Thursday, July 24, 2008

Negative inventory

Undisciplined inbound processing; non-compliant labels or inadequate/non-standardized label formats; inadequate returns processing; and lack of three-way matching leads to discrepancies in Inventory.
In order to avoid discrepancies invest in sophisticated, integrated, software that irrefutably reconciles inventory records with physical inventory through label compliance protocols, and inviolable, rules-based matching of the packing slip/invoice/warehouse receipt/and authorized purchase order. These rigorous business processes will manage inventory transfer internally and as inventory moves among suppliers and trading partners. Investments in sophisticated software have an irrefutable positive return; case study after case study proves it.

In addition to understanding the sources of negative inventory balances, it's also very important to understand their effects on planning and execution systems. In most planning systems, a negative item-level balance is treated the same as positive demand. Basically your system will tell you to make or buy more to offset the negative balance. Obviously this is a problem when a large negative balance occurs but can also create serious problems with small negative balances under certain conditions. For example, if you have an item that is set up as an "order as needed" item, meaning that you do not want to order or stock any unless you have actual demand (orders), an errant adjustment that drives the balance to -5 will result in a recommended buy of 5 pieces. Since "order as needed" is often associated with very slow moving or obsolete items, you may have just added to an obsolescence problem. In a manufacturing environment using MRP, a negative balance of a single end-item, will result in demand cascading throughout the bill of material structure, potentially resulting in unnecessary orders for hundreds of lower-level items. This is what occurs if your system handles negative balances as would normally be expected. Some programs, either purposely or due to poor programming practices, may not execute properly if they encounter a negative balance. They may ignore the records with negative balances or simply "blow up" because they weren't designed to incorporate negative balances into their calculations. Though there are valid reasons for not wanting a program to execute if it encounters a negative balance, there are also potential problems with this logic. You may actually need to take action, but because the calculations were suspended due to a negative balance, you did not get the information needed to initiate an action. Due to the complexities of demand-planning systems, especially MRP/DRP systems, there is no "best" way to handle negative balances within the programming. Execution systems such as warehouse management systems and manufacturing execution systems can also have problems with negative balances. While you may not be willing to modify your systems to handle negative balances in a specific way, you should at least understand what your systems are doing when they encounter negative balances. Ultimately, avoidance of negative balances in the first place is the best solution.

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