American Journal of Business

Inventory Control Practices in Manufacturing Firms

Carol Lee Stamm Damodar Y. Golhar Wayland P. Smith
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Carol Lee Stamm Damodar Y. Golhar Wayland P. Smith, (1989),"Inventory Control Practices in Manufacturing Firms", American
Journal of Business, Vol. 4 Iss 1 pp. 53 - 56
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 Inventory Control Practices in
Manufacturing Firms
Carol Lee Stamm
Western Michigan University
• Damodar Y. Golhar
Western Michigan University
ABSTRACT
Inventory control practices in medium-sized midwest-
ern manufacturing firms (75 to 500 employees) were in-
vestigated. Items concerning inventory model used, short-
ages, number of suppliers and quality assurance were
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included in the survey. The total number of respondents
was 212 (a 54 percent response rate). Our findings iden-
tify MRP as a widely used model at present, and MRP
and JIT as the inventory models of choice for the future.
These findings dictate appropriate educational emphasis
on MRP and JIT inventory models for both students and
practitioners.
INTRODUCTION
In recent years low manufacturing productivity and
increased competition from abroad have resulted in a
renewed interest in inventory management in the United
States. As a result, better inventory models, such as Ma-
terials Requirements Planning (MRP), and the Manufac-
turing Resources Planning System (MRP II), have been
developed. At the same time, a Japanese philosophy, Just-
In-Time has been widely studied for its adaptability in the
United States. The Just-In-Time (JIT) philosophy places
major emphasis on inventory reduction. Before we exam-
ine current and future trends in inventory management, a
brief discussion of these models will be useful.
MRP and MRP II
Materials Requirements Planning (MRP), in its sim-
plest form, is a planning tool. For a given delivery sched-
ule, a master schedule is developed to forecast demand
for individual components that are needed to manufacture
the desired end product. This forecast in turn identifies
order size, order-release data and a production schedule.
However, it does not incorporate important manufactur-
ing related functions such as financing and purchasing.
MRP, therefore, has evolved into a manufacturing re-
sources planning system (MRP II). This system inte-
grates the business plan and all production related activi-
ties (marketing, manufacturing, purchasing, finance, en-
gineering, data processing and management) via a com-
• Wayland P. Smith
mon data base. Inventory management is a key function of
MRP II and is handled much the same as in MRP. (For
detailed discussion of MRP, see Aggarwal 1985; Healy
1985; Burgon, et.al., 1985 a, b; Plossl and Lankford 1984).
The Just-in-time (JIT) philosophy was developed and
is extensively used by Toyota Inc. It has three major
goals: (1) total elimination of waste, (2) total quality
control, and (3) worker involvement and participation in
decision making. In a JIT environment, excess inventory
is viewed as waste. In order to reduce inventory, a manu-
facturer uses a variety of methods such as decreasing set-
up times and, hence, reducing the lot sizes. Reduction in
inventory is also achieved by improving the quality of
parts. This is done by establishing long term relation-
ships with suppliers and worker involvement in quality
control. These steps eliminate unnecessary inspections,
storage space and transport of work-in-process inventory.
This study discusses the inventory control aspect of
JIT that has received a great deal of attention in the U.S.
However, as pointed out earlier, the JIT philosophy is
comprehensive. Although Kanban, Zero Inventory and
Quality Circles are often used synonymously with JIT,
they are simply components used to achieve the three
major goals. Schonberger (1986), Huang, Rees, and
Taylor III (1983), Ebrahimpour, and Fathi (1984) and
Manoochehri (1984) provide excellent discussion on
various aspects of JIT.
Because the literature abounds with discussions of
MRP and JIT systems, it seems reasonable to assume that
these models are widely used. However, only a few stud-
ies report actual usage of these models in industries.
O’Neal (1987) reported an empirical study on linkages
between suppliers and buyers in industries that have
adopted the JIT philosophy. Empirical surveys regarding
critical factors in the JIT purchasing concept and the po-
tential benefits of such a policy have also been reported
by Ansari and Modarress (1987) and Ansari (1986). In
addition, company specific implementations of MRP and
JIT are cited in the literature (Healy 1985; Schonberger
1983; Devaney 1984). However, no empirical studies
have been reported to identify current trends in the actual
use of MRP and JIT as compared to the traditional (e.g.,
fixed order and fixed quantity) inventory models.
 Identification of current practices and future trends in
inventory management has important educational and per-
sonnel training implications. Awareness of these trends
would help educators to determine appropriate inventory
models to be emphasized in classrooms. In addition, of-
fering workshops and training opportunities to inventory
managers on these models should benefit industries in the
long run. Keeping this perspective in mind, a survey of
medium-sized manufacturing companies was conducted to
identify current and future trends in inventory manage-
ment practices.
METHODOLOGY
A survey instrument was developed to identify both the
inventory methods used by manufacturing firms and the
models they want to use in the future. The following four
distinct inventory methods were identified: (1) JIT; (2)
MRP (that included both MRP and MRP II), (3) fixed or-
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reported using two inventory models, while two firms
used three models). The respondents indicated MRP as
the most frequently used method (45.6 percent). Fre-
quency of use for JIT, fixed period and fixed order
models were approximately 13 percent each. These
findings suggest that MRP is the most popular model; and
that JIT has reached the same level of usage as traditional
inventory methods in a short time period.
As noted earlier, multiple responses for inventory
models used were possible. In order to examine the
relationships between variables, the 177 firms that used
only one inventory method were retained for the follow-
ing analyses.
An attempt was made to identify future trends in
inventory control practices. The relationship between the
inventory model currently used and the methods that
firms are interested in learning or using in the future was
investigated. These results are reported in Table 1.
Please note that some firms showed interest in more than

der, and (4) fixed period.1 (For convenience, fixed order

one inventory model for future use. Hence, chi-square
and fixed period models are sometimes referred to as tra-
analysis was inappropriate for this item.
ditional inventory models in this article.) Questions con-
cerning the number of suppliers, quality assurance pro-
TABLE 1
grams with suppliers, inspection of incoming parts, and
shortages for a self-specified “critical” inventory item PERCENTAGE (NUMBER) OF CURRENT
were also included. Selection of a “critical” item was es- MODEL USERS INTERESTED IN LEARNING/USING
sential if participants were to provide any meaningful in- VARIOUS MODELS
formation for these questions. A pilot study (n = 50, re-
spondents = 35) was conducted to identify non-functioning Inventory model currently used
items, clarity and other problems with the questionnaire. Want to
Pilot study responses were used to revise the questionnaire learn/use Fixed Fixed Row
and are not included in the analysis. in the future JIT MRP Period Order Other Total
The population of interest for the study was medium-
sized midwestern manufacturing firms (with a work force JIT 52% 67% 44% 43% 45% 56%
of 75 to 500 employees). A list of such firms (n = 391) (16) (63) (8) (8) (15) (110)
was compiled from Chamber of Commerce directories.
MRP 29% 23% 56% 47% 39% 32%
Questionnaires were mailed to the contact person (usually
(9) (22) (10) (9) (13) (63)
the company president) listed in the directory with a re-
quest that the survey be forwarded to the appropriate per-
Fixed Period 10% 2% 0% 5% 3% 4%
son. One month after the first mailing, a second question-
(3) (2) (0) (1) (1) (7)
naire was mailed to non-respondents. In total, 212 firms
responded, giving a response rate of 54 percent. Of these, Fixed Order 3% 1% 0% 0% 0% 1%
208 firms provided enough information for our analyses (1) (1) (0) (0) (0) (2)
(with a usable response rate of 53 percent). These firms
represent a variety of manufacturing industries that in- Other 6% 7% 0% 5% 13% 7%
clude paper, plastics, automobile components, food proc- (2) (6) (0) (1) (4) (13)
essing and furniture.
Data analysis was a two step procedure. First, the per- n = 177, multiple responses allowed
cent of response for each multiple-option item was calcu-
lated. Second, the relationships between various items JIT (56 percent) and MRP (32 percent) are the inven-
were tested using chi-squared test. tory models that the firms are most interested in using in
the future. Since only 5 percent of the responses favor
RESULTS
traditional models, MRP and JIT are the models of choice
Current inventory practices were determined by direct for the future. This idea is also supported by the percent-
query. When asked which inventory methods were being age of current JIT and MRP users who want to learn more
used, there were 241 responses from 208 firms (29 firms about the same models (52 percent and 23 percent respec-
 tively). Overall, among medium-sized firms, there is a
growing awareness regarding new inventory philoso-
phies. In order for this to happen, detailed classroom
coverage of MRP and JIT systems is essential. Further-
more, companies should provide an opportunity for in-
ventory management personnel to attend seminars and
workshops on MRP and JIT to make them aware of re-
cent developments in these areas.
An item regarding the number of suppliers was in-
cluded in the questionnaire. A chi-square analysis was
conducted to explore the relationship between the inven-
tory model used and the number of suppliers (see Table
2). This relationship was found to be significant at the 5
percent level (chi-squared value = 8.49). It is interesting
to note that most respondents had 2 or fewer suppliers
(91 percent for JIT, 69 percent for MRP and 54 percent
for traditional models). These results are unexpected for
traditional and MRP model users since neither method
advocates a small number of suppliers. However, as ex-
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key principles. Hence, it is surprising to find that there is
no significant difference between JIT and other model
users on these two important dimensions. This suggests
that some of the JIT users might still be in the process of
implementing the JIT philosophy.
Information regarding shortages in the previous year
was also collected. The percentage of firms reporting a
given number of shortages for different inventory models
are given in Table 3. The relationship between the
models used and the number of shortages was insignifi-
cant (chi-squared value = 3.99). Because of a strong
emphasis on reducing inventory, one would expect JIT
firms to report more shortages compared with other
model users. However, it is interesting to note that
different model users reported roughly the same percent-
age of shortages. These findings could suggest that JIT
firms are carrying excess inventory, possibly because
they are at the early stages of its implementation. On the
other hand, one could well argue that JIT firms have fine

pected, a much higher percentage of JIT users have 2 or tuned their inventory to avoid stock-outs.
fewer suppliers (52 percent have only 1 supplier). This Forecast accuracy is another critical factor in control-
is consistent with the JIT philosophy which identifies the ling inventory effectively. Not surprisingly, when
number of suppliers as a critical element in controlling queried about ways to improve the inventory situation,
inventory. the most preferred response was to improve forecast
accuracy. Overall, 60 percent of the respondents indi-
TABLE 2
cated forecasting accuracy as a problem (52 percent for
JIT, 59 percent for MRP, 61 percent for fixed period and
PERCENTAGE (NUMBER) OF SUPPLIERS FOR 75 percent for fixed order model). This suggests that a
SPECIFIC INVENTORY MODELS majority of firms find forecasting problematic regardless
of the inventory method used.
Traditional
No. of Suppliers JIT MRP Models Others
CONCLUSIONS
Single or Dual 91% 69% 54% 67% Currently, MRP is the most frequently used inventory
Sources (21) (61) (18) (20) model. However, firms are interested in learning more
about MRP and JIT for the future. Of these firms, a sub-
Multiple Sources 9% 31% 46% 33%
stantial percentage of MRP and JIT users want to learn
(2) (28) (15) (10)
more about the models they are currently using. To fa-
n = 175 x 2 = 8.49 p = .05
TABLE 3
Questions were also asked regarding the joint quality PERCENTAGE (NUMBER) OF INVENTORY MODEL
assurance program and the inspection of incoming parts. USERS REPORTING A GIVEN NUMBER OF
Correlation between the inventory model used and the SHORTAGES IN THE PREVIOUS YEAR
joint quality assurance program was found to be insignifi-
cant (r = 0.003).Furthermore, the percentage of firms Traditional
reporting a joint quality assurance program with suppliers No. of Shortages JIT MRP Models Others
was approximately 60 percent for all model users.
Responses to the supplier inspection item yielded similar 0 32% 33% 38% 33%
results. The percentage of firms reporting supplier (7) (28) (12) (10)
inspection of incoming parts was the same across inven- 1 to 3 27% 43% 31% 33%
tory models (approximately 20 percent). (6) (20) (10) (10)
JIT strongly advocates a long term relationship with
suppliers (O’Neal 1987), which includes, among other More than 3 41% 24% 31% 34%
things, a joint quality assurance program and supplier (9) (20) (10) (10)
inspection of incoming parts. For a successful implemen-
n = 168 x 2 = 3.99 not significant
tation, JIT philosophy emphasizes adoption of these two
 cilitate this learning process, firms should provide oppor-
tunities for their inventory management personnel to at-
tend workshops and seminars on the use of these models.
Also, inventory management courses taught in universi-
ties should emphasize recent developments in MRP and
JIT.
For JIT users, out-of-control inventory (excess
inventory due to zero shortages or a large number of
shortages) coupled with limited joint quality assurance
programs with suppliers may indicate lack of user
knowledge. If this is the case, proper training of inven-
tory management personnel in the use of the models
should cure these problems. However, please note that
there might be other probable causes for these problems,
such as lack of commitment of top management to new
inventory concepts and/or initial stages of model imple-
mentation.
A majority of the firms identified forecasting accuracy
as a way to improve the inventory situation. If forecasts
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are inaccurate, no inventory method will yield an opti-
mum inventory level, no matter the level of sophistication
of the inventory method used. The firms may simply
have been responding to this basic tenet. On the other
hand, inaccurate forecasts might be a result of inappropri-
ate use of forecasting models, in which case proper
training of inventory management personnel in forecast-
ing is a must.
In summary, educational opportunities must be
provided to inventory managers to acquaint them with
recent developments in MRP and JIT. Similarly, compre-
hensive coverage of these models should be a part of
graduate and undergraduate curricula in the production/
operations management area. Implications of forecasting
accuracy, supplier inspection and joint quality assurance
programs with suppliers for controlling inventory are
some of the issues that need further research.
NOTE
1. Even though JIT is a philosophy, it is commonly
referred to as an inventory method by practitioners.
For this reason, JIT is treated as an inventory method
for this article. However, inventory management is
only one of the important aspects of the JIT philosophy.
Carol Lee Stamm is chair of the department of management and associate professor of management at Western Michigan University. She
is the co-author of numerous journal articles on a variety of topics including meta-analysis and inventory control practices in industry. She
teaches quantitative methods and statistics.
Damodar Golhar is associate professor of management at Western Michigan University. He teaches production and operations manage-
ment. His articles on sequential analysis applications and canning problems have appeared in the Journal of Quality Technology, Medical
Decision Making and Sequential Analysis.
Wayland P. Smith is professor of management at Western Michigan University. He holds a Ph.D. from the Case Institute of Technology
and teaches quantitative methods and production/operation management.
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 This article has been cited by:

1. Yash P. Gupta, Subhash C. Lonial, W. Glynn Mangold. 1992. Empirical assessment of the strategic orientation of JIT
manufacturers versus non-JIT manufacturers. Computer Integrated Manufacturing Systems 5, 181-189. [CrossRef]
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