It’s About Time, Not Inventory

by BILL WADDELL

A volcano erupts in Iceland, the European air freight system slams to a halt, stores run out of products and manufacturers run out of parts – and its lean manufacturing's fault.  That inane mantra has been repeated over and over again ad nauseum in the past weeks. The same nonsense is spewed any time something happens that having a mountain of inventory sitting somewhere would have solved.

It is based on the same misguided thinking that has companies like Deere declaring themselves to be leaner because they gutted their inventories.  God help the students from the University of Iowa who went to Deere to study their world class lean thinking, and left thinking lean is all about gutting inventories.  While the market analysts are impressed that Deere is "ahead" because they are "focused on taking inventories out of the channel and becoming leaner over time"; the customers are not quite as wowed by the Deere lean strategy. "'It means I am losing market share,' says Larry Southard, co-owner of a central Iowa dealership that gets 90% of its sales from Deere gear. He figures his dealership's sales would be up to 20% higher this year if it had enough inventory to meet customer demand and products were shipped more quickly. 'I suspect we can lose at least half a dozen deals a month,' Southard says."

The objective of lean is to cut cycle times.  The fact that inventory dollars go down as a result is all well and good, but that is only because inventory is the manifestation of cycle times.  Reducing inventory value is not, in and of itself, a lean objective.  Reducing inventories without fixing the underlying problems that cause the need for the inventories is not only 'not lean' – it is just plain stupid.

Inventory turns is not a measure of 'leanness'.  All lean companies have high inventory turns, but all companies with high inventory turns are not necessarily lean.  Inventory turnver is a financial measure – meaning that almost by definition it is (1) inaccurate and (2) grossly over-rated.  Consider the data in the following eye chart:

There are two parts – a $100 part and a $5 part.  They both turn at a snail-like twice a year.  In scenario #1 you reduce the inventory of the expensive part by 67%, but make no improvement in the cheap part.  In scenario #2 you reduce the inventories of both parts by 50%.

In the first scenario you made greater improvement to inventory turns, but you still have an overall cycle time of 6 months because that is how long it takes you to get the longest cycle time part needed to produce.  In the second scenario your overall cycle time went down from six months to four months.  Dismal even after you have finished, but the point is made.  Even though the first scenario resulted in better financial inventory turns, the length of time it takes to execute the supply chain is no better.  You are just as dependent on forecasting as you were before.

The problem with financial inventory turns is that it assumes that reducing the inventory of the $100 part is 20 times more valuable to the company than reducing the inventory of the $5 part.  In fact, the cost of the part has no bearing whatsoever with the amount of waste the part is driving through the system.  Part #2 may well be bigger and bulkier, driving more wasted floor space and more material handling and storage cost.

Obviously the ideal scenario would be to reduce the cycle times of both parts – improving execution, reducing waste and improving financial inventory turns all at the same time. The point, however, is that it is not only possible but fairly easy to reduce inventory dollars and show an improvement to financial inventory turns without really making any meaningful improvements to the supply chain or factory execution.

Lean doesn't care about inventory dollars.  It cares about waste.  There are reasons for having all of that inventory … long supplier lead times, long set-up times resulting in batch production, geographic and logistics issues forcing purchasing by truck and container loads, and exposure to risk in the supply chain.  All of these things (and more) drive waste into the total cost – floor space, handling, exposure to quality problems, transactions and cycle counting to keep on top of it all, and on and on.  The objective of lean is to get rid of these costs.  That means rooting out the underlying problems and resolving them, then shortening the cycle times, and the inevitable result of that effort is the reduction of inventory and better turns – but that is just a side benefit.

The masthead from my web site is a Henry Ford quote, "Profit is the inevitable conclusion of work well done" that I believe encapsulates the driving principle of lean.  I think a corollary might be "inventory reduction is the inevitable conclusion of work well done".  But it is just that – an inevitable result but not the goal.