A Systems Approach to Inventory Management
Lean principles focus on eliminating waste from business processes. Inventory is not isolated to raw materials and finished goods. Companies will carry inventory masquerading as service parts, repair items, administrative suppliers, automobile fleets, and a host of other types of assets that are managed by setting and maintaining certain levels. The problem is that almost every function inside an organization can affect inventory levels. Whenever decisions are made in purchasing, marketing, manufacturing, or customer service, inventory levels across these asset types will be impacted. Unfortunately, all too often, these decisions are made in a vacuum and, consequently, inventory management becomes very difficult. For example, it is extremely hard for an inventory analyst to attempt to reduce inventories when the manufacturing area is frequently changing production schedules without informing the inventory analyst of the changes.
Therefore, inventory management is not just about managing inventory levels; more often, it is about recognizing the complex workings of the entire organization. This complexity is embedded in the system of the organization, and it is this system that produces surplus inventory. Taking a systems approach to inventory management is crucial when we begin our journey toward lean.
Inventory Management Processes
We can focus on the intricacies of inventory management once we understand how decisions and processes work inside the organization relative to inventory management. However, it is crucial to remember that inventory management fundamentals cannot be implemented effectively without a rigorous understanding of the inventory cause and effect and processes within the organization and spanning with supply chain trading partners. After this is accomplished, the logistician can focus on fundamental inventory management processes that would include:
- Inventory and ordering strategy of raw materials
- Inventory strategy of finished goods
- Inventory strategy of work-in-progress inventories
- Inventory placement and location strategy
- Transportation strategy
In summary; the basic premise of inventory management is: How much inventory should we have, where should we keep it, and how will we transport it? Yes, this may seem elementary to most logisticians, but many organizations cannot produce documented strategies to manage these three basic aspects. The successful organization will have a formal plan surrounding these basics, and this plan will be integrated into the sales, operational, and financial strategies of the company. Lean organizations focus on these three items from a different point of view.
When inventory strategies do not exist, the three principles described above will be managed re-actively. For example, in the absence of planned inventory strategy, warehousing and transportation functions will simply react to the daily operational situation. In this case, inventory will be transported and warehouses will be filled, yet nobody really knows whether the operation is running effectively or not. Whereas this approach illustrates reactive management, the Lean system is managed proactively. Logistics systems that are managed proactively have two distinct characteristics:
- Order, inventory control, transportation, and warehousing functions are planned and synchronized to the customer’s demand, getting to the heart of pull systems
- The real focus is not managing day-to-day activities of the logistics function, but on reducing the need for the logistics activities in the first place.
As indicated, a significant difference is that Lean systems question the need for logistics activities. Likewise, the goal is not to develop a fleet of trucks and trailers, but to reduce the need for trucks and trailers. In a lean logistics environment, the goal is not to build a network of warehouses, but to eliminate the need for warehousing altogether. In a Lean logistics environment, the goal is not to build up inventories, but to reduce the reliance on inventory completely. Lean is about the elimination of waste. Lean is about flow and pull. Six Sigma is about understanding and reducing variation. When we allow Lean and Six Sigma to create synergies in operations, inventories will be reduced, transportation strategies will become more effective, and warehouses will be few in number or nonexistent.
Posted by LeanCor Supply Chain Group
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.Facebook LinkedIn Twitter Google+