How managers can 'know all' and control inventory

-- At a General Electric factory in Louisville, Ky., there's a forklift truck driving around the plant with a computer terminal mounted on it. By feeding a constant flow of information to the company's central computer, the terminal has helped cut in half the factory's "work in process" inventory.

-- Three years ago, says Archie Carris, materials manager at the Harris Corporation's composition division, the plant had 250 orders in its "staging area" waiting for the factory to start work on them. Today, at this company's Melbourne, Fla., plant, which is making electronic equipment for the newspaper industry, the total is zero.

-- And a few years ago, notes Robert Garvey, materials manager at Wright Line Inc., in worcester, Mass., the company needed 15 to 20 weeks of inventory backlog. This year, the manufacturer of storage systems for data processing and multimedia equipment keeps just over four weeks of inventory, saving itself more than $1 million. It has also increased final-assembly productivity by 40 percent.

These three are on a slowly growing list of companies taking a long and sometimes painful march into a purchasing, production, and distribution system known as MRP. Those who have made the march recite long lists of ways they have saved money and boosted production because of those intitial; of vastly reduced -- and almost never depleted -- inventories; and up-to-the-minute knowledge of the materials they have on hand and what they still need.

originally, MRP stood for materials requirements planning. It came into vogue in the early 1970s as manufacturers learned to use computers to collect and monitor data on plant operations, particularly inventory of raw materials, semifinished goods, and completed products ready for shipment. Thus, to many people, MRP is still considered an inventory-control system, though it is really much more.

Today, it stands for manufacturing resources planning, taking in all facets of the production picture, including just about any internal and external factor that can affect a manufacturing operation.

For companies that have embraced MRP, it's available at a particularly good time: High interest rates have made it costly to keep even small amounts of unnecessary inventory sitting around.

Actually, the inventory sitting around is far from small. Michael Rowan, editor of Modern Materials Handling magazine, estimates that the value of partly manufactured or finished goods in US factories and warehouses at any one time adds up to about $344 billion, while those factories are shipping about $150 billion of finished goods.

He also estimates that a product or one of its parts is being "worked on" in the factory only 5 percent of the time. "The other 95 percent of the time, it's just sitting there, waiting in storage or waiting for the next move in the operation," Mr. Rowan said.

One recent study of more than 300 US enterprises using MRP showed they were able to increase a figure called "inventory turns" from 3.5 to 4.7. This means that if it takes $10 million of inventory to support $35 million in sales, the 34 percent improvement those 3.5 and 4.7 figures represent makes it possible to support $47 million in sales with the same $10 million inventory.

MRP is also winning favor as recent trends in the economy -- including a short recession last year and uncertainty over Reagonomics this year -- give companies plenty of reason to find ways to adapt to changes more quickly.

"Without MRP, you thinkm you can do this and you guessm you can that," Mr. Garvey says. "Without it, you never know exactly what you can do. With it, you always know."

Simply put, the system takes a computer and feeds it a constant, integrated flow of information about the company's operations. This information, which is continually monitored and updated, includes purchasing and levels of inventory; labor and materials requirements; the location and quantity of materials on the shop floor; the production capacity of the plant; delivery schedules from suppliers; sales forecasts and actual sales; measurements of labor efficiency; and the overall financial and business plan of the corporation.

The information keeps managers constantly aware of what the factory is doing and can do. In effect, they can ask the computer questions like: "We just got a special order for 100,000 new parts, to be delivered in 30 days. Do we have the equipment, manpower, and inventory to do this; if not, what do we need?"

Another question might be: "Because of the recession, sales of a certain product have fallen 7 percent. How can we reorganize our inventory and production to conpensate for this without laying off workers?"

Or: "A competitor just introduced a new product. Do we have the capacity to make one of our own? How long will it take?" One company did this and came out with its improved version of a competitor's product in three weeks.

Proponents stress that the key to a successful MRP system is accuracy. Skeptics of MRP agree, but they argue that it demands levels of accuracy which are beyond the ability of many workers and managers.

To be useful, the information that flows into the MRP computer has to be absolutely accurate and updated continually. MRP does not put up with people who file reports late, who are accurate 95 percent of the time, or who "only occasionally" forget to file their reports at all.

"Of course it demands accuracy," says Oliver Wight, an MRP consultant. "But so does a bank. What would happen if banks allowed their people to turn in inaccurate reports?'

While accuracy is absolutely necessary, it is not impossible, says robert M. Monczke, professor of management at Michigan State University. "The best firms in US manufacturing can attain 98 to 99 percent accuracy at all times," Dr. Monczka says. He says what is needed is strong support from top management, and other experts agree.

"The hard part is keeping management interested in MRP once it's in place," said David Sauth, director of data processing at JLG Industries, a McConnellsburg, Pa., manufacturer of aerial lifts. It is management consistency that "puts the teeth" in MRP and makes the workers know that accurate, on-time reports are required. A lack of commitment by top management is blamed for most failures with this system.

While Mr. Wight asserts that MRP can and should be used in all manufacturing processes, others believes it works best in particular types of operations. "MRP is especially good for a company with lot of parts in subassembly stages ready for final assembly," says Roy Shapiro, an associate professor of management at the Harvard Business School. "A company with a single product made from a few raw materials has no need for MRP."

While the system theoretically makes the whole manufacturing process easier and can save a company millions of dollars, "getting on" the system is not an overnight affair. At Wright Line, for instance, which makes metal office cabinetry and filing aids, the process of putting production, inventory, and distribution data into the computers and setting up a system where the factory could use MRP for all business decisions took about a year and a half, Mr. Garvey said.

Once on it, however, some benefits are quick and easy to measure. For instance, at the WEMCO division of Envirotech Corporation, a Sacramento, Calif., manufacturer of custom-order pumps, the factory was "doing well" if it achieved a 30 percent on-time delivery rate, says Dennis Axtell, manager of production control. After five years of MRP, on-time deliveries are made at least 80 percent of the time, he said.

This success did not happen just because MRP uses a computer, Mr. Axtell notes. "MRP takes a lot of people and dedication," he says. "It's definitely a people system."