Stuart is a member of the Society of Cost Management Executive Committee
During any implementation of Lean, Six Sigma or any recognized process improvement method inventory waste sometimes receives a perfunctorily glance. The process improvements zero in on all facets of the manufacturing process forgetting the danger of treating inventory on a secondary level.
In order to begin an understanding of inventory as waste we first must define clearly the term. Strategic inventory is the amount of inventory needed to make product. Anything above or beyond that number is waste. Even though inventory is on the Balance Sheet as an asset the unnecessary portion of it must be thought of as waste.
There are several forms of inventory:
1- Finished goods sitting in a warehouse unsold
2- Work-in-Progress tied up in the process.
3- Raw materials waiting for production
All of them at one point or another in the production process are waste. Unnecessary inventory or waste is caused by any number or combination of causes. They are the following:
2-Uncontrolled Bottleneck Processes
4-Long Change Over Times
6- Local Optimization
In turn due to these causes unnecessary inventory manifests itself in these characteristics:
1-Extra Space on Receiving Docks
2-Material Between Processes
3-Stagnated Material Flow
4-LIFO instead of FIFO
5-Extensive Rework When Problems Arise
6-Long Lead Time for Engineering Changes
7-Additional Material Handling Resources (Men, Equipment, Racks, Storage Space)
However, the primary concern or at least it should be is work-in-progress inventory, or what is commonly referred to as WIP. This is inventory that is in the area I like to call ‘no man’s land’. It cannot be sold to either customers or any other companies. This lack of movement can lead to a huge issue for many manufacturers and can ultimately lead to their downfall. A question needs continually asked internally – ARE YOU INVENTORY RICH AND CASH POOR?
This is the vital importance of having strategic inventory on-hand. The question is how much is strategic. It depends on the mix of product. Each product calls for its’ own inventory levels in order to complete so one product may warrant higher inventory levels than another. The rest is UNNECESSARY! Unnecessary inventory leads to a number of strategic disadvantages and negatively influences service and operations. Internal freight costs were expended to move product from one department to another. The warehouse layout is compromised through overcrowding leading to a downgrade in order picking. Inventory is repetitively cycle counted causing a by product called waste of motion. In addition, this impacts the agility to changing conditions.
We think of the above reasons as individual causes of unnecessary inventory but in reality it is due to multiple causes – the above actions acting in unison. The multiple reasons reflect the lack of underlying priority, process and control. Elimination of those causes is vital to company’s well being.
Unnecessary inventory does not have to be nor should it be accepted as a way of conducting ordinary day-to-day business operations. Eliminating the causes is vital to a company’s fiscal health. There are several options which can be implemented, on an individual basis or as a suite.
1-Strategy and Process: Develop a strategy and a process to manage inventory. This directive must come from the top down (C-level executives). Without sustained executive commitment successful management of inventory will be an arduous task. Step one is to develop metrics to measure velocity, aging and turns. Next I advise to implement LEAN across entire company as many departments can create non-value time and inventory. LEAN is a key tool in reducing unnecessary inventory. In addition one can not look at just one part of the supply chain for this to succeed. Long transit times across the Pacific and other trade routes affect the inventories that firms will carry. To aide in critiquing the supply chain draw a value map depicting the separate processes of the inbound supply chain versus the outbound supply chain. If not, the cycle times and the inventory become indistinct.
2-Distribution network: Previous warehouse locations may have been established years ago and are no longer conducive to he company’s success. Many warehouses can increase the inventory carried due to safety stock. Too few locations can mean longer transport distances thus more inventories in transit than in stock.
3-Supplier performance: This is an often overlooked inventory metric and one that should be measured and improved upon where required. There is much more at stake here than low prices.
4-Develop reliability: Unknowns in the supply chain will compound the safety stock calculations and increase inventory.