Managing Software: Information has value, but how much are you willing to pay for it?
INFORMATION HAS VALUE. IT IS AN ASSET AND, LIKE ANY ASSET, IT is never free. The value of information is not fixed. It is a function of your business requirements. For example, yesterday’s news has much less value than today’s.
The value of inventory information about a high cost ingredient has more value than a low cost one. When the information is gathered also impacts its value. For example, if an item’s inventory has been inaccurate recently, the information on that item’s inventory is more valuable. For a new formula, usage and yield information will help get the standards adjusted to reality faster. If a process’ yield is very predictable, yield information is less valuable than a process whose yield varies greatly.
As the value of information increases, so does the need for accuracy. Variances are used to measure accuracy. A 0.5 percent variance of a very high cost ingredient may not be acceptable while a 6 percent variance on a low cost ingredient may be.
Different methods of gathering information can have different costs and often yield different degrees of accuracy (see graph). As a general rule, a plant should be using the lowest cost method that yields acceptable accuracy.
The lowest cost method, backflushing, uses the batches produced and the standard quantities per batch. For products with predictable consumption and accurate formulae, backflushing works for charging consumption to the batch and relieving inventory. Extraordinary events (e.g. a spill) need to be taken into account for maximum accuracy. Cycle counts must also be used to ensure inventory accuracy.
Aggregate reporting yields better accuracy than backflushing but has a higher cost. Once a period (e.g. shift, day, week) the inventory quantity is measured (e.g. counting the bags or weighing the silo). From this measurement, and using the receipts for the same period, quantity used is calculated. That quantity is then prorated across all the batches that used the material based upon the standard usage per batch and the number of batches. The cost is reduced to the periodic determination of the inventory and the calculation of the prorated quantities consumed. Accuracy is a function of the inventory measurement and the standard formulae.
Direct reporting is the standard method used by most Enterprise Resource Planning systems. The system produces batch sheets that are filled out manually on the floor and then later entered into the system, or batch information is entered directly into the system on the floor. Accuracy is good because a usage is recorded at the time of consumption. However, direct reporting is labor intensive with production workers doing administrative work.
Automation is the most accurate—and most costly—method. A Manufacturing Execution System, batching system or other automation method records actual usage at the point of consumption. While the other methods require daily input, the automated approach requires capital but little labor.
Most systems offer backflushing as a standard. All systems provide direct reporting. Few offer aggregate reporting as a standard function. If yours does not provide it, consumption must be calculated as adjustments made to both inventory balances and batches. Although many ERP systems claim to connect to automatic reporting methods, very few do so “out of the box” and most require some degree of integration and custom logic to provide the link.