Taking Stock of Inventory

Although an inability to influence supplier behavior might seem like a major barrier to a lean operation, it’s possible to overcome this by thinking differently about this issue.

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While many facets of an operation are critical, inventory is a literal show stopper. Where other functions are important, an inability to supply material stops an order in its tracks. And, despite the perception that efficiency requires eliminating inventory, few have the kind of control over vendors to make this completely practical. Although an inability to influence supplier behavior might seem like a major barrier to a lean operation, it’s possible to overcome this by thinking differently about this issue.

When rethinking inventory, weighing out what constitutes a sound system is a great place to begin. An ideal scheme includes:

  • Aligned objectives. Some goals of inventory management systems are detrimental to other facets of an operation. Assuring that objectives are harmonized across an entire operation is the first order of business.
  • System parameters. To efficiently replenish materials, an approach to estimate inventory control parameters is needed. 
  • Accurate inventory counts. To assure that stocking levels are properly maintained, material counts must be accurate.
  • Early warning system. As best laid plans can go awry, a system needs a means to detect potential shortages to allow timely countermeasures.

Although every element is essential, proper foundations are an absolute must. Even if counts are dead-on, parameters are properly calculated, and proactive measures are deployed, counterproductive objectives will derail it all. By rethinking the issue of objectives, this rest of the inventory puzzle can fall into place.  

Typically, lean efforts are focused on waste elimination. Because inventory is considered a waste, there can be a tendency to misapply lean principles and eradicate stocks even when doing so will end up delaying shipments. To avoid these types of pitfalls, there is a radical departure in lean that offers a way out of this problem. Specifically, an approach called “product centricity” strictly gages lean performance against a product’s turnaround time and quality. In such a framework, inventory would only be reduced when lead time and quality won’t be compromised. By maintaining this standard, one can make improvements without impairing other phases of a business.

In addition to ensuring that improvements are consistent with overall operational excellence, product-focus enables you to screen out counterproductive metrics. For example, there is a consensus that maximizing inventory turns is desirable, but this widespread belief is frequently detrimental. Most of the time, maximizing turns translates into minimizing stock levels. In turn, some negative downstream consequences include:

  • Increased outages. Under equal customer demand, lowering inventory increases the chance of outages.
  • Increased lead time. If parts aren’t on the shelf, the best case scenario is that lead time isn’t compromised. More often than not, it is.
  • Increased cost. Shortages trigger increased expediting, overnight shipments, overtime and tender-loving care (TLC) for irate customers.
  • Decreased sales. Increasing lead time never improves a company’s sales prospects. Ironically, decreased sales reduces turns and the goal is undermined.

A common workaround to this problem is balancing sales against material levels and arriving at reorder points and quantities that compromise the two. The problems with this approach includes:

·        Balancing inventory vs. sales can be a time-consuming, ad-hoc exercise due to the fact that stock keeping units (SKUs) must be evaluated (and reevaluated) on a case-by-case basis.

  • Despite the effort, the results will probably be inaccurate, and successful decisions will possibly be due to luck.

Often enough, the cycle just described continues without resolution. Instead of rethinking assumptions when experience dashes hope, the common response is to keep trying to refine a system that rests on invalid assumptions.

Fortunately, product-focus provides a way out of this mess. Given product-centricity’s goal of minimizing lead time, a company must minimize outages to keep lead time under control. By implication, this means that the key objective of an inventory control system should be maximizing fulfillment. With this goal, the benefits are many-fold:

  • Decreased outages. Maintaining inventory by focusing on fulfillment decreases the chance of shortages.
  • Minimum lead time. Parts on the shelf facilitate rapid turnaround.
  • Retained sales. Maintaining or reducing lead time never hurts a company’s sales prospects.
  • Increased inventory turns. Interestingly, increasing fulfillment by increasing stock levels often increases inventory turns due to:
    • Minimizing outages minimizes lead time
    • Maintaining turnaround time preserves or improves sales
    • Right-sized stock levels tend to increase sales far in excess of any increase in inventory. 

Ultimately, chasing inventory turns frequently results in fewer turns, but prioritizing fulfillment increases them. Ironic, isn’t it?  

Despite the perception that lean and efficient operations require the elimination of inventory, product-centricity overturns conventional wisdom by transforming inventory into a resource rather than a liability. With this simple move, every other element of an inventory control system can work seamlessly to better ensure a business’s sustainability and profitability. In addition to making radical improvements in inventory management possible, product-centricity’s benefits can be extended into every phase of a business. While there are details to be mastered with product-focused lean, understanding its criticality to efficient operations is an essential first step. From that point, the possibilities are enormous. With approaches that honor authentic lean principles, much can be accomplished.