Page 61 - How To Implement Lean Manufacturing

42 Cha pte r T h ree

Just Why Do I Have and Why Do I Need the Inventory?
The smart ones, once they got in trouble said, “Wow, maybe there’s more to this inven-
tory reduction than just slashing our inventory volumes. What’s going on here?” The
really smart ones asked—and answered—two basic questions. These were questions
that were overlooked by the vast majority of the JIT implementers of the past, and are
frequently overlooked by the managers of the present. These questions are:
• What is the basic purpose of inventory? Meaning, if it’s so bad, why do I have
any at all?
• What is causing the need for the inventory? In other words, why can I not seem
to operate without it?

What Is So Bad about Inventory?
So what’s so bad about inventory? Simple: Inventory costs a lot of money. First, there
are the raw materials and operating expense it costs to produce it. Next, we must han-
dle it, which means we need more people and machines like forklifts. Then we find
ourselves moving the material around, usually more than once before it gets to its
desired location. This in turn requires space and transportation and neither are free.
Next, we must keep track of it, which means people, computer programs, and reports
galore—almost all of which are filled with errors. We then try to fix these errors. The
way we try to fix the errors is to use things like cycle counts which then take more
people, more time, more computers, and worst of all more reports and more meetings.
In addition, we must care for this inventory to make sure it does not get damaged. And
finally, we must ship it before it becomes obsolete.
I have dealt with several firms who say their cost of inventory, obsolescence excluded,
exceed 25 percent/yr of the product value. That is 2 percent per month, and if your
company is operating on 12 percent earnings on sales—well, the impact is huge and
you can see why many firms wanted to get rid of it. What else can be done to make such
a huge bottom-line improvement? It’s no wonder many firms jumped on this band-
wagon of inventory reduction in the name of JIT.
All of these liabilities of inventory are obvious bottom-line opportunities, and yet
the greatest advantage of reduced inventory is not even mentioned here. In fact, it is
often not even recognized. In just a minute, we will get to that crucial advantage which
so few see and even fewer appreciate.

Question 1: “What Is the Basic Purpose of Inventory?”
What is the basic purpose of inventory? This is not a complicated question—indeed, it is
a rather simple one actually, but it is asked by a scarce few, and answered by even fewer.
First, let’s make sure we are on the same sheet of music here. I am talking about the use
of inventory in a classic for-profit business. The objective of those companies is generally
to do just that: make a profit. In those businesses, the purpose of inventory is singular
and simple: You should only hold the inventory you will need to protect your sales.
I see no other reason to hold inventory. Any amount beyond this is an expense that
is not justified, yet to hold less undermines your ability to supply your customer—and
nothing will hurt profits like failing to sell. It is a very simple concept. Well, it is pretty
simple, anyway, and yet is still missed by many.