By Mike Hart
Knowing what to make or purchase and when to do it is a big challenge. Do it right and you can deliver on time using less inventory and WIP. Do it wrong and you are plagued with excess inventory, chronic shortages, high expediting costs, and late deliveries.
If you do not have an MRP system, most likely you are using some type of shortage list methodology to figure out what to make or buy. Most accounting systems offer an item reorder level that enables you to use a shortage list to compare the reorder level with stock on hand, demand from open orders, and supply from open jobs or POs. In theory, any item that falls below its reorder level is a candidate for a new job or PO.
Knowing what to make or purchase and when to do it is a big challenge. Do it right and you can deliver on time using less inventory and WIP. Do it wrong and you are plagued with excess inventory, chronic shortages, high expediting costs, and late deliveries.
If you do not have an MRP system, most likely you are using some type of shortage list methodology to figure out what to make or buy. Most accounting systems offer an item reorder level that enables you to use a shortage list to compare the reorder level with stock on hand, demand from open orders, and supply from open jobs or POs. In theory, any item that falls below its reorder level is a candidate for a new job or PO.
A variation on the shortage list is to filter the list to a bill of material. Let’s say you have an order for ‘X’ quantity of a particular product. You can explode the bill of material components by the order quantity and then run the shortage list against the component requirements. In theory, this tells you what you need to make or buy to fulfill the order.
Shortage lists fall short for two reasons – they are not time-phased and they do not reflect the interdependent nature of demand.
The shortage list assumes that all demand and supply is current. In reality, customer orders have varying required dates, especially in make to order environments, and incoming jobs and POs have varying due dates.
Because the shortage list does not take dates into consideration, it can give you false planning signals. You may think you are covered with supply for a particular item, but if that supply doesn’t get received until two weeks from now, and you need the item now, you have a shortage that may delay delivery or incur expediting costs to get a rush order from your supplier.
Conversely, you may think you have demand for an item, but if that demand is two weeks away and you order the item now, you are adding needless inventory that serves no purpose other than to take up space and tie up precious working capital.
Limiting the shortage list to a set of BOM components attempts to isolate material requirements to one job at a time, but this doesn’t take into account the shared nature of so many job inputs. You may have what appears to be enough stock on hand to make product A, but you can easily rob components needed by product B without being aware of it.
Because shortage lists generate so many false signals, the tendency is for planners to over-order with the idea that having extra stock on hand provides a safety buffer against shortages. This never works well because shortages are caused by mis-alignment of supply and demand dates, not overall lack of supply.
People go to great lengths to try and make shortage lists work better. Inevitably, the only way they work better is to add time-phasing and interdependent demand. And then you end up with what is essentially an MRP program.
MRP programs are not perfect, but they are far superior to shortage lists and include the manufacturing infrastructure – bills of material, work centers, routings, and jobs – that provide the necessary inputs for good production planning.
Mike Hart is the co-founder and President of DBA Software Inc., a leading provider of manufacturing software for small businesses.
Shortage lists fall short for two reasons – they are not time-phased and they do not reflect the interdependent nature of demand.
The shortage list assumes that all demand and supply is current. In reality, customer orders have varying required dates, especially in make to order environments, and incoming jobs and POs have varying due dates.
Because the shortage list does not take dates into consideration, it can give you false planning signals. You may think you are covered with supply for a particular item, but if that supply doesn’t get received until two weeks from now, and you need the item now, you have a shortage that may delay delivery or incur expediting costs to get a rush order from your supplier.
Conversely, you may think you have demand for an item, but if that demand is two weeks away and you order the item now, you are adding needless inventory that serves no purpose other than to take up space and tie up precious working capital.
Limiting the shortage list to a set of BOM components attempts to isolate material requirements to one job at a time, but this doesn’t take into account the shared nature of so many job inputs. You may have what appears to be enough stock on hand to make product A, but you can easily rob components needed by product B without being aware of it.
Because shortage lists generate so many false signals, the tendency is for planners to over-order with the idea that having extra stock on hand provides a safety buffer against shortages. This never works well because shortages are caused by mis-alignment of supply and demand dates, not overall lack of supply.
People go to great lengths to try and make shortage lists work better. Inevitably, the only way they work better is to add time-phasing and interdependent demand. And then you end up with what is essentially an MRP program.
MRP programs are not perfect, but they are far superior to shortage lists and include the manufacturing infrastructure – bills of material, work centers, routings, and jobs – that provide the necessary inputs for good production planning.
Mike Hart is the co-founder and President of DBA Software Inc., a leading provider of manufacturing software for small businesses.
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