The fundamental math and logic of inventory management has been part of the APICS Certification regimen for better than a couple of decades. Not being ones to miss out on the cutting edge, the faculty at Wharton is starting to wrap their Ivy League brains around the idea. For a couple of weeks now, I have been avoiding an article in the Wharton Business School Online rag, their repository of great thoughts, called Inventory Management: A Way to Give It a Grade . The article draws heavily on the wisdom of a guy named Serguei Netessine. Serguei hails from Russia – that hotbed of lean manufacturing – and he points out a couple of novel ideas (novel to him, anyway).
For one, Serguei notes that if you have too much inventory, expenses go up. "But if you reduce too much, you have nothing to sell," he says. Fancy that! He ponders the difficulty of forecasting, and the ugly exposure to obsolescence new technologies bring. The results of all of this pondering were reported in a study he wrote with a guy named Serguei Roumiantsev. (Now that is the most remarkable aspect of this whole Wharton article – that they have two guys named Serguei there.) The title of their report is "Should Inventory Policy Be Lean or Responsive? Evidence for U.S. Public Companies". Lean or responsive – as if the two are exclusive of each other. It is clear from the article that the esteemed professor thinks that lean means simply carrying less inventory, and that being responsive (translate: having shorter cycle times) is a different animal all together. If there is anything redeeming about the article, it is that the Sergueis came to the right conclusion – being ‘responsive’ is a better idea than simply not carrying inventory.
In another Wharton article, this one called Delving into the Mystery of Customer Satisfaction: A Toyota for the Retail Market, the subject of inventory is also given deep consideration. This one is also penned by Serguei (Netessine, that is). In this essay, he makes the startling observations that (1) retail stores are often out of stock and (2) that makes customers unhappy. In fact, he cites a statistic that the average U.S. retailer is out of 8.3% of their items on average. This, he points out, is not a very good thing at all.
I don’t know much about the Ivy League, except that they are generally lousy at football and inventory theory, and they are ‘elite’. Oh yeah, and they are very expensive. I can’t do much to help them with the football problem, but let me take a shot at the inventory theory weakness. The amount of inventory needed to assure availability is a function of the lead time and the variability of demand. If you want 98%+ inventory availability, then you need to calculate about two sigma worth of variation in the demand pattern, multiply that by half the lead time, and add it to the average. If you do that, then, as if by magic, there will be enough inventory.
Most companies do not like the results of that arithmetic, because it often says they need a very big heap of inventory. The average demand is set by the market, however, as is the demand pattern and all of its variability. The need to use two standard deviations was set by Copernicus or Tycho Brahe or Albert Einstein, or somebody else a lot smarter than we are, so we better not change that either. The only really controllable variable in the equation is the lead time. The shorter the lead time, the less exposure to all of the variability in demand, the less inventory is needed to keep the customers happy.
So I can save Wharton a lot of research time, effort and expense. Being lean is the result of reducing cycle times. That yields less inventory and greater responsiveness. No need to look into it any further. And yes, retail stores are out of a lot of products because they refuse to accept the math. When they source from Asia, their lead times are astronomical – manufacturing lead time plus at least 30 days on the water. With all of the variability in demand for most items, it takes far more inventory than they are willing to carry to protect a time line like that. Being out of stuff is the price they make their customers pay for getting Chinese pricing. No need to look into that much further either, professor. The "Mystery of Customer Satisfaction" was solved about twenty five years ago. To quote Foghorn Leghorn, the venerable rooster in the old Warner Brothers’ cartoon, "That’s mathematics, son. You can argue with me, but you can’t argue with figures."
Next, we need to take on the Warwick Business School in Scotland. Jon Miller over at Gemba Panta Rei wrote about a 60 year old deaf lean guru named Stuart Ross in Scotland, who calls himself a ‘resultant’ instead of a ‘consultant’. He has earned the right to call himself whatever he wants, based on the impact he is having. It is inspiring to read about this guy, but depressing to read that the Warwick Business School has taken note and has decided to conduct an ‘investigation’ to see whether there is anything behind this new fangled ‘lean business’. They are the guardians against any suspect, unproven theories like lean infecting Scottish manufacturing, I guess. Warwick is also elite and expensive…and they don’t even have a football team.
The problem is not all academia, though. Larry Grasso is plowing up all kinds of new, fertile ground in lean accounting at Central Connecticut State University; and Tom Johnson literally wrote the book on lean economics and sytems at Portland State U in Oregon; I have know Bob Amsden at the University of Dayton for years and he has blisters on his hands from hammering so much quality control knowledge into so many young heads for so many years; Shahrukh Irani at Ohio State is an absolute lean industrial engineering maniac. The University of Kentucky, the U of Tennessee, Iowa State, just about all of the state schools in California, and a whole bunch of other schools are doing great work in lean manufacturing.
There seems to be an inverse relationship between the cost of the schooling and the relevance of the knowledge. For a cool 66 grand a year, the Sergueis at Wharton will explain 1970’s inventory theory to you, and teach you all you could ever want to know about outsourcing. For $34K, you can join the fellas at Warwick in their quest to see if there really is anything to this ‘lean business’.
On the other hand, it’s less than seven thou to sit on the leading edge with Larry Grasso up in Connecticut. For less than half the cost of Warwick, Dr. Johnson, listed as one of the most influential business people in the nation by the Harvard Business Review, will fill your head with more lean than you can handle. Dr. Irani at Ohio State? $20K – less than a third of Wharton.
There is another common factor too. Central Connecticut State’s football team has been tearing up the Northeast Conference lately. Portland State has strung a couple of winning seasons together against some good competition. Ohio State? Tennessee? The PAC 10 schools out in California? What needs to be said about their football programs? Recall that a couple of days ago I wrote about Louisiana State and the ‘lean bus’? The LSU Tigers can play with half the NFL teams.
There is a clear pattern here:
Low Cost + Good football = Solid lean education;
High cost + lousy football (commonly known as an ‘elite’ or Ivy League school) = No concept of lean
I think the lesson for manufacturers from all of my research into the state of higher education is clear: Recruit all of your new hires from state schools with good football teams. Avoid the grads from the elite schools – the cost of retraining them will kill you, and they won’t even be able to make it up to you by helping you get good tickets on Saturday afternoons.