Lean and Inventory: Misunderstood

fabufacture.co.uk

One of the most misunderstood aspects of Lean is the use of inventory. Inventory is one of the eight deadly sins (wastes) in Lean manufacturing. This waste is often one that hides other wastes in our businesses. I think most are familiar with the river and boulder analogy. The water level in the river is the level of inventory and the boulders in the river and the problems in our business. As we lower the water level or inventory level those boulders or problems stick out.

It is fairly well understood the financial impact of inventory. Certainly, in these economic times it is not a surprise that many companies and their CEO’s are focused on cash flow. Yet, well-intentioned efforts to reduce inventory, more often than not, get only temporary results. Without effective business process changes, the organization can easily slip back to old ways with inventories (and costs) just climbing up again. I think question is should inventory reduction be an objective of the business or a result of say implementing improvements.

The numbers on the company balance sheet do not tell the whole inventory story. The overall inventory of an organization can be divided into 3 major groups: 1) Raw material, WIP, and Finished Goods 2) MRO inventory (inventory of tools, maintenance spares, misc. production items, etc.) and 3) Distribution inventory (all materials in-transit of stored outside premises). Traditionally, inventory reduction efforts have focused mainly on the first category. However, this typically accounts for less than 40% of the overall inventory of a company.

One of the major impediments to inventory reduction is the mistaken notion that just improved inventory management is all that is required to get the job done. The real culprits are the inefficient business processes that cause excessive inventories to exist in the first place. It is often the case that the real causes of excess inventory lie outside the purview of the supply chain managers.

The mantra here is that in order to get a bigger piece of the cake, one should increase the size of the cake itself. So the objective should be one of continuous improvement. We should consider improving production scheduling, reducing cycle times, increasing manufacturing flexibility, improving quality, improved forecasting, and developing and partnering with suppliers as the goal. By addressing the cause of the increased inventory the gains can be sustained. Reduced inventory quantities and dollars are then the resultant of said improvements in the business system.

Lean doesn’t mean ZERO inventory. It means the right inventory at the right time at the right quantities and in the right place. Every company needs buffers, but they must be well planned and controlled. As anybody who has spent some time in a manufacturing plant will tell you, operating without buffers is a sure recipe for disaster. Low inventories are commonly linked to Lean because many organizations are able to reduce inventory levels due to practicing Lean Thinking. But "true" Lean Thinkers understand lower inventories are a resultant of a process improvement not a solution to a problem.

Keeping the right amount of inventory is not straightforward, so managers need to address the issue in a proper way. Management who do not truly understand Lean teachings are often results orientated in our performance driven society. Inventory decisions are risky and they make a large impact throughout the supply chain. Without proper planning, a manufacturing company can run out of raw material, negatively impacting the company and its customers. Likewise, overstocking of raw materials, work in process inventory, or finished goods could also hurt the company’s profitability.