Uncommon Sense: Inventory: Friend or Foe?
The choice seems to be waste vs. performance, but can it be true that if I add waste I get better performance? Just thinking about it makes my head hurt. In reality, better performance is just an illusion. When things go wrong, as they always do in the real world, you have the ability to quickly make up for it by dipping into the reserve of "excess" inventory. But when things aren’t going wrong, which hopefully is most of the time, the waste is sitting there draining your business.
The lean argument is that reducing inventory brings problems to the surface and forces their resolution. Supplier issues, machine downtime, quality problems, low productivity, scrap, incapable processes, long setups, imbalanced lines, lack of teamwork and inadequate training are problems we can avoid fixing if we have plenty of inventory.
In fact, inventory is one of the seven wastes, and a lean teaching tool tells us to hold waste in a CLOSED MITT. This acronym helps us remember:
ComplexityFind simple solutions; they cut waste, and are easy to understand and manage. LaborEliminate unnecessary steps. OverproductionProduce only the amount of goods the customer wants. SpaceImprove layout to make best use of space. EnergyAvoid scale inefficiencies and unproductive operations. DefectsEliminate defects and rework. MaterialMaximize material turned into product; minimize scrap. Idle materialMake sure there is a steady flow of product to the customer. TimeEliminate delays, long setups and unplanned downtime. TransportationEliminate or reduce the movement of material or information that does not add value to the product.
We can see that inventory hurts us in many ways. It ties up money, takes up space, hides defects until it’s too late to fix them, consumes material we need for something we could actually sell right now, and consumes productivity being made, moved, stored and counted.
The need for some inventory is clear, but how do we know the correct balance between waste and performance? The usual measure is turnsthe value of the inventory divided by the annual cost of goods sold. But different products should have different targets. If you’re selling nuts and bolts it’s reasonable to expect 50 turns or more. Building ships and airplanes is entirely different; the production cycle is much longer, and the inventory tied up in process is massive until the unit is sold. So there is really no objective measure of the right number of turns to aim for.
An indirect measure of inventory is working capital, but the importance of this mea-sure depends on interest rates. Inventory also fluctuates over time. Having parts delivered just-in-time can reduce the amplitude and increase the frequency of these fluctuations, but doesn’t that make us more vulnerable to operational failure?
What it all comes down to is that each of us needs to assess whether the operational risk of minimal inventory outweighs the benefit of eliminating waste. Finding the optimal point where your business runs best is what will determine your success or failure.
Inventory is your friend or foe, depending on how you manage it in your business.