Waste of Inventory
In a lean manufacturing environment, waste of inventory is considered one of the 7 major wastes. Although some level of inventory may make good business sense, you will want to avoid carrying excess inventory. Inventory will hide many problems in your company. The best way to reveal these problems is to lower your inventory. The five major categories of inventory we will review are finished goods, sub-assembly, raw components, office supplies and MRO.
Finished Goods Inventory
Very few repetitive manufacturing companies, if any, operate with zero finished goods inventory. Their customers expect immediate or next day delivery, so a marginal volume of inventory (at the very least) must be kept at the finished goods level. The problem for most of these companies is determining what the correct level of inventory should be for their current situation. Don’t be afraid to start high during the initial phases of your lean implementation. Inventory levels will decrease as the level of lean increases. Dropping inventory levels too quickly could be detrimental to maintaining customer service levels.
Most companies will create waste of inventory by setting these levels too high. This requires space for storage, ties up cash flow and requires labor to move and rotate the stock (FIFO). On top of that is the cost of tracking the inventory and the amount of time spent sorting this inventory should a quality concern arise.
Finished goods inventory is generally the most expensive inventory as it has labor and other overhead attached to it along with the cost of material consumed during production. There are formulas available to help establish what level of inventory to carry in order to meet desired customer service ratings. In order to reduce this inventory, process improvements as well as a higher accuracy in forecasting customer requirements is required.
Another type of inventory some companies will carry is sub-assembly inventory. This type of inventory is carried in lieu of, or in conjunction with, finished goods inventory. This provides companies that produce similar end items with many different options and the ability to quickly satisfy customer orders. Although less expensive to carry than finished goods inventory, it is still considered waste.
As with finished goods inventory, every attempt must be made to keep this inventory to a minimum. Zero sub-assembly inventory should be the ultimate target, however many companies will require some level of subs. This inventory needs to be closely monitored in order to avoid consuming raw components that may be required for other product. This will lead to other wastes. A kanban system will help keep sub levels under control.
Raw Component Inventory
Arguably the largest waste of inventory in most companies is raw components. Most companies believe it is a necessity to sit upon days and days of component inventory. While there is a need to cover component delivery lead time, the remaining days on hand of raw components must be kept to a minimum.
On the one hand, you have the material planning department keeping high levels of inventory to protect against expedite costs due to short ships, supplier issues and fluctuations in customer demand. They will bring in larger quantities of material in order to get a price break. Good intentions, bad idea. This leads to extra storage costs, material handling costs, unnecessary use of space, and the list goes on. The manufacturing group, if left unchecked, may build according to their own agenda, putting a further strain on components.
On the other side of the fence sits the finance group. Although they like the idea of a price break for buying bulk, they require low inventories in order to maintain cash flow levels. Ultimately, this waste needs to be addressed through improvements to production control, MRP and reduction in component lead times.
Office Supplies Inventory
Office supplies are often overlooked when considering inventory because they are not directly related to production. As is the case with finished goods, subs and raw components, office supplies are a waste of inventory. This type of inventory must be monitored in a manner similar to production inventory.
Carrying excess supplies will take up space and tie up cash (although it is generally in much smaller volumes than production inventory, it can get quite large in some companies). Not only will vast quantites of similar supplies end up in many different locations, the risk of pilferage is higher because many of the supplies are common household items. The less office supply inventory that you carry, the easier it is to control. If you don’t have a central area responsible for ordering and maintaining this inventory it can get out of hand pretty quickly. Reducing this waste of inventory and keeping it in a central area where it can be monitored and controlled should end up saving your company in the long run.
The last waste of inventory to review is MRO (Maintenance, Repair and Operations/Overhaul). Due to the critical situations that generally call for this type of inventory, it needs to be tightly controlled. Unfortunately, the same critical nature that requires tight control also results in high MRO inventory.
Although you may never know exactly when a major line down or machine issue will occur, you can develop a preventative maintenance system that will help prevent them from occurring. By developing this type of system, you should be able to order equipment or replacement parts as needed instead of tying up cash through inventory. MRO items that have long lead times or are hard to get should consist of the bulk of this inventory. Target the improvement of delivery time from these MRO suppliers in order to maintain a lower inventory in house. Remember, you don’t want to carry much of any item that can be obtained quickly, but it would be considered a real waste of inventory if you end up stopping production for lack of a 25 cent bolt.