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Sunday, May 31, 2009

Is Inventory Reduction an Objective or a Result?

Inventory is one of the eight deadly sins (wastes) in Lean manufacturing. This waste is often one that hides other wastes in our businesses. I think most are familiar with the river and boulder analogy. The water level in the river is the level of inventory and the boulders in the river and the problems in our business. As we lower the water level or inventory level those boulders or problems stick out.

It is fairly well understood the financial impact of inventory. Certainly, in these economic times it is not a surprise that many companies and their CEO’s are focused on cash flow. Yet, well-intentioned efforts to reduce inventory, more often than not, get only temporary results. Without effective business process changes, the organization can easily slip back to old ways with inventories (and costs) just climbing up again. I think question is should inventory reduction be an objective of the business or a result of say implementing improvements.

The numbers on the company balance sheet do not tell the whole inventory story. The overall inventory of an organization can be divided into 3 major groups: 1) Raw material, WIP, and Finished Goods 2) MRO inventory (inventory of tools, maintenance spares, misc. production items, etc.) and 3) Distribution inventory (all materials in-transit of stored outside premises). Traditionally, inventory reduction efforts have focused mainly on the first category. However, this typically accounts for less than 40% of the overall inventory of a company.

One of the major impediments to inventory reduction is the mistaken notion that just improved inventory management is all that is required to get the job done. The real culprits are the inefficient business processes that cause excessive inventories to exist in the first place. It is often the case that the real causes of excess inventory lie outside the purview of the supply chain managers.

The mantra here is that in order to get a bigger piece of the cake, one should increase the size of the cake itself. So the objective should be one of continuous improvement. We should consider improving production scheduling, reducing cycle times, increasing manufacturing flexibility, improving quality, improved forecasting, and developing and partnering with suppliers as the goal. By addressing the cause of the increased inventory the gains can be sustained. Reduced inventory quantities and dollars are then the resultant of said improvements in the business system.

Management who do not truly understand lean teachings are often results orientated in our performance driven society. This can be summarized quite effectively by these two quotes:

• “Leaders may be judged by he numbers they deliver, but that’s not the way they should run the company” – Rowan Gibson

• “The winners will be those companies that focus on their processes, not their results” – Art Byrne


  1. Businesses tend to think that the whole aim of Lean is that of waste reduction and forget that they should be creating value for the customer. To focus inwardly on the waste, whichever waste it is, without considering the customers perspective will lead to an implementation that is likely to not be sustainable.
    how to implement lean manufacturing

  2. Hi,
    I ahve been assigned to a Black belt project that involves reducing slow moving inventory, at a plant that has $2.3 M of inventory older thatn 12 months...aprox 60% of the inventory comes from China...there are 14 variables identified as possible sources of variation generating the slow moving inventory, by anay chance any of you have run into a similar problem or do you know of a case study that somebody might be willing to share? Thanks !, Ana D'Hondt - IR.

  3. Ana, Great question. I think there is more information that is needed to support your request. The types of variation matter and therefore for the solution.

    Can you share more information? email me mcmahontf22@comcast.net.