8 Lean Wastes – Inventory

Posted on December 21, 2011 | in Inventory, Lean Wastes, Manufacturing, Overproduction, Small Business, Sports, Time Savings | by

lean wastes inventory

(This is the sixth in a series of deeper dives into the 8 lean wastes.)

Excess inventory is a significant problem in that is affects business operations in many ways and is generated for a multitude of reasons.

First, how does it develop?

  • Ordering more from a supplier (whether it’s in-house or from the outside) than what is needed creates excess supply
  • A poor inventory tracking process (be it by electronic inventory tracking database, ERP system/process, or poor forecasting) can cause unnecessary ordering of supplies or production.
  • Utilizing a “push” production process (suppliers pushing items/material down the line instead of the next process on the line “pulling” it from the supplier) which creates a glut of unneeded inventory in storage.
  • How often do we see big sales at the grocery store on certain items, and we “stock up” even if we don’t need it right away? Sure, we’re saving money on each unit, but how does that cost savings compare to losing flexibility later?

As a definition, if you  have more inventory than you need or can quickly turn over, it’s excess inventory.

Next, what does it look like? I’ve visited many plants and strolled through their warehouses. Frequently I’ve seen dust-covered pallets or shrink-wrapped boxes with a “rainbow” of inventory stickers from prior audits. Anything getting dusty or pushed into corners from not being needed is probably not being turned over very quickly. Look at the storage in your warehouse/fridge and cabinets at home/concession stand food storage areas and try to determine how long it would take to consume each piece of that inventory. Are there things bought in bulk that will not be used quickly? What about obsolete/spoiled products that will never be used?

How bad is excess inventory? Think of excess inventory in this way: how much money is tied up in material you don’t need, how much valuable floor space absorbed by the unneeded product, and how much resource time was used in creating it all? Excess inventory is very bad, perhaps the worst of the 8 lean wastes. What could make it worse is if the inventory never gets used – product becomes obsolete or, in the case of food in a concession stand, spoils?

Excess inventory is a waste that managers welcome because it insulates them from stocking out of items or not having products for customers in the event they have an emergency. Managers keep inventory around, “just in case.” They believe that not having product is worse than having too much product. (That’s not necessarily false, but wouldn’t it be better to have only what is needed where you never stock out?)

But what managers don’t see is that liquid assets (aka money) is tied up in that excess inventory, so the company loses flexibility and loses a chance to use that money somewhere else. Also, floor space is valuable – why would managers dedicate floor space to something that won’t sell right away? To produce that inventory, machine time or employee time is required – if you’re dedicating those resources to wasteful activities, you’re throwing money away.

So how can excess inventory be prevented? There are many ways.

  • Companies use first-in-first-out (FIFO) for inventory consumption. This helps to consume the oldest inventory first, so you can prevent products from getting too old and becoming obsolete.
  • Better forecasting helps – know how much you need, calculate how much you have, know how long your inventory will last or how long it will take to produce more, and either make up the difference with production OR if you have more than you need, stop producing and focus resources on making something else you need.
  • Improved warehousing/use of ERP systems will prevent production/scheduling of items not needed.
  • Utilize “just in time” methodology instead of “just in case.” Just In Time (JIT) implies that materials are available right when they are needed, and not too long before. If you need known quantities of material X and material Y this week, make sure you have just those quantities on hand and not more. There are more complicated calculations to determine how much is needed (safety stock, reorder points, order lead times, etc) but you want to have just enough to not stock out but not more than what is needed in the short term.

 

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