Materials Management and Stock Control

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

Before commencing, it is worth spending a few minutes describing the environments to which these processes and systems are addressed. They range from simple stockist type environments to highly complex manufactured products, manufacturing processes and distribution networks. They also range from low volume, or one-off complex assemblies or mixtures, to very high volume mass produced products of varying complexity. It is not surprising therefore that a wide range of techniques have been developed to accommodate this range of applications. So let us start by simply listing the techniques available:

Push Systems	Pull Systems
All Time Buy	Replacement
Project Manufacturing	Top up point of use / Vendor Managed Inventory
Period Batch Control	Input / Output Control
Materials Requirements Planning (MRP1)	Two Bin
Manufacturing Resources Planning (MRP2)	Three Bin
Drum Buffer Rope (although the "rope" it could be argued is pulling, the "drum" is pushing)	Kanban
Advanced Planning & Scheduling (APS)	Reorder Point (ROP)

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

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

Dealing with the Pull systems first, they are a group of techniques that aim to ensure that when stock is used, it is replenished. It is important to note at this point that pull systems do not plan, they react! This is fine if your processes and logistics are infinitely flexible, uncomplicated and do not vary. If they are not, some degree of capacity or materials buffering will be necessary! For example there is a need to reduce buffer stock for declining demand and prime stock for sales initiatives. Also the new product introduction process and product change process must somehow feed in the new and feed out the old.

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

In it's simplest form there is "Replacement", which simply replaces used items. This technique is commonly used for maintenance spares, grocery shelf restocking, stationery and my partner's re-supply of our bathroom consumables, and was probably used by cave dwellers to replenish food stocks. This technique is now very common for many simple applications.

It is now very common for suppliers to manage customer's inventory by managing the stock levels themselves as a value added service to customers. Usually this replacement is based on simple top up to predetermined levels or by a Fax-Ban (see Kanban).

Also it is now very common for suppliers to manage customer's inventory, replacing used items by delivering directly to point of use, avoiding the stores management process as a value added service to customers.

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

For this technique there are 2 "bins" in the system (a bin can be any fixed quantity container including a plastic bag, or kitting tray):

3 bin systems operate in the same way as 2 bin systems except that a safety stock is stored separately in the third bin. Breaking into the safety stock triggers an expedite request and a review of bin sizes.

Attributed to Toyota in the 1980's, Kanban systems are an extension of 2 and 3 bin systems, where there is a semi-fixed number of containers in the system, which may be spread throughout the system and which are replenished when depleted. This topic is covered separately in the article Kanban.

"Reorder-point" systems, invented by operational researchers, sophisticated simple replenishment processes in the Second World War by taking into account:

Later smoothing algorithms (exponential smoothing) were introduced to take more account of recent demand.

Perhaps the original method of ordering, you buy everything you think you are likely to need. The obvious disadvantage being that it is difficult to forecast all time requirements. However for items which are likely to be difficult to acquire in the future and are of low value, this is still a widely used technique, particularly in the aerospace and electronics industries towards the end of original equipment production.

Very different in concept to MRP systems, and much better suited to small volume production, or engineer to order environments, this system schedules both parts and processes. Bills of material are created for each “chunk” of the project, and capacity planning includes engineering resource as well as manufacturing resource. Items are made and purchased ("multi-level pegged") for individual final products. Actual costs are accumulated during manufacture, with estimates to completion (time and cost) calculated.

Also during the second world war the first simple scheduling technique was introduced to deliver to the next stage in the process all the parts required for the next period's work in a UK aircraft manufacturing plant. This technique ("Period Batch Control" by the late Jack Burbidge) synchronised the arrival of components for sub-assembly and sub assemblies for final assembly by allowing a fixed period for the production of all the parts required for the next stage. Using a weekly period as an example:

The technique was a huge step forward in co-ordinating the supply of parts for "A", and "X" type products (see Postponement & Mass Customisation. It required a Bill of material (parts-list), to drive the schedule for the preceding stage. This concept was later adapted by Lucas Industries in 1991 to incorporate variable work packages of fixed duration (without Bill of Material restructuring) in their JIT / MRP project which integrated the two concepts in a single philosophy.

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

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

This was followed in the 1970's by Manufacturing Resources Planning (MRP2) ("Manufacturing Resource Planning: MRP2 Unlocking America's Productivity Potential": Oliver Wight) which combined MRP1 and capacity planning together with a control system. Whilst widely implemented, the faulty implementation of MRP systems became a scandal with little regard for data accuracy, ownership, and accompanying (new) management processes.

One of the major criticisms of MRP is the concept of a staged Bill of Material, which represented the stages of manufacture and which also enshrined that into a sequential process, which ignored the potential for parallel working. Work by Burbidge, showed that by flattening the Bill of Material, and parallel working not only simplified the administration of production but also reduced lead-times. However this created tension between the engineering view of the product and the logistics view of the product which "phantom bills of material" did not resolve and which also complicated the issue of bill of material ownership. This difficulty remains today in most commercially available ERP systems. (See Previous Best Practice of the Week 014: "Effective Bills of Material", and Previous Technique of the Week 038: "Bills of Materials Simplification")

However MRP is still the dominant technique used by most computer "ERP" software commercially available today. Whilst the concept of MRP2 is sound, the advent of "Just in Time" (JIT) and it's control system "Kanban" created an attractive and significantly simpler mechanism. This for a while in the early 1980's seemed to provide an alternative to the concept of MRP, to an extent where the leading gurus of the time predicted the demise of MRP, in favour of the more pragmatic approach. This was unfounded and in fact ignored the requirement to plan "A" and "X" type product (See "Postponement & Mass Customisation") production in advance from both a materials and capacity viewpoint, which JIT did not provide. Even "I" and "T" and "V" type product production require a forward view to provide a planning ability. This led the computer software suppliers to attempt to integrate the two approaches with so called "Electronic Kanbans" (a replenishment signalling mechanism sent electronically). Although rarely needed for internal company signalling, this mechanism has found later usage in the inter-company replenishment signalling involved with "agile" communications. Unfortunately this ignored the inherent weakness of computers in that it is notoriously difficult to change computer programs quickly and reliably in the event of requirements, suppliers, or system changes and the lack of visibility of the process. This led to the expansion of parameters held within the computer system that could be changed to reflect the changed situation. This has now led to a process of "configuration" where the software can be "configured" to reflect different circumstances. Presently and unfortunately the process of reconfiguring can often be difficult. Another trap that the software suppliers have fallen into in the race to provide increased functionality is to add complexity to the configuration process. This has resulted in many horror stories of incorrect configuration, and a demand for highly skilled "configurers" which for a time outstripped supply. These factors combined to constrain sales of the software, and has led to the sale of preconfigured or cut down versions of complex software. Unfortunately this misses the point which is that the manufacturing plant was simply trying to plan materials and capacity simply. (See "Implementing ERP computer systems.")

MRP and JIT have now resolved into split roles. In a mixed MRP/JIT environment MRP is primarily used for long term capacity planning and forward ordering of indicative material requirements with JIT pulling the next job when the previous one is finished or stocks depleted. In the absence of JIT, MRP schedules may be treated as firm. This poses the question in what circumstances is an approach valid? (See: What control systems do I need?). In this case the choice is primarily determined by the environment.

In mixed mode operation MRP can provide firm schedules in parts of the supply chain not covered by JIT replenishment signals, and indicative schedules in parts of the supply chain where JIT replenishments are used as shown below. (See "Kanban".)

The terms were defined by Goldratt and Cox in their book “The Goal” in the early 1980's. The ‘Drum’ is the schedule for the bottleneck (drumbeat for the whole system). The ‘Buffer’ is surplus stock put in front of the bottleneck to make sure it never runs out. The "Rope" is the coupling mechanism for ensuring that inputs (release of raw materials) do not exceed the bottleneck capacity, avoiding build-ups of unnecessary WIP.

The mechanism later became confused with the software “OPT” and its successors “Advanced Scheduling Systems” (See APS). Here we have deliberately separated the two.

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

Advanced Planning & Scheduling (which are probably best generically described as, multiple constraint, finite capacity, network, planning systems (see APS systems))

This is a topic in its own right and we will not attempt to paraphrase it here. Suffice it to say that it is:

Originally this technique was adopted by customers who wanted to loose inventory from their balance sheet, whilst still having it available, giving rise to bonded warehouses where the stock was available but still belonged to the supplier until issued for use in the shop. However suppliers then recognised that this gave them more opportunity for increasing value added services by maintaining this stock for the customer. It also locked in the customer to a long term arrangement. It is now widely recognised that the benefit is largely in the supplier's hands rather than with the customer. Also care must be taken to ensure that the financial transfer of ownership from supplier to customer is auditable, and that liability of risk of obsolescence in the event of change is agreed.

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

In a lean organisation and to the inventory planner, the arguments are irrelevant, the stock is still there and it should be minimised to improve the whole supply chain.

I wrote 7 years ago, in the first version of this article: "A logical extension of this concept is that the major retail outlets become property owners rather than retailers with their aisles owned by the supplier!" I think we are much closer to that concept today, except for the sophisticated off-balance sheet accounting of buildings used by venture capitalists.

Again, 7 years ago, I wrote that off-site, (out-sourced) warehousing was an increasing trend. At that time it applied to Distribution Centres (DC's) to consolidate supplies for just in time customers for onwards delivery to point of use destinations, primarily in the major automotive assemblers. This alleviates the logistics congestion which can arise in feeding hundreds of different items per day to an assembly line. However, now, out-sourcing is applied to many pre-assembly stores, most distribution networks and is also being applied to raw materials.

In the last ten years we have seen the out-sourcing of kitting from assembly operations. There are a few important considerations here, but in principle this is a perfectly valid method of managing inventory. Often combined with 2 bin systems (where the kit is a bin), one kit can be prepared, whilst the previous one is being delivered. Kitting suppliers are either suppliers with dominant kit content, specialist kit consolidators, or increasingly part of a wholly outsourced stores operation.

Unlike the USA, delivery of goods in the UK was principally the responsibility of the supplier. The increasing use of third party carriers has given rise to significant economy of scale by having a full load on the return journey. "Ex-works costing" has facilitated a carrier to create a milk round, delivering and collecting goods on a daily or weekly cycle, ensuring full loads at all times. Also an in-house customer can often arrange to collect raw materials in the vicinity of their important customers, or other suppliers, to gain economy of scale.

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

Stock recording and stock movement recording has been greatly simplified and improved by the automation of the data entry by bar coding. If used as a common identifier between sales outlet and first tier manufacturer this becomes a significant element of "Agile" manufacturing. Radio Frequency Identification (RFID) has now made an entrance into this arena. RFID is capable of identifying an item at radio frequency distances, as opposed to bar code scanning. However this may be distracting us from the simplification of stock control which can be achieved by visible control systems, and Kanban replenishment systems.

The use of computers to communicate demands between organisations has grown significantly from the introduction of faxes which were used to send schedules then Kanbans to the use of electronic buying via the Internet and electronic payment settlement towards e-commerce. It is now common to communicate the output of a delinquent MRP system to a supplier, with much greater speed via electronic means!

The computer technique of deducting components parts from stock based on the arrival of a sub-assembly at some key measurement ("deduct") point has been developed in response to the need to automate the stock issuing process in conjunction with the introduction of JIT techniques. This has also been used as a basis for paying suppliers. By doing this, a situation has been created where the Bill of Material accuracy for these inexpensive parts must be totally accurate. Often these parts' usage is probabilistic anyway rather than deterministic (with shims for example), with average usage entered into the Bills of Material making the usage approximate. This seems to miss the point that these parts require minimum administration and supplier top up or two bin systems are usually more appropriate than issuing MRP schedules for these parts which are notoriously unreliable.

These systems grew out of MRP and / or Inventory Management and / or Accounting systems in the early 1990's depending on the pedigree of the software supplier into a "total" business control system integrating the functions and data from various areas. For example: a goods receipt would automatically update outstanding purchase orders, reduce requirements generated by MRP, update the stock balance, create a creditor in the Purchase ledger and eventually update the general ledger with the new asset. Many ERP systems incorporate MRP2 planning processes, fewer incorporate Project Manufacturing. Many also incorporate links to APS planning systems as an optional extra avoiding the MRP module of the software.

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

The following further best practice articles were also mentioned in this paper:

The following public training courses and in-house workshops provide solutions to Materials Management & Stock Control:

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