Inventory costing and material requirements planning in manufacturing

Operations Management

Discuss the nature of costs that affect inventory size.

The balancing of inventory positions can often mean the difference in any manufacturing company attaining profitability from quarter-to-quarter and throughout any given year. Besides the cost of acquiring inventory, or the capital costs, there the measures of inventory velocity or how quickly inventory turns in a given distribution center that must be taken into account. What makes costing of inventories on an ongoing profitable basis difficult is the need to take into account the costs of being out-of-stock on any given component or subassembly, or finished good. Balancing the costs of carrying inventory, or what is often referred to as sunk costs, relative to the cost of lost business for not having a specific component or subassembly in stock when a customer requests it is the essence of inventory management. Increasingly manufacturers are turning to constraint-based and linear programming techniques to triangulate the costs associated with inventory positions. The paradox for manufacturers is that additional inventory is required so they can be responsive to demand, yet on the other hand, carrying excessive inventory directly reduces profitability. Intermediating these costs is the setup and ordering costs that also need to be taken into account whenever a new product is introduced or a new supplier is brought into the production cycle. The costs of placing an order with every supplier, including the time trade-offs of their fulfilling orders is also critical to take into account. Inventory management costs including asset tracking and logistics also need to be taken into account when considering the nature of inventory costs is evaluated. Each of these costs do not have a linear relationship however; they are not necessarily tied to inventory volume. Each of these costs in fact has their own set of factors influencing them, the majority of which are from the supply chain partners and from the costs of logistics partners.

How does MRP II differ from MRP?

Material Requirements Planning (MRP) is the precursor to Manufacturing Resource Planning (MRPII) and both form the foundation for Enterprise Resource Planning (ERP) enterprise-wide systems. MRP's center of focus as a manufacturing system is on minimizing inventory levels and carrying costs. In addition, MPR systems are used for monitoring and improving manufacturing processes from sourcing and procurement through manufacturing planning and fulfillment. MRP systems often rely on the Bill of Materials (BOM) for order routing through production. This reliance on the BOM results in a limited amount of accurate data as to how production is actually performing relative to the other departments in a company. MRP II systems were designed to overcome the lack of visibility into longer-term production, pricing, sourcing and procurement, sales and marketing plans that had made manufacturing scheduling imprecise with MRP alone.