Companies specializing in project-based manufacturing often plan, order, and stock parts on a project-by-project basis to ensure they have adequate visibility and control of manufacturing demands and supplies (inventory and supply orders) by project. This process is typically referred to as “hard pegging” or “project pegging.” Many companies in the aerospace manufacturing and defense manufacturing industries supplying the United States Department of Defense (DoD) routinely segregate inventory and supply orders by project or contract. Non-DoD commercial manufacturers sometimes do this as well.
These companies often use material requirements planning (MRP) and related business system modules to accomplish this segregation. In these sorts of systems, each inventory record and supply order is exclusively “owned” by (pegged to) a single project or work breakdown structure (WBS) task.
But buried in these project-based manufacturing processes there frequently lies a significant yet often overlooked trade-off between:
- the segregation of inventories and work-in-process by project and
- the achievement of economies of scale associated with the commingling of inventory and supply orders across projects.
Unnecessarily constructing project boundaries within manufacturing, procurement, inventory, quality assurance, and cost accounting processes can artificially segment the enterprise into project silos that inherently conflict with the operational need to operate as a fluid, integrated whole. The resulting overemphasis on managing projects as opposed to producing parts efficiently can, in turn, create a major obstacle to the envisioning, developing, and implementing of lean practices throughout an enterprise.
So how can we solve this?
To unify and synergize these project silos, soft allocation can be employed. Soft allocation simultaneously manages the physical commingling and logical segregation of manufacturing demands and supplies. More specifically, all MRP-generated dependent demands and supplies are combined within a single non-project-specific pool. This allows supply orders to be aggregated across all contracts at all bill of material levels and, thereby, enables economies of scale and lean practices to be focused on this single non-project-specific pool. Then, at month-end, the pool is recast financially by project by allocating the pooled demands and supplies through all bill levels (and associated part and work-in-process (WIP) order costs) back to their originating independent demands, e.g., contract lines and/or WBS tasks, on an “earliest due date first” basis. In this way, pooled costs become equitably allocated or “attached” to contracts. (See figure below.)
In each successive month, soft allocated costs are reversed and placed back into the pool making them available for the following month’s allocation (in essence, placing them into “beginning inventory” of the subsequent month). This process is followed monthly. End items shipped to the customer are hard allocated to projects and are not reversed back into the pool since the ultimate contract ownership of these items (and their cost) is known.
At year-end, there are no special procedures required, although the impact of prior year burden transfers (into beginning inventory) should be considered.
This allocation has no effect on the MRP plan itself, since a “snapshot” of the month-end MRP plan is used to allocate items and their associated costs. Manufacturing operations can therefore work with commingled demands and supplies uninterrupted. So you have the best of both worlds: a pooled environment conducive to the application of lean principles along with project visibility of inventory, costs, and audit trails.
This is an edited excerpt of “Achieving Lean Objectives in a Project Manufacturing Environment.” To read the full paper visit http://bit.ly/pPAxqX.