DEFINATION AND MEANING
Inventory is a list of goods and materials, or those goods and materials themselves, held available in stock by a business. Inventory are held in order to manage and hide from the customer the fact that manufacture/supply delay is longer than delivery delay, and also to ease the effect of imperfections in the manufacturing process that lower production efficiencies if production capacity stands idle for lack of materials.
The reasons for keeping stock
All these stock reasons can apply to any owner or product stage.
Buffer stock is held in individual workstations against the possibility that the upstream workstation may be a little delayed in providing the next item for processing. Whilst some processes carry very large buffer stocks, Toyota moved to one (or a few items) and has now moved to eliminate this stock type.
Safety stock is held against process or machine failure in the hope/belief that the failure can be repaired before the stock runs out. This type of stock can be eliminated by programmes like Total Productive Maintenance
Overproduction is held because the forecast and the actual sales did not match. Making to order and JIT eliminates this stock type.
Lot delay stock is held because a part of the process is designed to work on a batch basis whilst only processing items individually. Therefore each item of the lot must wait for the whole lot to be processed before moving to the next workstation. This can be eliminated by single piece working or a lot size of one.
Demand fluctuation stock is held where production capacity is unable to flex with demand. Therefore a stock is built in times of lower utilisation to be supplied to customers when demand exceeds production capacity. This can be eliminated by increasing the flexibility and capacity of a production line or reduced by moving to item level load balancing.
Line balance stock is held because different sub-processes in a line work at different rates. Therefore stock will accumulate after a fast sub-process or before a large lot size sub-process. Line balancing will eliminate this stock type.
Changeover stock is held after a sub-process that has a long setup or change-over time. This stock is then used while that change-over is happening. This stock can be eliminated by tools like SMED.
Where these stocks contain the same or similar items it is often the work practice to hold all these stocks mixed together before or after the sub-process to which they relate. This ‘reduces’ costs. Because they are mixed-up together there is no visual reminder to operators of the adjacent sub-processes or line management of the stock which is due to a particular cause and should be a particular individual’s responsibility with inevitable consequences. Some plants have centralized stock holding across sub-processes which makes the situation even more acute.
The basis of Inventory accounting
Inventory needs to be accounted where it is held across accounting period boundaries since generally expenses should be …