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EXCUSES FOR HIGH INVENTORY

by Rene T. Domingo (email comments to rtd@aim.edu)

Among the requirements for lean manufacturing - which includes zero defects, short set-up times and short lead times - the most visible and probably the most difficult to achieve is lean inventory levels at all stages: raw materials, work-in-process and finished goods. As in quality, the ultimate target is zero inventory. To benchmark, Toyota in Japan - the just-in-time (JIT) pioneer and the world's leanest manufacturer- carries two hours of parts inventory in contrast to two weeks for a comparable American company.

Ironically, attaining low inventory levels does not start with the physical reduction of inventory, just as weight loss does not begin with the surgical removal of fat. It requires radical change in systems; e.g. JIT, and management philosophy. The successes, systems and philosophies of lean manufacturers in inventory management all over the world are well-documented. So what prevents most companies from emulating them?

There is in fact an inventory of excuses which a typical manager uses to maintain the status quo of high inventory. Using the output-process-input framework, we can classify these into the following elements.

1. Output instability

  • Unreliable demand
  • Unsteady demand
  • Poor forecasting
  • Lack of market information

2. Process instability

  • Long production lead time
  • Long set-up times
  • Frequent machine breakdown
  • High defect rate
  • Labor unrestHigh absenteeism/employee turnover
  • Equipment capacity imbalance

3. Input instability

  • Unreliable suppliers
  • Long lead time
  • Unstable prices

We could add a fourth, very fashionable group of excuses:

4. Environment instability

  • Bad roads
  • Bad traffic
  • Bad government

In short, a typical manager who makes use of these excuses admits and recognizes his own helplessness and incompetence in dealing directly with these problems. He uses inventory to cover up, hide and offset the effects of management problems, without actually solving or eliminating their roots. What is management for if its solution to practically all problems is to build up inventory?

To incompetent managers, inventory is the easiest way to paper over problems, especially if the company has adequate financial resources at its disposal. High inventory is often a symptom of mismanagement or no management at all.

The approach of a lean manufacturer is totally different. To cope with output instability, it involves the customer in its planning and designing activities, and sets up flexible production processes than can cope with changes in market demand and variety. It therefore relies much less on forecasts and their accuracy; it assumes all forecasts are and will be wrong anyway.

To deal with process instabilities without resorting to inventories, the lean manufacturer continuously reduces all lead times and set-up times through Kaizen. Machines and equipment are made reliable through Total Productive Maintenance (TPM). Employees and workers are formed into self-managing teams empowered to solve their own problems. Employees are trained with multiple skills so that capacity and productivity are not adversely affected by absenteeism and turnover.

A lean manufacturer trains its suppliers to reduce instabilities in input quality and delivery. Establishing partnerships with foreign suppliers often leads to more reliable lead times and deliveries of imported raw materials and supplies. To make them more manageable, the number of suppliers is also reduced. Lean manufacturers do not resort to speculation and hoarding when prices of raw materials fluctuate ; these solutions usually create more problems

What about environmental constraints or "things beyond one's control?" The point is not to use them as excuses to defer action on the output – process - input instabilities. Lean manufacturers have demonstrated that substantial reduction in inventory can be achieved through improvement in internal system efficiency even within the most harsh environmental conditions.


 

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