities

Inefficient Time Fencing 38

Ineffective Control 3 8

Vendor Early Deliveries 39 Ineffective Priority of 40

Purchasing Activities Ineffective Follow-Up of

4 0

Discrepancies

vi

Unable to Project Inventory Within • • 41 Tolerance

Alternative Parts 42 Goods in Transit 48 Consumption of Active Inventory • . 49

and Reconciliation of Supply and Demand

Inaccurate Inventory Record 52 Space Limitation 53 Staff Training 55 Policies and Procedures . 57 Cycle Counting 57

V . SUMMARY OF OBSERVATION 60

BIBLIOGRAPHY 78

vi

LIST OF ILLUSTRATIONS

TABLE 1 SNAP-SHOT OF TIME BUCKET SETTING . . . 34

FIGURE 1 MANUFACTURING RESOURCES PLANNING . . . 65

FIGURE 2 INVENTORY VALUE IN 1993 . 66

FIGURE 3 INVENTORY TURNS IN 1993 67

FIGURE 4 SALES TURNOVER IN 1993 68

FIGURE 5 FISH BONE DIAGRAM OF THE 69

INVENTORY PROBLEMS

FIGURE 6 LEAD-TIME BY ITEM FOR A PRODUCT . . . • 70

FIGURE 7 CANCELLATION CLAIM LIST 72

FIGURE 8 ABC CLASSIFICATION • • • 73

FIGURE 9 SUPPLY AND DEMAND ANALYSIS 74

FIGURE 10 EARLY DELIVERIES 77

vii

ACKNOWLEGMENT

This project would not have been carried out

successfully without the co-operation and assistance of

the Managing Director, the Materials Manager, the

Material Planning Manager, the Material Control Manager,

the Purchasing Managers f and the MRP II System

Administrator of the company in the study. However, to

keep the company anonymous, we are unable to quote their

names directly here. They provided all the information

on the details of the MRP II system, and inventory

control problems that they are confronting in the

company.

We are also indebted to Dr. T. S. Lee, our

supervisor, for his advice, opinions, and support during

the period that we are working on the project.

CHEUNG CHI-LEUNG STANLEY

HA WAI-HUNG MICHAEL

1

CHAPTER I

INTRODUCTION

Many books and articles on Material Requirement

Planning (MRP) and Manufacturing Resources Planning (MRP

II) have quoted inventory reduction as one of the

benefits of installing such methodology or system. Adam

and Ebert1

mentioned in a section on the benefits of MRP

system through inventory reduction,

、、MRP determines how many of a component are needed

and when, in order to meet the master schedule. MRP

enables the manager to procure that component as it

is needed, thereby avoiding costs of excessive

inventory."

The very basic capability of MRP system to translate

master schedule of end products into demands of raw

material in one processing provides user with more timely

information to react to changes in master schedule.

1 ’Material Requirements Prnrinrtion and Oneration Management, Concepts,

Models, and Behavior: p.524

2

Wight2

also quoted a typical gain of 20 to 35

percent through inventory reduction by

^getting the right material at the right time via

better scheduling.“

The timeliness in updating demand data of dependent

demand with respect to changes in independent demand is

again the source of benefits. On the other hand,

Parmelee3

reported that when MRP II system is used in

conjunction with JIT (Just-In-Time) philosophy,

y y

Raw and in-process inventories have decreased about

60 percentr inventory turns have doubled.〃

As a result, inventory reduction is becoming a

taken-for-granted benefit of installing MRP or MRP II

system by many companies. However, is the function of

inventory management as simple as getting a report from

the system and then doing a few data entries into your

MRP or MRP II system? Are there problems, especially

inventory problems, that MRP II system cannot solve for

you?

In this project, we are going to look at a real-life

case of performing inventory management in a company with

MRP II system installed. From the various issues

2 "The Productivity of Money," MRP TT Unlocking America's Productivity Potential: p.78

3,,Just-In-Time MRP II Cuts Electronics Inventory 60%," Production Inventpry Review

with APTCS News: April 1987, p.41

3

discussed, it should be apparent that MRP or MRP II

software is merely a tool to help you control and achieve

reduction in inventory. Whether you can really benefit

from such installation also depends on other factors like

hardware support for the system, expertise to keep

settings and parameters correct, and company's strategies

or policies in tackling her business problems.

Company Background

Before we go straight into inventory management

tasks, let1

s first have an overview of the company in our

case study and see why inventory management is so

important to the company.

The original name of the company will not be used

here in the report. Instead, let1

s refer it as company

XYZ. XYZ Co. is an OEM (Original Equipment Manufacturer)

of electronics products. Its core business is the

manufacturing of switching power supplies, chargers and

adapters. Its products are used mainly on computers

(mini-, personal, and notebook), photocopying machines,

telecommunication equipment, and many other digital

data/signal processing equipment. Based on customers'

specifications, the company will design new products or

modify existing standard products to suit customers'

requirements. She also has its own line of standard

products that customers can order directly.

4

XYZ Co. has its headquarter based in Hong Kong and

factories located in China, Hong Kong and Malaysia. She

also has a design office in her HK headquarter and in

Singapore. Sales offices are also set up in the United

States, United Kingdom, Taiwan and Europe.

This project is centered around one of the

operations of XYZ Co., namely, its operation in China.

We will refer to this division as the China Division of

XYZ Co. The factory in China is located in Bao1

An County

near Shekou. It is registered as a wholly foreign-owned

company. It started its operation in 1989 and was ISO

9002 certified in 1993 by HKQAA.

With the recent price war among the manufacturers of

personal computer (PC), there is tremendous pressure on

the selling prices of components for PCs. Being one of

the major components inside a PC, price of switching

power supplies is inevitably affected.

The speed of development or change in the PC market

is so fast that product life is becoming shorter and

shorter. Products are quickly replaced by other new

products. For examples, the 386, 486, Pentium, 3.3 V

Central Processing Uriits (CPUs), power saving options

(the Green PCs, and the Energy Star program),." all

these demanded a shorter development lead-time of all

personal computer systems. This pressure on development

lead-time is also carried over into switching power

supplies design and manufacturing.

5

As a result, the operation of the China Division is

threatened by the following factors:

1. Lead-time dilemma:

Customers required shorter development lead-time.

Yet, component lead-time is increasing as fewer and fewer

manufacturers are interested in the production of

analogue components in general. The lengthening of

component lead-time is also worsened by the explosion of

the Sumitomo plant in Japan in early 1993 which resulted

in tightening of resin material supply for molding of

most encapsulated components. Material buffering seems

to be necessary to achieve short ordering lead-time

delivery.

/

2. Price dilemma:

Ever-increasing pressure on product prices but

leveled (if not increasing) raw material costs eroded

XYZ Co.'s profit margins. Thus, cost reduction in other

areas, e.g., administrative cost, indirect labor cost,

and Research and Development cost, becomes very important

to keep the company reaping reasonable profit. To this

end, a smooth and efficient inventory management system

does help reduce avoidable costs associated with material

shortages, production line down, material obsolescence,

etc. Among other alternatives, the company also chose

6

the target of becoming a debt-free company as its overall

business objective. With this target, again, inventory,

the largest working capital attracts much management

attention.

3. Market and Market Share Volatility:

The recent volatility of the PC market is also

threatening the company. Many big PC manufacturers

themselves are suffering from their first net losses

ever. One of their inevitable reactions is to transfer

the situation to their suppliers by asking for price

reduction. They will also try to minimize their own

inventory and become conservative in forecasting future

requirement.

Strong competition also leads to market share

volatility. That means a customer can switch to your

competitors for generic products within a short duration,

and lower your market share dramatically. This may be

the result of not just price but also lead-time

competition.

With the anticipation of increasing importance of

cost control, the company already replaced its old MRP

software system with an MRP II software system in 1989.

The new software system had been available in the market

for quite some time and has already been proven to be

successful in some other implementations. Together with

7

the new softwarer the company also installed an IBM 3090

mainframe computer to run the MRP II package. Multiple

instances of the same MRP II system with different

settings are run on the same machine to provide tailor-

configured system for different Strategic Business Units

(SBUs) of the company.

The China Division, similar to other divisions of

the company, is connected to this mainframe system via a

Wide Area Network (WAN) using leased data lines.

Since the MRP 工工 system is such an advanced

application, it is closely related to the Management

Information System (MIS) department of XYZ Co. The

existing MIS department in the company is structured

under the head office. Its manager reports directly to

the Chief Financial Officer (CFO)• MIS department

provides services to all SBUs of the group. However, it

has been the practice of the MIS department in the

company to report problems of individual SBU directly to

head office without giving the individual SBU any chance

to look into the issue and try fixing it first. As a

result, the China division (perhaps other divisions as

well) is reluctant to unveil any internal problems or

findings in the early stage. To avoid letting MIS know

what is being investigated at the divisional level for

improvement, the division used its own resources to

analyze problems using PCs.

8

Besides, the capacity of the mainframe computer,

which is housed in the head office and is used to run all

the MRP II systems for all SBUs of the group, is very

limited. The division is already suffering from frequent

loss of system up time because batch processing is taking

too much of the daily time slot. Currently, the on-line

system is only available for twelve hours a day for user

data entry. After that, the system must go off-line the

remaining twelve hours to perform daily batch processing.

On weekends, it has to go off-line on Saturday afternoon

and Sunday for the actual MRP processing. For month

ends, it has to go off-line starting Friday mid—night to

allow more time for the batch processing of month end

reports. It is therefore obvious that both the 、、batch

window" and the ^on-line window" are currently fully

occupied. This situation implies that further

enhancement to the system by means of new computer

programs will only worsen the availability of the on-line

environment.

Because of the above two factors, the division

prefers to perform problem identification, analysis, and

problem-solving using personal computers. Unfortunately,

the connectivity of the mainframe to PC is very poor.

The only viable communication is through report text

files. Therefore, the PC analyst in the division has to

deformat the text report which is collected using some

9

utilities to print the report to a disk file instead of

to printer.

Yet, results proved that working on PCs is more

flexible and beneficial to the division. Therefore, in

the discussions to come, a lot of improvement or

corrective actions are carried out in terms of PC

analysis and reports. However, the revert to PC analysis

does not decline the usefulness of the MRP II system

running in the mainframe. The PC analysis simply

supplements the ma inframe tasks and provides more timely

and better-informed reports. Should more resources be

available on the mainframe so that more enhancements can

be run without affecting the on-line window, it is

believed that all the PC reports and analysis can be

performed equally well or even better than on the

mainframe because of direct and more timely access to

data.

Objective and Methodology

Even with an MRP II system, inventory control is not

a straight-forward task. Management of the company is

still not satisfied with the large amount of excessive

inventory of the division. This calls for the

significance of this study. And, the purpose of the

project is to:

1. Evaluate the magnitude of the inventory problems;

10 2

• Identify the possible causes of these inventory

problems (WHY);

3. Recommend possible solutions to the problems and

evaluate feasibility.

This project is carried out as a single case study4

into、、WHY inventory cannot be controlled in XYZ Co. with

the help of the MRP II system". It is believed that the

findings can be applicable to at least some similar

situations.

As such, special concern will be placed on whether

the problems identified can be improved or solved using

the existing MRP II system or not. In fact, most real-

life problems on MRP II applications are due to improper

configuration5

, e.g., settings do not match users'

requirements. Yet, there are imperfections, or

improvements yet to be incorporated, in almost all

computer applications and they may not be able to solve

some real world business problems.

Data and other information on the company's

contemporary inventory management techniques will be

investigated. Techniques from various sources will be

investigated for feasibility. Suggestions and

recommendations will then be summarized.

'Robert K. Yin. C^ae Study R^nrch. Desitm and Methods

5 Alan D. Luber. Solving Business Problems with MRP II

11

The main idea is that MRP II system MAY NOT BE the

complete answer to your inventory management problem. It

is just a tool to help you. Moreover, through the

typical problems identified in this single case study, it

should provide some insights to the criteria of selecting

your next MRP II or even MRP IIIs

system.

'”MRP III: World Class Control”,Computerize^ Manufacturing. April 1990.

12

CHAPTER II

WHAT IS MRP II

Material Requirement Planning (MRP) is the name

given to those computer applications that plan to balance

material supply and demand with some lot-sizing rules

like Economic Order Quantity (EOQ). It utilizes

information from the Bill of Material (BOM) which

contains basically what and how much is needed to build a

product, and the master production schedule to explode

into demands of every item required to support the master

production schedule.

MRP system also maintains information on available

inventory, and outstanding purchase orders. These

together constitute the supply side of the equation. By

analyzing the imbalance in supply and demand of each item

required, MRP system will suggest ordering strategy to

place future orders.

Further information to expedite shortages, re-

schedule or cancel existing orders are also provided.

With further advancement of digital computers, the

same concept is extended to include other manufacturing

13

resources on top of material. When planning of

production capacity, man-power resource, cash flow, etc.

are included in the applications, MRP II is used to

denote "Manufacturing Resources Planning" to distinguish

it from the traditional approach that considers material

only.

In figure 1, the basic components of an MRP II

system are illustrated. It starts from the top level

Business Planning System (BPS) which is simply a company-

wide target on revenue in the periods to come. This is

usually a long-range planning system and specific details

may not be available. Then comes the Master Production

Schedule (MPS) which is the medium-term plan with

details. A rough cut on Capacity Requirement Plan is

required at this stage to ensure that the MPS is

supported or to highlight constraints that have to be

resolved to support the MPS.

The MPS is fed into the traditional MRP sub-system

which performs the supply and demand analysis and

balancing to create action plans. The plan created will

be validated on capacity and material availability by

feedback loops. This means that users of the system have

to obtain reports from the system to identify problems

with capacity and material availability. If the MPS is

instead not supported by material schedules or capacity

plans, the original MPS must be refined and the whole

process starts over again.

14

Further details to the working of the MRP II system

can be referred to from the references included in the

bibliography section.

15

CHAPTER III

MRP II SYSTEM IN XYZ COMPANY

By replacing the old MRP system with the existing

MRP II system, XYZ company is now able to cope with the

following critical issues that she was unable to handle

before 1989:

1. Time phased engineering changes

2. Delaying placing purchase orders

3. Handling of alternative sources

The first two issues have already been discussed in

detail in Luber' s book7

• The old MRP system in the

company allowed only one version of the bills of

materials to exist at a time. Any changes to bills of

materials take effect immediately. If part A is replaced

with part B, the system will tell store people to use

part B immediately leaving part A in inventory and not

used up. Part A ends up in the list of obsolete

materials.

With the new MRP II system, you can tell the system

to implement the change two months later. In the mean

7 Alan D. Luber. Solving Business Problems with MRP II. p. 27 & p. 72

16

time, part A will still be used. Schedules to ship the

product two months later will demand part B

automatically. This avoided a lot of manual effort to

prevent parts becoming obsolete unnecessarily.

The old MRP system also automatically orders

material as soon as a requirement is known. The facts

that the requirement may be six months later, and it

requires only two weeks to get the part, will not stop

the system from telling the buyers to place the order

now. This resulted in material being ordered too soon.

Schedules for shipments six months from now may change

later. Then system will tell buyers to modify the

quantity on the purchase order. All such manual effort

could have been saved if the original order was not

placed yet #

The new MRP II system incorporated vendor lead-time

data on the item master. System will not request buyer

to place order until it is needed. In the example

mentioned above, the system will not tell the buyer to

place order until two weeks before the quantity is

required.

The third issue is specific to the way the old MRP

package is designed and used. In the old system, the

vendor information is built into the item number itself.

This caused difficulties when two suppliers are supplying

17

the parts with functions identical in all aspects.

Examples will include simple resistors. Same functional

parts will be referred to by two different item numbers.

This led to unnecessary difficulties in allocating the

two parts between different demands.

In the new system, taking advantage of the

opportunity to redesign the item numbering convention and

the availability of separate vendor information data

base, the company is now using same item number for one

functional part. Vendor related information is left to

the Purchase Control System.

In fact, the installation of the MRP 工工 system also

helped the company in getting ISO 9002 certification in

1993:

1. With the detail records in the MRP II system,

traceability is possible upon request. In case a

component from a certain vendor is found to have

reliability or even safety problem in the field, the

division can make use of the week code on the

product to trace back the period that the lot of

problematic component is used. She can also

identify the range of other possible products (if

any) which may be affected. Corrective action can

then be initiated to concerned parties.

18

2. With the company-wide database of vendor information

within the MRP II system, vendor qualification can

be easily and centrally controlled. In case a

certain vendor is dis-qualified, the information can

be updated onto the database immediately. Further

order loading to this dis-qualified vendor will then

be prohibited. Outstanding purchase order(s) on the

supplier can also be summarized easily for

disposition. This capability is equally applicable

when a part is dis-qualified and should no longer be

used.

3. One of the biggest contribution of the MRP II system

in helping to get 工 SO certification is on

Engineering Change Control. The Bill of Material

system in MRP II acts as the company-wide database.

Authorized engineering changes, after proper sign -

off, can be updated to the system and every

concerned party will be alerted as the system will

act per the changes right on the next processing.

Capability to handle time-phased Engineering Changes

helps keep track of current, past and future

revisions.

4. The fact that only authorized users are allowed to

update critical information ensures data integrity

in the company-wide database. For instance, only

19

authorized persons from the Engineering department

are allowed to maintain the BOM, master scheduler to

update master schedule, and buyers to update their

own purchasing related data, and so on.

5. Demand pegging is the standard feature in MRP II.

With it, demand of every component can be traced

back to its related product, then to the

corresponding master schedule, to the corresponding

customer order and so on. This ensures that every

purchase order is supported by corresponding

documentation.

The foregoing features and the fact that the system

has been proven in other installations saved the company

a lot of effort explaining to the auditors of ISO

certification how the related clauses in the ISO

standards are being met. The division needs only to

ensure a proper paper-work flow system for the

authorization of these activities.

After understanding the benefits of MRP II compared

with the older MRP package and how MRP II helped the

company in obtaining ISO certification, it is necessary

to quote some critical parameters of the configuration,

and indicators that show the size of the MRP II system in

Company XYZ:

20

1, Lot-sizing rule:

Although a number of advanced options are available,

the company chose to use the Lot-For-Lot8

rule. Based on

this rule, the system will suggest buyers to place a

purchase order to cover demand within a defined period

when vendor lead-time window is due. This rule has its

beauty of simplicity. Ridenoure9

also suggested

designing

^material order policies based on pareto analysis

(ABC) to limit the order lot sizing of expensive

material".

Besides, by linking the period covered with ABC

Classification, the company is able to define a level of

inventory that is theoretically attainable. In fact, the

division is reluctant to change to use the more optimal

approach of Economic Ordering Quantity in lot sizing

because she finds forecast volatility and engineering

changes created a lot of obsolescence in the past. By

employing a sub-optimal lot-for-lot rule, the company can

estimate and control its risk of obsolescence in return.

8 "Material Requirements Planning", Production and Operations Management, Concepts,

Models, and Behavior, p. 356

9 Ridenoure, Scott W. "The ABC's of an Inventory Autopsy - Why Is It Here ?”,

Production & Inventory Review with APTCS News. June 1991.

21

2. Some critical parameters:

MRP processing is run weekly. In fact, the software

package is capable of running MRP processing every day.

However, the division believes that daily MRP would be

too frequent. There will not be sufficient time for the

human side of the system to react.

The size of the database should also illustrate the

complexity of material management in XYZ company. There

are totally sixteen thousand items in the item master,

but among these only two thousand are active• Besides,

on average, the number of active models is around a

hundred.

22

CHAPTER IV

THE INVENTORY PROBLEMS

First of all, let's look at the inventory status of

the company in 1993. Figure 2 and 3 show the inventory

value and inventory turns of the company in 1993. Figure

4 shows the sales turnover of the company in 1993.

The inventory turns of 6.3 at the end of year 1993

is quite far away from management1

s target of nine turns.

Despite the deviation from the management target on

inventory turns, the company is already at a net cash

position at the end of year 1993, and is now the number

one supplier of power conversion products as a whole.

However, overall market share is only around 8 percent.

Moreover, as at the end of year 1993, slow_moving or non-

moving inventory in the company also amounted to

US$860,000 which is roughly 7 percent of the total

inventory value at that time.

The fact that there are sixteen thousand different

parts in the item master virtually rejected the

possibility of using human intelligence to handle

23

inventory management. An MRP II system is therefore a

suitable candidate.

In this study, we conducted interviews with key

personnel who have bearings in the area of inventory

management. Summarizing their views and the factual

information, a fish-bone diagram is constructed and is

shown in figure 5. Details about major entries on the

fish-bone diagram will be discussed.

High Level of Excess and No Current Use Inventory

、、Excess and no current use inventory," which is also

termed 、、slow or non-moving inventory, “ amounted to 7

percent of the total inventory value of the company at

the end of year 1993. The following factors that

contributed to this high level of non-active inventory

are identified

Engineering Changes

There are frequent Engineering Changes requesting

immediate effectivity. These changes may have been

raised per customer change of specification or as a fix

to design problem. However, the change potentially

creates slow or non-moving inventory. Why? This is

because a large portion of the parts used to manufacture

24

the end products are either shipped out three to five

weeks before the ex-factory date of the product (for

overseas delivery) or started to be fabricated by local

vendor (for local delivery)•

Some engineering changes in itself may not

necessarily cause obsolescence. However, owing to the

ineffective coordination among responsible parties,

obsolescence is still resulted. Take an example, when

part to be phased out by this month end is in shortage,

buyers may simply search for alternative to keep the

production line running• They may not aware that the

original part/ when arrived later, may become dead

inventory in the stock room until it is written off the

book and scrapped later.

For changes that are intended to be phased in

gradually, the MRP II system still required a specific

date for the effectivity. Software system is still not

intelligent enough to accept generic phase-in changes

like "'Change to use part B instead of part A when

inventory on hand of part A is used up." Instead you can

only tell the system "Change to use part B instead of

part A starting 02 May, 1994." An exact date of

implementation is always required. To estimate the most

appropriate effectivity date, latest supply and demand

details are analyzed. Once the date is fixed, if

concerned buyer does not update the result accordingly

when supply and demand situation changes, parts ordered

25

for forecast, which is removed after the initial check,

may become dead inventory.

For example, if part A is to be replaced by part B

after using up existing stock, buyer will look at the on-

hand inventory of part A first, say 1000 pes. Demand for

part A will be counted and may find out that this 1000

pes can be used up in three months by firm customer

orders of 600 pes total and forecasted demand of another

400 pes. So, the change will be entered into the MRP 工工

system to be effective three months from now. After

that, sales people changes their estimation of the future

demand of the product. Forecasted demand for part A,

therefore, dropped from 400 pes to 300 pes. If the buyer

do not delay the effectivity of the change, 100 pes of

part A will not be used up when the change is

implemented.

Corrective Actions:

Excess and no current use inventory is summarized

regularly. Reason code is added to every item that

appears in the list. Dollar impact on inventory due to

every engineering change is evaluated and summarized to

management and corresponding parties periodically. This

may not eliminate the problem. Nevertheless, this

procedure can associate the problem with its originator.

In case changes are requested by customer, claims

will be made to customer (after balancing potential

26

impact on relationship with customer) to recover the

losses due to obsolescence.

Forecast Fluctuation

Forecast fluctuation is perhaps experienced by every

manufacturing company. Forecast, by definition, is a

guess and a guess only. However, the company is caught

into a very difficult situation by the lead-time dilemma

that customers are placing official orders for typically

8-week demand only while the company needs to place

orders to its vendors for 12-week to 16-week demand

depending on the ordering lead-time required by

individual supplier. This leaves the company with net

liability to pay vendors which is not covered by

corresponding sales orders.

This is not unreasonable for customers to place firm

orders for 8-week demand only under the current market

situation. Some customers do not really know whether

they can sell their expected number of product two months

later in this volatile PC market. However, check in

figure 6, which is a sample summary of the lead-time

requested by the division's vendors on the parts, it can

be seen that a large portion of the parts have a supplier

lead-time longer than eight weeks.

On top of this vendor lead-time/ the factory itself

needs a two-week manufacturing time to complete the

27

product. That means, at the time when customer places an

8-week lead-time order, the company should have already

placed orders for all raw material with vendor lead-time

longer than six weeks.

The only source of information to know how much to

order before receiving an official customer order is the

sales forecast. The division is therefore forced to

drive its MRP for firm and forecast demand within nine

months (which is around 39 weeks as the company uses a

13-week quarter in its working calendar) to provide

sufficient visibility in future demand of components. In

fact, some components required an ordering lead-time of

2 6 weeks. The 39-week window on MRP provides only a 13-

week window of forecast to suppliers of these parts.

Fortunately, the MRP II system of the company is

capable of requesting buyers to place purchase orders

only at lead-time. (Some less sophisticated system is not

capable of doing so.) That is, system will not ask

buyers to place purchase order (P〇) on a 6-week lead-time

part for all the requirement in the 39 weeks. It will

only tell buyers to place PO now for the requirement

within a time bucket (which is to be defined item by item

and is a one-week bucket for the most active parts) six

weeks later.

However powerful the system may be, "Garbage in

garbage out" is still the rule. A lot of purchase orders

28

placed for forecasted demand have to be cancelled or re-

scheduled when forecasts are not realized. Inaccurate

forecast, therefore, definitely contributes to the

inventory problem.

Corrective Actions:

Volatility in forecast is being summarized regularly

and brought to management attention• However, there is

nothing that can be done from the company alone. Sales

Department is assigned the responsibility to work with

customers more closely to understand their forecast

better.

In extreme cases where all forecast for a model is

removed, which potentially rendered a lot of parts to

become dead inventory, a claim list similar to the one

discussed in customer order cancellation below will be

generated. This keeps management alert of the impact of

forecast changes.

Customer Order Cancellation

Whenever a customer cancels its order, which is

usually within 8 weeks of shipment, the company is stuck

with parts ordered. The company attempted to prepare

claims in the past but was not very successful because

cancellation liability could not be estimated quickly and

accurately. There were disputes between sales people and

29

the factory on what items and how many of each item

should the customer be liable for. Sales people, who are

supposed to expedite customer concur and payment, are not

very aggressively following up with these kinds of

activities. Perhaps, sales people are afraid of

impairing their relationship with customer by doing so.

Corrective Action:

A report from the MRP II system showing the excess

and no current use inventory and purchase orders is used

to generate Claim List on customer cancellation based on

the Bill of Material of the corresponding end product

cancelled. This kind of report is not included as part

of the MRP II package. A sample is shown in figure 7.

Management Reluctant to Write Off

Management has been reluctant to authorize write off

dead inventory. Questions on possible use-up in form of

concession, on higher salvage values, etc., have been the

major concerns. These are valid concerns as write off

usually affects the business1

s bottom line directly

unless provision had been properly prepared for in the

budget. However, keeping the dead inventory in store

will only do harms to the company.

30

Corrective action:

It is suggested to prepare a weekly summary of write

off documents generated by the division but is not yet

signed off by management. Besides, on every write off

submission, a justification should also be attached.

Should the items being written off is caused by customer

cancellation, customer1

s agreement to settle the claim

will definitely speed up the approval cycle.

All these actions help take the excess and no

current use inventory out from the stock room (either

main store or off-site warehouse) to free up more space

for turning around of active inventory.

Long Lead-Time of Components

In the section on forecast fluctuation above, the

problem with component lead-time has already been

mentioned. In spite of the general pressure on

decreasing lead—time, the division is actually

experiencing vendors asking for longer lead—time. This

is typically on capacitors.

Corrective Action:

The Corporate Procurement of head office has been

assigned to negotiate with vendors for better lead-time

or to source vendors locally to shorten the lead-time.

This will not be a short term exercise.

31

Active Inventory Level Higher Than

Management Expectation

"What is a justified expectation of inventory

level?" is always difficult to answer. In an attempt to

assess what should be the target, the ABC Inventory

Analysis is used. The MRP 工工 package included an ABC

ANALYSIS REPORT on projected usage. A sample is included

in figure 8. Using ABC Classification1 0

, those items

accounting for the top 80 percent of total projected

usage value are classified as "A" class items. The next

10 percent as "B" class items while the remaining 10

percent will be classified as "C" class items. Items

without usage in the projected horizon will have blank

class.

Management expected that all、、A" class items will be

procured for a 5-day1

s requirement (under the Lot-For-Lot

rule used in setting up the current MRP II system)• This

requires vendor delivery every week. Similar requirement

is also applicable for、、B" and、、C" class items for 20-day

and 40-day respectively. Assuming that the average

inventory level will be half of the total requirement in

the procurement bucket (i.e., 2.5 days of requirement for

class、、A" items) , the inventory turns can be estimated as

follows:

10 "Inventory Control Applications”, Production and Operations Management, p. 502

32

、、A" class items constitute 80 percent of total

projected usage value. Average inventory will be 2.5

days because of the 5-day Purchase Order bucket. 、、B"

class items, which constitute 10 percent of total

projected usage value, have 10-day of average inventory.

Similarly, 、、C" class items, which constitute 10 percent

of total projected usage value, have 20-day of average

inventory.

Thus, inventory allowed for procurement bucket

= 2 . 5 * 0.8 + 10 * 0.1 + 20 * 0.1

= 5 days of average daily material cost

WIP (Works in Progress) held up in shop-floor is 10-

day (the average lead-time of manufacturing for the

division) while FG (Finished Goods) held up in store

before shipment is 5-day maximum.

Since WIP and FG are valuated at higher value to

account for the labor costs and overhead absorption as

the product is assembled, the factors of 1.1 for WIP and

1.2 for Finished Goods are used. Then, the following

will be the estimated days of inventory held up on

average:

33

Expected inventory level

= 5 + 10 * 1.1 + 5 *1.2

= 2 2 days of average daily material cost

This 22-day of inventory is roughly equal to twelve

inventory turns (250 days in a year divided by 22 days).

Of course, this estimation is based on active inventory

only. Management therefore believes that a requirement

of nine turns be reasonable on net inventory. Current

inventory level is at around six to seven turns and is

higher than management expectation. As a result,

divisional management has to submit weekly status and

projection of inventory level to head office.

Note that the target of nine turns on inventory is

equivalent to about 27.8 days of average daily material

costs. Compared with the theoretical value of 22, the

division has 5.8 days or 26 percent for leverage.

The following factors are identified to cause the

high level of active inventory:

Incorrect Purchase Order Time Bucket

As mentioned above, management of the company

expected a 5-day bucket for、、A" class items. For、、B" and

、、C" class items, the expected time buckets are 20-day and

40-day respectively. However, a snap-shot of the current

34

settings in the item master file reveals results shown in

Table 1 below:

TABLE 1

A SNAP-SHOT OF TIME BUCKET SETTING

Class A B C Null

01 day 5 0 1 0

05 days 324 97 160 13

10 days 69 156 251 0

15 days 4 0 32 6

20 days 5 4 26 0

40 days 59 160 12525 1

50 days 0 0 5 0

Note: 、、Null〃 Class includes those items

that have zero projected usage in the

ABC Classification (i.e., not

required in the horizon of

calculation).

It can be seen from the above table that a lot of

components are set with the incorrect time bucket value.

35

Corrective Action:

MIS was instructed to prepare a computer program to

update this time bucket setting according to management's

expectation. The program should not down-grade the

control if an item migrates from class 、、A" into class

、、B". Manual intervention is needed for the down-grade of

control. This program was implemented starting end of

February, 1994.

Inefficient Re-scheduling Activities

Buyers in the division have been accused of unable

to react promptly per rescheduling instructions from the

MRP II system. If POs can be cancelled or re-scheduled

timely enough, the inventory problem, that can be on an

active part or on an inactive part, should be avoidable.

The following are quoted as difficulties encountered with

this approach:

System not designed to de-expedite1 1

Similar to many other MRP II packages, the system

that the company is using can suggest rescheduling of

existing orders to meet changing requirements. However,

the system will only report its suggestion once on the

Planning Action Report which is standard among MRP II

11 "The Inventory Problem”,Solving Business Problems with MRP II. p. 70

36

packages. If nothing is acted on by the planner and

buyer, and there is no change in the total supply and

demand, the suggestion will not be printed again in later

reports. That item may not even appear in later report.

This is what is termed "Report on Exceptions only."

This phenomenon raised two concerns:

1. Manager cannot focus on critical activities when

there is no report to highlight the priority of all

these re—scheduling activities. Priority in this

sense will be connected with dollar impact of each

re-scheduling activity,

2. Buyers, if occupied by other management focus (e.g.,

shortages) , may be less initiative to act on re-

schedules . If management cannot prioritize, then it

will never be under control.

Vendors do not accept cancellation.

It is natural that vendors will not accept

cancellation so easily. The company itself does not

accept cancellation by its customer easily either. This

is really a difficult task for purchasing to achieve.

However, the company in some cases may not be in any

better situation with some of the big suppliers of

electrical component. The volume of business with them

is not big from the supplier's perspective • They can

37

shut the production lines of the company down simply by

putting deliveries on credit hold. The company had come

across a number of situations that it needs to accept

delivery of definitely slow or non—moving items to

prevent credit hold situation of other critical parts.

Other similar situations will be found on vendors

with whom the company needs an urgent delivery. This

also limits the company1

s leverage on the issue of

pushing order cancellation.

The company also has some small vendors which are

forced into financial problems when the company cancels

major business with them with short prior notice. This

causes some conflicts between business objectives and

moral standard. The company does not want to cause its

vendors to go bankruptcy. Humane considerations again

causes some slow or non-moving inventory coming into

dock.

Corrective Actions:

Again, PC report is developed to highlight

priorities to purchasing managers on the top 20 percent

of rescheduling activities. This usually covers the top

80 percent of value of such activities. This allows

purchasing managers to push and monitor buyers for

actions in a possible and effective way. A sample of

this report is included as figure 9.

38

Ineffective Time Fencing

Time fencing is generally quoted as a crucial

element in maintaining the stability of an MRP or MRP II

system in the short term. However, the lead-time dilemma

that the company is experiencing is destroying any time

fence that has developed. A frozen window of 8 weeks was

set up in the company to prohibit changes in MPS

requirement within the window. However, management

itself is starting to destroy the time fence because

customers are asking for shorter and shorter ^order to

delivery" lead-time that the company is unable to meet

with this frozen window.

No corrective action seems to be feasible in this

area except that the company should review its overall

business policy to see whether it is justified to plan

for buffer finished product as well, and to start some

degree of 、、!nake to forecast" activity.

Ineffective Control

Inventory control has been considered to be very

ineffective in the division. Vendors' early deliveries

are not c o n t r o l l e d or not even highlighted for management

attention. Re—scheduling activities are not followed up

closely and prioritized with management involveitient when

necessary. All these stem from the bulkiness of reports

39

from the MRP II system. Full review of all suggestions

on these reports is not feasible. As a result, a number

of PC reports are developed to highlight priorities using

the 20-80 rule similar to the ABC Classification.

Vendor Early Deliveries

Early deliveries from vendors were identified as one

area that no control was exercised in the past.

Shipments will be received as long as there is a

corresponding purchase order within the system. Whether

vendor is shipping the goods, say, two months ahead, is

not considered. This unnecessarily increased the

inventory of the division. If payment is also settled

routinely, the division also worsens its cash flow

situation.

Although there is a standard report from the MRP II

system on early receipts, it shows all details and is

intended for operational level staff. Management again

needs a concise summary.

Corrective Action:

A PC report is developed to summarize those early

receipts that are more than 5 days earlier than requested

date. A sample is shown in figure 10.

40

The same report requires buyer and purchasing

manager to assign disposition to the receipts.

Alternatives include:

a) Return to vendor.

b) Accept shipment but delay payment until original

scheduled delivery date.

c) Accept shipment without further action.

Critical cases had been identified via this early

receipt report. In one incident, arrangement was made to

ship the goods back to vendor partially as they are

shipped two months before requested date.

Ineffective Priority of Purchasing Activities

This has been touched on in the section of in-

efficient re—scheduling activities. The same PC report

is used to prioritize activities in purchasing and for management control. Purchasing manager regularly reviews

with buyers on the progress of the activities mentioned

in the reports in the order presented.

Ineffective Follow-Up of Discrepancies

Managers are facing difficulties in identifying

issues to follow up with the buyers. The PC reports now

prioritize the activities and allow follow-up task to be

41

taken easily in the order presented. However, the

managers are also reminded that, due to high volatility

of demand in the MRP II system, the priorities shown on

the reports will also change frequently. These must be

reviewed more regularly to ensure proper follow-up.

Unable to Project Inventory Within Tolerance

Before one can effectively control inventory, you

must be able to project it within a certain bandwidth.

However, there is no standard report from the MRP II

system that helps one to do so. The only two reports

related to this function are:

- P r o j e c t e d Inventory Value report.

一 Excess and Obsolete Inventory and Supply report.

However, the projected inventory value report is

based on status quo and does not incorporate any

improvements that can be achieved. Also, it does not

include the magnitude of actionable values that

management can assess their confidence of achieving.

Basically, divisional management needs more information

on top of this standard report to perform better

inventory projection and control.

It should be noted that the MRP II package that the

company is using is designed based on a push and pull

42

logic. The standard MRP system pushes buyers to place

the orders in order to avoid shortages. Facility to warn

users of excessive purchases and inventory is not handled

in the standard MRP section in any satisfactory level.

On the other hand, the Excess and Obsolete Supply and

Inventory report summarizes the impact beyond a certain

horizon (120 days or 6 months for the company) • This

highlights the actions required to avoid excess and

obsolete six months later. This is considered not enough

in the situation of volatile market that the company is

engaged in.

In an attempt to formalize a procedure to project

inventory level within tolerance, the following factors

are identified that may prevent accurate projection:

Alternative Parts

Many MRP II packages are programmed to drive for

demand of primary parts only. That means, if a product

has a component that can be sourced from more than one

vendor or there are multiple functional parts that can

serve the same purpose, only the one that is called as

the primary part in the Bill of Material will be driven

by the MRP system. The other part simply serves as a

reference in the BOM. This is closely related to the

part numbering system of the company.

43

Currently, if parts from multiple sources or vendors

are functionally identical, only one part number is

assigned. The different sources are distinguished by

different source code which is basically ignored by the

MRP system when balancing supply and demand. This

creates no difficulty if buyer wants to maintain multiple

sources. He or she simply places purchase orders to

different vendors for a share of the total demand. MRP

II system is still capable of balancing supply and demand

perfectly.

However, in cases where the parts are not identical

(examples are the semi-conductors which each manufacturer

is supplying functionally compatible but not identical

parts) but are functionally suitable for a certain

application/ the situation is a bit more difficult to be

solved. The following example helps to illustrate the

situation:

Case 1: Same part number:

Part 149-00000001 is a resistor which can be sourced

from three different vendors. Because resistors are

simple, the parameters are identical from the sources.

These sources are interchangeable in all applications.

Therefore, same part number is assigned to parts from

different vendors. MRP makes no distinction among the

sources in balancing supply and demand.

44

Case 2: Different part number:

Part 211-00000010 is a semi-conductor from Motorola.

Part 211-00000020 is another semi-conductor from Hitachi.

They served similar applications but since parameters are

different, they are not considered to be globally

interchangeable. However, in the application in product

、、FG0001 〜 i t happens that both parts can be used (because

the parameters that are different are not important in

this specific application). To code the use of two parts

in the same product as alternative, almost every MRP II

package requires you to code one as the primary and the

other as the secondary. System will only tell buyers to

buy the primary part only. The secondary part is for

reference only. That is why most MRP II packages are

said to be designed for single source application.

Actually, dynamic allocation among alternatives is

difficult to program logically. However, real-life

applications may not be fully supported by the proposal

of single source. The following considerations in the

company lead to inevitable use of alternatives or

multiple sourcing:

a) Small vendor volume:

For some parts, any single vendor will not be able

to support all your requirement. The company definitely

needs to source alternative parts and use both parts

concurrently.

45

b) Strategic parts:

For parts that are used on many products, if the

company sticks to single source and this single vendor

has fatal shut down (e.g. Explosion of Sumitomo plant in

Japan)• All your products will be affected. The company

definitely does not want to be locked into this kind of

situation (She experienced similar crisis in the past).

Sourcing functionally compatible parts from more than one

source helps to minimize the impact of problem with a

major supplier. You still have the other sources with

which the company is keeping close relationship in case

of emergency.

The above discussions should have clearly

illustrated the necessity for multiple sourcing.

Nevertheless, the MRP II system that the company is using

definitely has no solution to balance supply and demand

on alternative parts. Demand is always being driven on

primary parts. System keeps telling buyers to release

more POs on the primary part (since supply is less than

demand)• On the other hand, system also keeps telling

buyers to re-schedule POs placed on the alternative parts

(since no demand is seen by MRP) • This dilemma is the

main drawback of the system that we can identify. We are

not sure whether this is generally found in other

packages or in other companies. Yet, this caused a lot

of confusion on the system data and reports.

46

Corrective Actions:

After reviewing with the system people in MIS, the

possible solutions include:

a

) Code Bill of Material with fractional usage.

For example, code 0.5 pes for 211-00000010 and 0.5

pes for 211-00000020.

This is undesirable as every lot of finished product

will have half quantity from each source. Future

traceability will be more difficult. Also, the system's

internal checking for unreasonable fractional usage for

the "PCS" unit of measure has to be turned off. This

potentially switches off one of the important data

integrity checking mechanism in the system.

b) Regular swap between the sources:

The Bill of Material should be changed regularly

(say once every two weeks) to drive demand for half and

half on both sources. This is better than (a) but

involves work in the Engineering division which is not

under full control by the factory. They will be

reluctant to accept more workload to solve the situation

which is "A Material Problem".

c) volume share among models:

This alternative is to code one part as primary in

one product and code the other as primary in another

47

product• If these products are manufactured roughly at

the same rate, the company can then both achieve keeping

multiple vendors alive and working, and avoiding many

system issues. The concern here will be whether model

sharing can actually be identified and evaluated

regularly.

This alternative is considered not desirable by the

division as it requires a knowledgeable person to define

and maintain the share regularly.

d) Use of dummy supply and demand:

This approach involves creating a dummy supply and

demand to re-direct the demand on primary parts into

demands of alternative parts. In actual implementation,

a supply will be created on the primary part and a demand

created on the alternative part concurrently. This

balances the supply and demand of both items. However,

it also inflates the total demand and supply in the

system.

Among the four alternatives above, the division

chose the option (d) • Although this approach somewhat

tackles the business problem by enhancing the current

package, the enhancement itself is creating confusion to

other users who are not trained to understand the other

reports under the influence of this enhancement.

48

Goods In Transit

Goods in transit is one of the major items in the

inventory report of the division. In the past, it is

always estimated. The following factors prevent an

accurate goods in transit (GIT) figure from practical

reach:

a) Vendor may not send all invoices per cut-off;

b) Invoices sent may be on its way at cut-off;

c) Someone from purchasing has to distinguish valid

invoices from early shipped ones;

d) It is difficult to define cut—off for vendor

invoices.

In an attempt to estimate GIT, we use the full list

of outstanding Purchase Orders from the division. We

also ask the purchasing managers to estimate the in-

transit time for shipment from each vendor. Local

vendors are excluded from this estimation as no GIT will

be provided for local shipments. Based on these in—

transit times and the PO details, we estimated a US$1.5

million GIT at year end of 1993. However, managers in

the material department are not confident in the

estimation and continue to use the estimate from account

department•

49

Anyway, it can be seen that GIT figure in actual is

usually estimated and is difficult to get exact.

Consumption of Active Inventory and Reconciliation

of Supply and Demand

To cope with the difficulty on the possible

imbalance in supply and demand due to existence of

alternative parts, together with managers in the

division, we tried to establish a method to project

inventory by breaking down the demand and supply details

in the coming months first. Again, because of capacity

constraint and lead-time for enhancement on the

mainframe, the division chose to perform analysis on PC.

Current inventory is divided into:

a) Non-available inventory.

This is portion of the inventory that includes

rejected parts. This portion of the inventory is not

useable in any future period. Disposition to discard as

soon as possible is needed. This is assumed to stay

constant in the six months to come unless a schedule to

dispose has been worked out.

50 b

) Excess and Obsolete inventory.

This will be the amount included in the Excess and

Obsolete inventory report. This is constant in the next

six months.

c) Active inventory.

This portion of the inventory should be gradually

consumed in the coming months. Schedules of consumption

can actually be worked out from the Supply and Demand

analysis.

This divides the existing inventory into a fixed

base plus a gradually decreasing portion.

Besides current inventory, supply and demand must

also be considered. On the supply side, the following

categories are established:

a) Purchase Orders placed and needed:

This is the portion of the supply that is scheduled

as needed. No change is required on these.

jb) Purchase Orders to be cancelled or re-scheduled from

each month:

This portion summarizes the supply orders that

should be rescheduled out or cancelled. This is

calculated on the basis of each month.

51

cj Additional Purchase Orders to be released:

This summarizes the amount of material that is not

supported by the current PO schedules. Additional

material must be ordered to avoid shortages.

Note that under this way of categorization, POs to

pull-in will be shown under categories (b) and (c)

simultaneously. For example, if an order is placed for

July for $30,000 of material which is actually needed in

June. $30, 000 will be included in category (b) in July

and in category (c) in June.

Finally, on the demand side, the following summary

is required:

a) Demand backed up by corresponding shipment schedule:

This includes those demands that are valid for

finished product shipment.

b) Demand put into system for buffering purpose:

There are demands in the system for material

buffering. These demands will be re-scheduled on a

regular basis but will usually not consumed.

With all these details available, the material

management team can assess the amount of supply orders

that they feel confident to achieve rescheduling with

vendors. They can also assess the inventory impact of

52

every demand that is kept for buffering purpose. After

that, they can finally project the inventory levels in

the weeks to come.

Inaccurate Inventory Record

Inventory accuracy is one of the factors affecting

the effectiveness of an MRP or MRP II system. Most

systems require an accuracy of over 95 percent in

inventory records. In some cases, users (typically

material picker) of the system are unable to locate parts

that, according to system records, should be found on a

certain rack in the main store. Such unexpected shortage

leads to expedition of parts at top urgency. Otherwise,

master schedule conimitted will have to be re-scheduled.

From inventory control point of view on that part,

this may not affect the inventory level as any purchase

resulted will be used up very shortly after receiving the

parts. In case inventory of a certain part is overstated

in the computer records, identification of the problem

will cause downward adjustments on inventory figures

(usually small)• On the other hand, upward adjustments

will be resulted in case inventory is understated in the

records•

53

The major concern related to inventory control is

that such unexpected shortages allows no lead-time to

vendors and may not be satisfied even by paying premium.

As a result, schedule to ship out the product will have

to be delayed. This dramatically increases inventory

level at cut-off time (either as raw material inventory

if not assembled, or as Work-in-Progress if partly

assembled) as all the components of the product are not

consumed as expected.

The following factors are identified to affect

inventory accuracy in Company XYZ:

1. Space Limitation;

2. Staff Training;

3. Policy and Procedure;

4. Cycle Counting.

Space Limitation

The main store occupies around 8, 000 sq. ft. in the

factory in B a of

A n . Although there are separate areas to

hold newly received parts waiting for Incoming Quality

Inspection, finished products, parts rejected due to

quality reasons, etc., this main store is already fully

occupied. There have been cases that even the corridors

between racks were filled with pallets or cartons. This

54

jammed the main store and prevented effective picking

process from being carried out.

There is no plan to increase the store area as it is

believed there should be measures that can be taken to

avoid future occurrence of store being jammed.

Corrective Actions:

It is suggested that slow moving items should be

identified regularly and removed from the main store to

off-site warehouse. This leaves valuable space for

turning around active items, and thus, makes a more

productive use of the area in main store.

Items of relatively large physical size, like fan,

metal box, packaging materials, are controlled separately

by a special group in the factory. The deliveries of

these items are on a daily basis and are according to

latest production schedule in the factory. This is

somewhat similar to Just—In-Time deliveries* Deliveries

of such items are also directly from Incoming to

Production floor. This avoided keeping these items in

the main store at any moment.

The lead-time offset feature of the MRP II system is

also employed on items that are required only at the end

of the manufacturing process. Such items as output wire

55

assemblies, packaging materials and metal boxes are

structured to come at a later time compared with other

items in the Bill of Material.

Staff Training

Man-power turnover in the China plant is usually

high after the Chinese New Year Holiday. This is typical

for factories in China. When staff go back to their home

county, which may be as far as the Northern part of

China, they may get married with the money earned and

saved. Some are tired of the hard work in the factory

while some others are attracted by companies nearby or

even those in other Special Economic Zones (SEZ) like

Shanghai. Typical man-power turnover after the Chinese

New Year is from 15 percent to 30 percent.

It is also typical that more experienced workers are

prompt to drain to other companies or competitors.

Such high man-power turnover problem caused

difficulties in maintaining the qualified skills of the

work-force. MRP II systems are usually difficult to

understand even for staff in Hong Kong. Local Chinese

workers in the factory usually experience more

difficulties in getting skillful in working with the MRP

56 II system. Regular and quality training is therefore

important.

However, the MRP II system in the company was bought

from the States and has only English version of manuals.

Local Chinese workers, therefore, have difficulties in

reading the original training materials on the MRP II

system.

Corrective Actions:

Activities and exercises to get ISO 9002 certified

do help in this aspect. Training is a very important

part in these quality standards. ISO audits already

require that every worker using the MRP II system must

have completed qualified training. Refreshment courses

are also suggested.

As on the training material, the company is

arranging to translate the English training material into

simplified Chinese characters for the local worker in the

factory. Coupled with up-to-date ^policies and

procedures" document to be discussed in the next section,

training should be sufficiently effective to maintain

users' proficiency in using the system.

57 Policies and Procedures

To ensure correct data are entered the correct way

and in the correct sequence, most MRP II system require

that you have ^Policies and Procedures'' set up for every

activity related to the system. The company has a

version of such policies and procedures prepared when the

MRP II system was newly installed. Only minor updates

were done afterwards. This rendered the document out-

dated and required review and major update.

Corrective Actions:

It is suggested that the expert within each section

is to review the correctness of related sections of the

policies and procedures of the company. English version

has to be updated first and then a version in simplified

Chinese Characters compiled. This document, when

updated, can be used as another source of reference or

training material for both new comers and existing

workers for refreshment training purpose.

Cycle Counting

The MRP II system of the company has a very-

primitive feature related to cycle counting. The item

master contains two fields on、、the next count date" and

、、the interval between counts". There is a daily report

58

which lists the inventory status of all items whose next

count date is the current date. After the items are

listed for cycle counting activities, the next count date

is incremented by the interval between counts.

Such a feature has the following drawbacks:

a) Should users want to incorporate ABC Classification

into cycle counting activities, the item master must

be updated regularly. The company actually wants to

count 、、A" class items once every month, 、、B" class

items once every quarter, and、、C〃 class items once

every year. This requires regularly refreshing the

data in the item master.

b) Randomness is not incorporated in such feature. The

selection of items for cycle count is pre-

determined.

c) For new items, the fields will not be initialized

with any default value. Actually, when a new item

is created, it will not have any demand nor

inventory and will not have any ABC Classification.

All the above factors prevent an automatic way of

generating a list for cycle count from the system that

i n c o r p o r a t e s randomness, proper weighting b y A B C

59

Classification, completeness in covering all the items in

inventory.

Corrective Actions:

Instead of the system standard cycle count report,

the daily inventory report and the ABC Classification

Report are used for cycle counting purpose. Counts are

calculated first to define how many 、、A", 、、B", and 、、C"

class items are to be counted respectively on a daily

basis. Then, items are randomly selected among the 、、A"

class items until the corresponding count is satisfied.

This goes on for 、、:B〃 class and 、、C〃 class items. This

method is simple and does not require any complicated

data update. The only drawback is if an item's inventory

record is totally missing, it will never be counted.

However, it is believed that such possibility is very

small. It should be noted that the standard report from

the MRP II system does not have this drawback.

In fact, if cycle counting results show consistent

accuracy above 98 percent on a daily basis, the company

will consider performing inventory audit once every year

instead of twice every year.

It should be stressed that the corrective actions to

fix the root cause of every discrepancies found in cycle

counts are more important than the count itself.

60

CHAPTER V

SUMMARY OF OBSERVATIONS AND CONCLUSION

Among the corrective actions identified in the

previous discussions, only the following issues can be

resolved by enhancing or replacing the existing MRP II

system in the company:

a) Alternative Parts handling/

b) Goods in Transit estimation/

c) Consumption of Active Inventory and Reconciliation

of Supply and Demand;

d) Cycle Counting;

e) Customer Order Cancellation/

f) Vendor Early Deliveries.

In fact, not all of the existing MRP II packages on

the market can satisfy all these requirements. The

handling of alternative parts is a typical example that

many other packages cannot resolve. However, the company

still has a better option of allocation by model to cope

with this problem.

61

Some issues can be classified as business issues

that the company has to cope with whether she has a MRP

II system or not:

a) Forecast Fluctuation (Time Fencing);

b) Long Lead Time of Components (Material Buffering);

These required the management of the company to make

strategic decisions on how to handle these. Such

decisions can then be translated into the parameters in

the MRP II system or Policies and Procedures so that

people can follow.

The rest of the issues are related to effective

management of large volume activities. Most of the

corrective actions suggested employ the 20-80 rule which

is very similar to the ABC Classification. Management

attention should be focused on the top 20 percent of the

related items as these usually accounted for 80 percent

of the total problem.

As a summary, the MRP II system that XYZ Company is

using still has room for further improvement. However,

most of the problems related to inventory control are not

caused or limited by the system. Non-software-related

issues are, in fact, the major causal for the inventory

problems in Company XYZ. How engineering changes can be

implemented without affecting inventory? How effects of

62

forecast fluctuations can be minimized or prevented? How

to justify inventory write off to management? How to

buffer long lead time material to cope with short lead

time orders? All these are questions that the software

of MRP II system cannot answer.

In fact, the MRP II system is one of the tools that

we can use to implement answers to these questions. For

example, if buffering is decided and details can be

worked out, the quantity to buffer on each item can then

be maintained in the MRP II system. The system will

consider this as a demand and plan for it automatically.

However, MRP II system is not the complete answer to

your inventory problems. To enable an MRP II system to

provide the maximum benefits (including but not limited

to inventory reduction) , the company must also have a

comprehensive policies and procedures, a commitment on

sufficient resources (e.g. MIS staff and hardware

resources) , and a commitment on training programmes and

related expenses. A full time system administrator to

look after and control the overall system (including

software, hardware, and related logistics) is also

suggested. This list is by no means exhaustive.

Besides, from the issues discussed, the following

listed factors are also worth considering if one is going

63

to select a new, or replace your existing MRP or MRP II

software package:

a) Selection of platform and software:

As can be seen from the case itself, XYZ Company

uses a central mainframe to run its MRP II software. The

limited resource handicapped further development. Trend

on the market of computer system is towards distributed

data processing. If a package running on Local Area

Network can satisfy your needs already, then do not

consider the mainframe area. This will increase your

flexibility in future expansion also.

The inability of the MRP II system of XYZ Co. to

allow concurrent batch processing and on-line data entry

is another major bottle-neck. Try and see if the

software and hardware combination is capable of doing so

when you are selecting among different products. This

avoids batch processing eating into on-line window when

more and more enhancements are added to the system.

b) Computer Language Used:

The computer language that is used in creating the

MRP II system is another consideration. System developed

using Forth Generation Language or for open systems are

usually more accessible using other available utilities.

This somehow may save your future expenses and efforts in

performing specific enhancement or data manipulation by

n o n-expert staff. Such system also allows higher

64

flexibility to entertain ad hoc requests for one time

only analysis.

Of course, among the features offered by various MRP

and MRP II packages, you need to identify those features

you required definitely, those you would like to have,

and those that are irrelevant to your applications. This

will definitely help you in making a good choice.

Figure 1

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x

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> 1

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9 0 8 4 1 0 0 0 0 3 5 0 F C S E . F B 3 A S M 5 0 V S 4 . 8 . 5 s w 0 . 6 9 7 S 8 1 . 0 0 0 0 O . O I 1 . 0 1 8 0 . § 9 S P 7 2 4 7 S 4 0

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142 36800000030 BANDING CUPS PC 2 0.027200 0.0066 0.0000 0.0060 0.000001 0.000163 10

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FIGURE

8.

only

part

of

the

first

page

is

included

as

sample

because

the

report

is

originally

formated

to

be

printed

on

large

computer

paper.

IVTBS57B1

DATA

DATE

11/22/93

XYZ

COMPANY

LTD.

11/21/93

PAGE

1

DETAIL

SECTION

ABC

CLASSIFICATION

ANALYSIS

PAGE

1

CLASSIFICATION

A 80

PERCENT

OF

ANNUAL

USAGE

(HIGH)

ITM

TOTAL

USAGE

CUM

ITEM

NUMBER

ITEM

DESCRIPTION

UM

CLS

ABC

USAGE

UNIT

COST

USAGE

VALUE

PCT

CUM

VALUE

PCT

BY

08500001970

FAN

DC12V

AD0812MS-A70GL

PC

A A

1192240.000

12.368000

14745624.32

4.70

14745624

4.70

MN

06104347125

CAP-E

M47

M 200V

LK

PC

A A

1884197.000

4.495000

8469465.51

2.70

23215089

7.40

SA

22100000211

IC-SM

MC

CONT

MC68705R3FN

PC

A A

165799.000

30.920000

5126505.08

1.63

28341594

9.03

SC

22600001970

RECT-SK

3OA

45V

MBR3045

PC

A A

947834.000

4.483400

4249518.95

1.35

32591113

10.38

SE

08500002040

FAN

DC12V

AD0812HB-C70

PC

A A

181535.000

22.417000

4069470.09

1.30

36660583

11.68

MN

21100000219

IC

AS3842N

PC

A A

1503467.000

2.628200

3951411.96

1.26

40611995

12.94

SC

21702211730

MOSFET-N

3A

600V

MTP3N60

PC

A A

1130133.000

3.478500

3931167.64

1.25

44543163

14.19

SC

04202139203

PCB-M

SA145-3430

PC

A A

813189.000

4.100000

3334074.90

1.06

47877238

15.25

MP

22611300120

RECT-UF

16A

100V

FEP16BT

PC

A A

1121027.000

2.319000

2599661.61

0.83

50476900

16.08

SE

36120000290

DC

SHLD

CAB

2X#26+#28GY

PC

A A

65593.000

34.888000

2288408.58

0.73

52765308

16.81

MO

85200018490

CHK-COM

UU16

44:44

PC

A A

818314.000

2.707600

2215666.98

0.71

54980975

17.51

TP

06109122226

CAP-E

2M2

M 16V

LXF

PC

A A

1705911.000

1.298640

2215364.26

0.71

57196339

18.22

SA

10900600790

CORE-FE

ETD29

SB-9C

PC

A A

2558607.000

0.850300

2175583.53

0.69

59371923

18.91

TR

85101708711

ASSY

WIRE-O/P

AA16990

PC

A A

210000.000

10.144800

2130408.00

0.68

61502331

19.59

MO

22600004030

RECT-BR

4A

600V

GBL06

PC

A A

1013382.000

2.087100

2115029.57

0.67

63617360

20.27

SE

85101709970

ASSY

O/P

WIRE

PC

A A

179950.000

11.700000

2105415.00

0.67

65722775

20.94

MO

06847200010

CAP-MPR

4N7

M 250V

Y PME

PC

A A

1981044.000

1.004900

1990751.11

0.63

67713527

21.57

SD

25800000370

THMTR

2R5

CL-30

PC

A A

831856.000

2.319000

1929074.06

0.61

69642601

22.18

SG

22700000210

SCR

TYN112

PC

A A

1039023.000

1.855200

1927595.46

0.61

71570196

22.80

SE

06107933132

CAP-E

M33

M 200V

GQ

PC

A A

411070.000

4.638000

1906542.66

0.61

73476739

23.41

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7 8

BIBLIOGRAPHY

Books

Everette E. Adam, Jr., Ronald J. Ebert Production and Operations Management, Concepts, Models, and Behavior. Fifth Ed. Prentice-Hall.

Luber, Alan D. Solving Business Problems with MRP II. Digital Press, 1991.

Porter Michael E . Competitive Strategy• Free Press, 1980.

Wight, Oliver W . MRP II : Unlocking -America's Productivity Potential• Oliver Wight Limited Publications, 1981.

Yin, Robert K. Case Study Research : Design and Methods. Sage Publications, 1984.

Periodicals

Chong, Philip S. "Performance Measurements in an MRP

System" Production & Inventory Review with APICS News, June 1989^ — —

F o m a n , Joseph R. "Integrating JIT with MRP II"

Production &Inventory Review with APICS News, March 1989. — —

Marshall, Dan. and Olson, Gordon. "A Top Down Look at MRP" Production & Inventory Review with APICS News, January 1987.

7 9

Paquee, Michael. "Inventory - How Do We Control It?"

Production & Inventory Review with APICS News, March 1989.

Parmelee, Robert A . and Rice, Jack F. "Just—In—Time MRP 工工 Cuts Electronics Inventory 60%" Production & Inventory Review with APICS News, April 1987.

Ridenoure, Scott W. "The ABC1

s of an Inventory Autopsy -Why Is It Here?" Production & Inventory Review with APICS News, June 1991.

Saunders, Carol A . and Meyers, Charles E. "MRP 工工 + Repetitive = JIT" Production & Inventory Review with APICS News, April 1987.

Woodgate, Sam. 、、MRP III: World Class Control" Computerized Manufacturing/ April 1990

_ ... 一

CUHK Libraries

_ _ _

•003^^756 I