Inventory Has a Purpose!

Now that I have your attention, let me explain that declaration before you start calling me crazy in the comments section.

In my role as an on-site manager for a large manufacturing customer, I was following up on some supplier short shipping issues that were impacting truck utilization, expedites, and transportation cost. When I spoke with one supplier, the conversation went as follows:

Jacob: I’ve noticed that we are having a lot of short shipments and expedites, as well many additions of material that are shipping early. Can you help me understand what is causing this?

Supplier: Yeah, we ship what we have ready.

Jacob: Can you walk me through your production scheduling process?

Supplier: Well, most of our product takes only one day to assemble. So, each morning we look at all of the orders we have due to ship for the next week and compare it to what we have enough raw material to build. We build it that day and ship it that afternoon.

Jacob: If you produce something before the scheduled ship date, why are you shipping it early?

Supplier: We’re a lean facility, so we don’t hold inventory. If we have it finished, we ship it.

Jacob: But if you ship it early, then we end up with the extra inventory on our end. It’s important that you only ship what we are asking for.

Supplier: We don’t make room for inventory, as it is wasted space. We clean our dock of all finished goods every afternoon, without exception. It’s our policy.

Jacob: Regarding the not shipping of material that is needed, it appears that you have some tier 2 supplier issues causing you to have raw material shortages that prevent you from shipping many schedules on time.

Supplier: Yeah, our suppliers are bad and rarely get us our material on time.

Jacob: Have you looked at re-sourcing to suppliers who can meet your demand?

Supplier: Our suppliers are the cheapest producer; it would be crazy to buy elsewhere.

Jacob: Have you considered building any buffer into your raw materials to ensure you can build the right schedules?

Supplier: You clearly don’t understand lean. Inventory is waste. We can’t ship to your orders because we are too lean!

The views the supplier expressed in our conversation are not uncommon among suppliers, manufacturers, and even six sigma black belts and other “experts." The truth is that inventory has a purpose, even if it doesn’t add value. The most important thing to the above supplier should be meeting the customer expectations (in this case the manufacturing company I was working with). If they have chosen low cost producers that can’t meet production or quality demands, then they should hold buffer stock on those parts to ensure their downstream customer is not impacted. This means they hold extra inventory, which will also serve as a very visual flag that they have a problem. They should then problem solve with the goal in mind of no longer needing the inventory they are holding. This could include working with their tier 2 suppliers to negotiate lead time changes, increasing visibility of their demand to the tier 2 suppliers, or even re-sourcing the parts to a more reliable source at a higher price. They should also engage their downstream customer in the problem solving efforts to see where they may be able to assist. Increased cost for them will typically mean increased cost passed on to their customer.

Often times, inventory is justified by the logic of reducing transportation cost. A lean practitioner will use that as an opportunity to discuss the importance of the Total Landed Cost (TLC) Model. TLC focuses on the idea that you have to look at all of the cost of decisions, instead of their silo effects to portions of the business. It follows the notion that there are several levers that you can use to adjust the supply chain (lead time, lot size, transportation mode, etc). The right solution is the one that has the lowest total landed cost in the current context that meets the customer expectations. This may even include increasing inventory levels if the cost of the extra inventory is less than the savings in other areas like in the example below:

(Click on image for quality view.)

How to use the TLC model to effectively manage your supply chain:

  1. Identify your levers – the options you have to adjust the supply chain.
  2. Identify the impact of the levers on your cost areas.
  3. Find the right combination of levers that result in the lowest cost within the current constraints while meeting customer expectations.
  4. Problem solve and improve current constraints.
  5. Identify new combination of levers that result in lower cost.
  6. Repeat steps 4 and 5 continuously.

If you ask a random sampling of the population what they think when someone says “lean," I believe a majority of them would either respond with “5S” or “eliminating inventory." A portion of those people would go on to share with you how lean has made their lives harder, or how they worked for a company that tried lean and it only caused them problems so they gave it up. Unfortunately one of the biggest roadblocks in the path of spreading the value of the lean model is “pseudo-lean” methodologies. These typically result from a telephone-game-like passing of parts of lean from one person to another. The result is a focus on the WHAT of lean instead of the HOW or WHY of lean.

We need to be responsible ambassadors of lean, and ensure we take the time to teach those with whom we come in contact the why of lean. We need explain concepts at the root of lean, as opposed to just tool sets and catchphrases. We have to be careful saying things like “increasing inventory is ALWAYS the wrong thing to do,” when in fact sometimes, that is exactly what needs to be done in the short term.

Do you agree?

Written by Jacob Nance, Lean Supply Chain Operations Manager at LeanCor

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Posted by LeanCor Supply Chain Group

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LeanCor Supply Chain Group is a trusted supply chain partner that specializes in lean principles to deliver operational improvement. LeanCor’s three integrated divisions – LeanCor Training and Education, LeanCor Consulting, and LeanCor Logistics – help organizations eliminate waste, drive down costs, and build a culture of continuous improvement.

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