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In an era in which inventory is increasingly viewed as evil, it seems incongruous to be addressing the issue of measuring inventory management. But there exist many environments where finished goods inventories are mandatory to meet customer expectations, and/or where lot sizing is used to replenish lower-level inventories resulting in normal operating inventories. In this article, a method for measuring the effectiveness of inventory management in such environments will be addressed. The model developed provides a "management-by-exception" approach to highlight problem items and identify the degree to which total inventory is operational versus nonfunctional.
PHILOSOPHICAL OVERVIEW
Where inventory is necessary to the operation of a business, and/or inventory results as a natural consequence of the planning system in place, companies will normally have overall inventory measurements by which the total inventory is measured against an established target; these may be expressed in the form of inventory turn ratios, weeks of supply, gross/net dollars, etc. Some companies have instituted more finite measures, profiling total inventories by ABC category to determine if an optimal balance exists in the inventory. But to truly measure the effectiveness of inventory management, more finite measurements are necessary. It is essential to understand the profile and dynamics of the existing inventory in terms of its utility to the business and aging of the inventory. Further, a mechanism is needed by which management can, by exception, quickly identify and isolate problem items at the part-number level, which may represent overall control or policy problems, in order to take corrective action. The development of such a profile provides a tool to be used in diagnosing possible functional problems in inventory management, as well as providing insight into the opportunities for optimization and reduction of inventories on a planned basis.
Value judgments will not be made with regard to various inventory planning approaches. The purpose is to provide measurement based on the policies and practices in place, without suggesting changes to such policies.
To develop a finite inventory measurement requires resolution of the total inventory into individual categories of utility. For purposes of this article, five categories will be used; some companies may choose to use more or less, according to their environment-specific needs. The five categories chosen are: operating, surplus, excess, obsolete, and...