Monday, October 03, 2005

How much Inventory is too Much?

Inventory is recognized as one of the seven types of wastes mainly due to the fact that it ties up cash. Following lean manufacturing principles , one can easily see the value of a reduction in high dollar items to a minimum inventory level. But what about low dollar or cheap items?

Does it make sense to expend effort on these items to move to a one piece flow?

How much inventory is too much?

Some of you would say its not worth the effort while others would argue that we should eliminate all waste. Where should we draw the line?

One way to help answer these questions is to look at inventory from a different point of view. Instead of dollars, let's look at inventory in time or days of supply. While working for a company a while back, I complied an inventory listing of all active part numbers and sorted by days of supply. The results were eye opening and I recommend you doing the same thing at your company.

Guess what the longest days of supply for an active part number was found at this company?

It was 46 years. Yes, 46 years. I could hardly believe it myself especially with the company being only 20 years old. To make matters worse, it was a metal part. I wondered how long it would be before it starts to rust. Of course, there is a high degree of probability that a design change would make the part obsolete sometime within 46 years. In this case the part was purchased in volume, at a discount, and considered low dollar at this company (less then $3,000 total value) .

From this perspective, now how much inventory is too much?

You may think this is an obvious point, but you would be surprised at the number of companies that overlook it. When on the lean journey, it is not enough to just point everybody in the same direction, you must have measurements/goals that point in the same direction. This includes the Purchasing Department.


Mark Graban said...

I was taught once that you need as much inventory as required to keep production running and no more. If you just cut all inventory (as I've seen companies do), you'll kill production. You need to work on the root causes that require inventory (such as downtime, quality problems, long supplier leadtimes, etc). Work on the root cause first, then reduce inventory appropriately.

Chet Frame said...

There has been a great deal written on the APICS Leansig Listserv about whether Inventory Reduction is a goal of Lean Manufacturing or a result of Lean Operations. There is one group that says you reduce your inventory to get to the problems, and another that says you resolve problems and get rid of the excess that you have created by your actions.

The first way tends to lead us to the condition Mark notes. The second leads us to a more studied and safer point with a lot less backlash from frustrated managers and operators.

Mike Wroblewski said...

Both comments by Mark and Chet are valid dealing with lean and the issue of inventory reduction. It would be a mistake to make drastic cuts in inventory that choke the manufacturing process even with a good support system. However, without a reduction, we could stay in our comfort zone without improvements or even seeing problems needing fixed. If we measure inventory amounts in days of supply sometimes we can see obvious cuts as in my example of 46 years of inventory.

Either approach may work for your company ONLY if you fix the problems to be able to eliminate additonal inventory.