Key Definitions

1.      Inventory – All products and/or materials in store for any duration, outside or inside the factory. In lean management, inventory is a sign of a sick organization or factory.

2.      Lean inventory – An organization's philosophy that means performing tasks as cheaply and simply as possible while offering fast service and superior quality to the customer.

3.      Overstocking – Is increased inventory or money sitting idle.

4.      Just-In-Time system (JIT) – JIT denotes a production system in which components and materials are delivered just before they are needed in the production process. JIT seeks to reduce or eliminate inventory.

5.      Toyota Production System (TPS) – The TPS is an incorporated socio-technical production system, designed by Toyota. It is highly tied to lean management practices and philosophy. 

Today, organizations are adopting lean inventory practices to lower costs, enhance flexibility, and have additional time to focus on clients. Lean inventory and supply chain management allows small, medium, and large organizations to improve efficiency and boost profits.

Definition and Origin

Before Just in Time was developed by Toyota, producers kept large stocks of inventory just in case there was a surge in demand. However, Taiichi Ohno developed a production system where parts were manufactured or ordered just as they were required in the production process (Just in time inventory management). He discovered that JIT reduced the lead time by 33% and production cost by 50%.

Lean production and JIT are often taken to be synonyms, but they are not. JIT focuses on building efficiency of production process, but lean production seeks to use efficiency to deliver optimal value to the external receiver. As such, JIT manufacturing is just one of the components of lean production.

JIT lean inventory management allows only production of the exact amount of what is needed, exactly when it is needed, and only in the specific quality and quantity required. JIT must be practiced not only by your organization, but also by your suppliers if it's going to eradicate all forms of inventory waste. Done right, JIT can fully eliminate the need for warehousing. This saves resources that would have been spent on warehousing buildings, maintenance staff, employees and measures to prevent obsolescence, spoilage and similar problems.

Quick Note: Lean inventory management (using JIT to manage inventory) is a systematic method of enhancing value in an organization by identifying as well as eradicating waste of material, time, and effort through continuous development in search of perfection.

Causes of Inventory

There are a number of factors that can lead to excess inventory in an organization. These include:

• Acceptance of stock as a necessary evil or normal.

• Poor equipment layout.

• Large-lot purchasing or production.

• Long changeover times.

• Stocking on speculation.

• Obstructed flow of goods.

• Defective material.

It should be noted that the main cause of inventory is overproduction; if a workplace manufactures more than the market demand of its output, to manufacture faster than inventory builds up. Another major cause is the assumption that stock is good (an asset). Many firms record stock as return on investment or revenue, but the stock has zero value until it is demanded and sold – it attracts costs. 

An awareness campaign must be run in organizations if inventory is to be reduced or eliminated. Managers and employees must believe in the likelihood of zero inventories – inventory cover problems, it does not solve them. 

Effects of Inventory

Inventory is a hard waste to talk about because managers believe it is a necessary one. They believe (might be true or not) that their plant cannot function without a certain level of inventory, but inventory should not be desired. In fact, controlling and reducing inventory is one of the main purposes of pull production.

Inventory does not gain value or worth. No matter how long inventory is kept or stored, it will not add value to the consumer than if it was used immediately. Inventory is only a source of cost.

Finally, just like overproduction, inventory hides other wastes; it covers processing and production issues and pads long waiting and transportation times. 

Cost of Carrying Inventory

Generally, costs of carrying stock for one year ranges between 20 to 30 percent of the original cost, thus, it costs 20 to 30 cents to carry a dollar worth of stock for one year. Inventory costs that lean management seeks to eliminate include;

•         The cost of cash sitting idle in stock.

•         Inventory loss, obsolescence, and loss.

•         Recording product and inventory turnovers.

•         Taxes and insurance on warehouse and inventory.

•         The cost of utilities, maintenance, warehouse store, etc.

•         The cost of putting inventory away and transporting material in the store.

Lean Inventory Ideologies

There are 5 lean inventory management ideologies that management should consider when implementing lean management in their organizations. These are;

1. Additional Value

Before making major changes to organization processes, managers need to determine whether implementing lean inventory ideologies will generate additional value. Transforming current processes will be a huge investment in terms of both resources and time. Management should ask: Will this investment really generate a return or will it change the order of doing things, without generating additional value to the client? Will the organization value rises, remain the same, or decreases?

2. Demand-Based Flow

Managers need to know how inventory flows in their organization to determine the economic value, as well as the business value provided to customers. In a demand-based production system, inventory is only provided when it is required to meet customers' orders. Adopting demand-based flow of inventory will eradicate the following forms of waste:

1.    Waste of transporting – To realize smooth flow, products should not be transported between processes. Eliminating unproductive movement might require adjustment of production or the raw material buying process.

2.    Waste of overproduction – Overproduction occurs when goods are produced in anticipation of likely demand. Overproduction leads to two types of waste: waste of material and waste of money for warehousing the excess product.

3.    Waste of motion – Inventory should be stored well to avoid unnecessary motion such as bending, reaching, searching and walking. Time used to look for a product can lead to longer lead times and delays.

4.    Waste of waiting – Waste of waiting is experienced if the inventory is not constantly moving through the processes.

5.    Waste of over-processing – Waste of over-processing result from using expensive, more complex machines in processes where cheap, less complex machines are more effective in production.

6.    Waste of defects – Defects lead to scrap or re-works and both have adverse effects on profitability of the firm.

7.    Waste of inventory – Excessive inventory occurs due to waiting and overproduction and the outcome is higher stock holding costs and longer lead times.

3. Pulling Inventory

Once the management has mapped how inventory flows in their organization and they have worked toward eradicating the above areas of waste (the seven waste), the next ideology (pulling inventory when customer place the order), will be a natural result. A lean pull-based system is demand centered where no inventory is stored. Pull production holds that effective demand control does not only require projecting product demand based on previous data, but also active monitoring of inventory flow.

4. Responsiveness 

A rigorous and continuous evaluation of inventory flow together with effective demand control allows managers to adapt and respond quickly to market changes. This responsiveness keeps inventory at the right levels; preventing write-downs or write-offs of obsolete inventory and unnecessary warehousing costs of inventory.

Pursuing perfection

Perfection ideology requires the management to commit to a constant refinement of the organization's inventory management processes. This leads to improved quality, efficiency, cycle time, and cost. The pillar of lean inventory is built on the concept of constant process and product improvement and the eradication of non-value-adding or waste activities.                              

Shifting to a lean inventory system is a decision that managers should make after organization-wide consultation.

Lean Inventory Management Attributes

Establishing and maintaining an effective lean inventory system involves six key attributes. These are;

1. Demand management

Demand management involves providing inventory when demanded by the client. For efficient demand management, organizations need to plan their operations and sales, check their inventory management practices, and enhance collaboration across the value chain.

2. Costs and waste reduction

Although lean inventory practices are focused toward elimination or reduction of cost and waste, they should not compromise customer value. There should be no negative impact on the product or service value.

3. Process standardization

Process standardization allows continuous inventory flow or stream in the organization. Some inhibitors such as transportation delay, work in the queue, and batch processing can slow down or interfere with inventory delivery.

4. Industry standardization

Product and process standardization among custom partners can still result in waste, particularly when common elements are not fully standardized. Although standardization can improve service delivery and benefit client using the service or product, it can also lower the proprietary nature of a service or product, making other competitive features more significant.

5. Cultural change

Inventory partners such as suppliers and customers must all work together to offer value to the final consumer.

6. Cross-venture collaboration

Cross-venture collaboration via the use of groups can assist in defining customer value as well as understanding the value stream or flow, thus, maximizing the value received by the consumer. 

The advantage of implementing lean inventory techniques are clear: lower inventory levels or SKU (stock keeping unit) count, increased use of standards in materials and processes, enhanced collaborations, as well as a general reduction in cost compared to organizations that do not utilize lean practices.

Inventory Reordering or Replacing

Lean inventory management use Just-In-Time system. In an organization that has adopted JIT system, there is zero or little inventory – the best situation is to sell one, then reorder. Inventory should turn over at least twelve times on stock, four times on special items a year and stock should not be stored for more than one month.

Managers should remember to evaluate discount from suppliers as it takes long to offload. For instance, a supplier's discount of 4 percent for quantity bought might cost an organization as much as 6 percent to carry this stock for one month.      

Approved Inventory List

Every organization makes a commitment to have a stock of approved inventory for each location. However, this commitment does not mean that all the items are always available but that they can be provided in a few hours or days. In some situations, some of the items in inventory might not be on this list and one may ask, "How did these items get into the warehouse?" Here is how:

•         The client orders 10 pieces but the organization must produce a minimum of 15 pieces (5 go in inventory).

•         The client returns some items or cancels the order.

•         Clients stop to purchase stock specifically produced for them.

•         Leftover items of terminated products.

There are two techniques managers can use to manage or control these inventories in their organizations. First, they can classify them as a necessary evil and implement a special reduction program every time cash gets tight. Alternatively, they can make tactical decisions on the amount to carry, enact a stock management process to actively control inventory and constantly improve the organization results.

Types of Checklist

Managers should use a checklist to identify and analyze the workstation inventory.

Inventory Waste Finding Checklist
Process:                                                                            Date:
Description of Waste             Yes No  L/S                Cause/Improvement Plans
1.    A lot of inventory on floors/shelves.
2.    Floor/shelves storage takes up space.
3.    In-process inventory accrues within an individual operator.
4.    Inventory piles block walkways.
5.    In-process inventory is piled up between processes.
6.    Impossible to determine quantities of in-process inventory.
7.    In-process inventory is piled up between operators.
Total
(L/S: Large or Small Problems)

Figure 1: Inventory Waste-finding Checklist.

Transport Waste-finding Checklist
Process:                                                                           Date:
Description of Waste               Yes  No L/S              Cause/Improvement Plans
1.    Pile up during transport.
2.    Transport requires manual help.
3.    Change of transport machines in mid-transfer.
4.    Transport distance is too long.
5.    Next/previous process on another floor.
Total
(L/S: Large or Small Problems)

 Figure 2: Convey checklist

The figures above show sample diagrams of an inventory and convey checklist. The checklist can be used to identify waste in the production process and hence reduce or remove them.

Avoiding Lean Inventory Management Pitfall

To understand how lean is perfected, bring into your mind the National Association for Stock Car Auto Racing (NASCAR) pit. In just a few seconds, the pit team manages to give the driver a drink, wipe down the windshield, change tires, and fill up fuel. Everything is perfect.

Predicting inventory levels is the key to successful waste elimination. However, stock management is becoming a recurring issue for some firms, mainly due to difficulties related with demand forecasting, multi-channel distribution, as well as lack of communication channel among the involved parties.

Taking a keen look at the experience of pioneer organizations in the quests to implement lean inventory management system helps other organizations avoid these three snags. In most cases, lean inventory management fails of;

1. Failure to Adapt Organization Process

In an attempt to reduce inventory, some firms take lean management too far. Management changes one business process rather than the entire value chain. They focus on the financial benefits of reducing inventory, but pay less or no attention to how it will change operations. They also ignore the role of the distribution department in making lean decision, and the head of distribution find out that inventory is being reduced when fewer pallets and cases show up at their station.

Hint: Adapting lean inventory management require organization wide consultation; involving the heads of finance, operations, procurement, as well as the sales and marketing team is vital to maximizing effectiveness.

2. Failure to Align Goals

Even with lean inventory management as the main force, the idea of optimization cannot be ignored. Sometimes the problem of inventory is solved by counter-intuition. In fact, it might be more productive to raise rather than reduce inventory levels if it is clear that doing so will lower the overall costs. Organizations' inventory and business plans should align.

Although lean inventory management has hit the manufacturing industry, many firms, particularly wholesalers and retailers, are yet to implement lean ideologies. Even among those that try implementing lean management, their focus is often on suppliers upstream as opposed to adding value to the final product.

Paul A. Myerson, a professor of practice in supply chain management, Lehigh University, argues that organizations should identify store and distribution operations as the main candidates for lean, because this is where most inventory waste can be reduced.