Inventory & Lean Manufacturing

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.

Is Inventory Really Evil?

Excessive inventory is not a problem nor is it evil; it is only an effect. Just as obesity and fat are not problems; only symptoms of poor diet and insufficient exercise. The fundamental causes of high inventory, like the fundamental causes of obesity lie deeper. Some of the more common causes are shown below. Notice that the various remedies, taken together, constitute the core disciplines of Lean Manufacturing. 

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 they are consistent.)

The table below shows average turns for several industries. Such comparisons are a valuable benchmark. they help rate your firm's performance against others in the same or similar industries.

Averages are not all the story. In most industries, many firms cluster around the average. A few firms are far above. Lean manufacturers show turns of 200%-1000% of their industry average.

Firms with outstanding inventory performance excel on other dimensions such as customer service, delivery and productivity. The accompanying chart shows the results from one of many studies that support this contention. The study examined four similar firms in several countries. The chart shows their WIP turns and productivity in units per employee. 

Cause	Effects	Remedy
Inflexible Equipment	►Long setups ►Large Batches ►Inappropriate Layouts	►Setup Reduction (SMED) ►Smaller Scale Equipment
Functional Layouts	►Excessive Handling ►WIP Queues ►Disconnects ►Poor Quality	►Cellular Layouts
Poor Quality	►Angry Customers ►High Scrap/Rework ►Chaotic Schedule ►Inaccurate Inventory	►Six Sigma & TQM ►Workcells ►Work Teams & Quality Teams ►Cycle Counting & Error Reduction
Inappropriate Scheduling	►Complex Systems ►Inventory Errors ►Large Queues ►Long Lead Times	►Kanban ►Broadcast Schedules ►Workcells