for Independent Demand
The senior executives of Alpha Numerics were having their annual retreat to review accomplishments of the past year and to discuss major policy issues for the coming year.· As was the norm, the retreat was held at a small hotel in the mountains of eastern Pennsylvania, well removed from the company's actual manufacturing facility. The first day's meeting had gone well, but in the early evening, after dinner, the subject of inventory control and the number of shortages that had occurred over the past year came up for discussion. The vice president of engineering suggested that, as <;I solution to the shortage 'problem, purchasing should order all of the projected material . requirements at the beginning of . he year. The vice president of manufacturing was taken back by this suggest ton that, to the amazement of the others in the room, he leaped .onto the conference table and shouted out, "Inventory is evil!" He turned to the president and said, "If we were to follow this suggestion, Mr. President, do you have an extra 25,000 square feet of warehouse space where we can store the material?" The president shook his head no. "And do you, Mr. Vice President of Race, have an extra $5 million to buy all this material?" The VP of finance similarly shook his head. "And are you, Mr. Vice President of Marketing, point to provide me with a pertec forecast of the products we expect to sell for the next year?" The VP of marketing said, "No, of course not. That would be impossible." And turning to the VP of engineering who had made he initially posal, he said, "And you'll keep the same designs in the coming year without making any changes, won't you?" The VP of engineering said, "That would be very unrealistic." All of the individuals in the room then looked up to the VP of manufacturing still standing on the conference table and said, "We see what you mean. Inventory is indeed evil.
Management's view towards inventory has changed significantly over the past several years. Previously, managers
perceived inventory as an asset because it appears as an asset in the firm's financial reports. However, as seen inthe opening vignette, this is no longer the case. swe have seen, product lifecycles are becoming ever shorter, increasing the likelihood of product obsolescence, as seen in the accompanying OM in Practice box. As we also have seen, excessive inventories on the manufacturing floor tend to conceal a wide variety of problems. Moreover, inventory storage costs are typically v ry expensive, averaging 30 to 35 percent annually of the.value of the inventory-and in some cases they are much higher.For all of these reasons, managers now look at inventory as a liability to the firm, something to be reduced or eliminated wherever possible, as illustrated in the Advertisement. Consequently, no topic in operations is more often discussed by managers or perceived to be more important by them than inventory. There is a continuous effort among managers to reduce inventories in all categories, beginning with raw materials and purchased parts, through to working- process, and ultimately in finished good.