Operational Definitions Part II

In part I of this two part blog we discussed Operational Definitions and how specific words, terms or concepts can have a distinct meaning in a specific organization or business and how people must be aware of this when communicating in effort to solve problems and improve operations.  Now, let’s discuss how Operational Definitions plays an important role in Operational Measure and Inventory.
A recurring theme advocated, or mantra chanted, by process improvement experts is that:

• If you do not measure it, you cannot improve it.  


• If you do not measure it, you will never know if your efforts and actions have had any impact, positive or negative, on the process.

Operational Definitions are even more basic.  Without the right Operational Definitions, there can really be no Operational Measures.
In any particular situation, everyone has to know and agree on:

• What is the attribute that is to be measured and monitored?  


• What is considered good quality as well as bad quality?  

While Deming provides plenty of examples in his book, the problem is even more complicated in our modern world of ERP.  We are awash in a sea of data.  We need operational definitions more than ever to turn that data into information that we can then monitor and act upon.
Let us consider something as obvious as inventory.   We all know what we mean by inventory… don’t we?   Let’s start with a formal definition from dictionary.com:

Inventory: A complete listing of merchandise or stock on hand, work in progress, raw materials, finished goods on hand, etc., made each year by a business concern.

There we have it.  What could be easier?  Now that we all have the same understanding, we can easily measure it.  It is just Inventory.  Our experience at Cadent Resources while working with our clients is that we can break it down, per the above definition, in terms of stock on hand, work in progress (WIP), raw materials, finished goods on hand, etc. Etcetera?  What is included in etcetera?  What exactly does on hand mean?  Here are some questions we make sure we review with our clients and feel everyone in a company interested in inventory needs to have good definitions for including general management, finance, supply chain (planning, inventory management, purchasing, and more), and IT.

• What does “on hand” mean?  When is ownership taken of merchandise?  When does this include in-bound in-transits and under which criteria are out-bound in-transits considered as on-hand?


• WIP might be understood, but what is Construction in Progress (CIP)?  Do you use it?  Should you be using it?


• What exactly are raw materials?  Should packaging materials be counted separately from raw?  Are components, sub-assemblies different than raw?  How are they defined?


• Are returned goods counted as part of inventory?  Under what conditions and exceptions?


• What about inventory of every category on Quality Hold status?  


• What other exceptions, special rules, and “off the book” status categories are used?

This simple, or seemingly simple, area of inventory can be very complicated.  When working with an ERP such as SAP or Oracle, the complexities can be daunting.  There are so many levels and layers of transactions that must be considered.  The system may have a definition different from the common lore held to be true inside the company.