The
Mantra of Lean
Inventory
is a recurring theme in Lean Manufacturing. Many
authors and lecturers on Lean Manufacturing say it is
"evil". This white paper explores the role of
inventory and why it is so important to your manufacturing
operation.
Inventory-
Asset or Plague?
Inventory
is probably one of the two biggest assets on your company's
balance sheet. It is an important determinant of
Return On Assets (ROA) and other measures of financial
performance. Carrying stock is
expensive, usually 20%-40% of the average value per year. It
devours capital-- capital the business may need for growth. It
requires large warehouses and valuable floor space. It increases
material handling. Large stocks require massive computer systems
for tracking and control. |
Financial
managers would never bank at an institution that offered a negative
25% interest rate and inconvenienced the business in many ways.
But they readily place their money in the Bank of Inventory.
This is because conventional accounting
systems bury the true costs.
Yet,
inventory can serve many purposes. It allows continuous delivery
while manufacturing focuses on long runs. It prevents the
vagaries of maintenance and quality from interrupting schedules.
It accommodates the variation of incoming orders.
How
Much Inventory?
We
usually measure inventory in "turns.": Annual sales
divided by average value on hand. This ratio allows comparison
of larger and smaller firms. It accounts for changes in annual
sales volume and seasonal fluctuation. (While there are many
variations of this metric, they matter little as long as you are
consistent.) |
