Though accountants usually focus on how to reduce inventory to the minimum level in order to reduce the company's working capital investment, the better approach is to focus on how much of an inventory buffer is needed in front of the bottleneck production operation in order to ensure that it is not adversely impacted by upstream production problems. The buffer management report (as shown above) is very useful for determining the correct size of this inventory buffer. Though it can initially be set based on a rough estimate, ongoing monitoring of buffer penetrations is needed to decide if the buffer should be increased or reduced in size.
The report shows an upper and lower boundary line, which represent tolerable boundaries for the percentage of all jobs where shipments caused the expedite portion of the buffer to be penetrated. The expedite zone is that portion of the buffer where a lack of inventory from an upstream work center will trigger expediting to ensure that replenishment inventory arrives as soon as possible. The small circles represent the daily percentage of jobs causing buffer penetration, while the line running approximately through the center of the boundary limits is a multi-day moving average of the percentage of expedited orders experienced.
An in-condition situation is when the moving-average line stays within the upper and lower boundaries. If it regularly strays outside the top boundary, then the buffer should be increased in size to reduce the risk of total buffer penetration; if it stays outside the lower boundary, then the buffer is too large, and should be reduced. In the exhibit, the trend line has repeatedly exceeded the top boundary, so it appears that a larger buffer is needed.