Friday, December 3, 2010

Lean Quote - Inventory Buffers A Lack of Information

On Fridays I will post a Lean related Quote. Throughout our lifetimes many people touch our lives and leave us with words of wisdom. These can both be a source of new learning and also a point to pause and reflect upon lessons we have learned. Within Lean active learning is an important aspect on this journey because without learning we can not improve.

"Inventory is a substitute for information: you buy them because you are not sure of the reliability of your supplier or the demand from your customer” - Michael Hammer,The Economist, 2000

To continue with the theme from A Lean Journey's Daily Tips on supply chain this week I thought this quote was appropriate.  This is also the season when the news is covering stories of Christmas toy shortages due to supply chain issues.

Improving in-season inventory positions requires getting merchandising, planning, supply chain, marketing and other functions to work off “one version of the truth.” It also means aligning these teams around the same critical metrics.

Numerous functions play a role in a retailer’s inventory management—not just the planning or supply chain functions. These functions may have quite different information on what’s selling (or not) and why, when product is due to arrive and when and where it is needed. This lack of common information leads to errant plans and disjointed operations, or simply put, the wrong inventory in the wrong place at the wrong time. 

Where you have perfect information, you don't need any buffer stock.  The less reliable information you have, the more inventory you need to hold.  On a basic level there are two pieces of information needed:  the reliability of the supplier to deliver to you and the stability of the demand from the customer.  Inventory is a buffer for fluctuations in these two components of the supply chain.

Art Smalley, President of the Art of Lean, has a great visual explaining the basics of Toyota's inventory logic:

To improve the information you have about your supply chain these are some questions you can ask:

What is your on time delivery performance?
What is your lead time?
What is your inventory level?
How much time do you spend looking for components?
How good is the quality of your supplier?
What is your supplier's on-time delivery performance?

Art demonstrates that making improvements in your supply chain with the emphasis on lead-time can have a big impact on inventory.

So if you want to reduce your inventory substitute distortions or uncertaninty in your supply chain with good information while continuously improving your cycle time.

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  1. Wow. I haven't seen those visuals before. Those are great. Thanks for sharing.

  2. Tim,

    Great post. This calls to mind the Operations Management Triangle (or Lovejoy's Triangle) in which Inventory, Information, and Capacity sit at the three vertices. A deficiency in any one of the 3 can be made up for with more of the other 2. I see this at work everyday, but I'm suprised how little this simple concept gets talked about.

  3. Tim,
    Two comments:
    1. I think it's better to replace lead time with interval, as you can order daily with a lead time of a week, and still require only half a day cycle. Too often I see lead time being used as that is in the text books, but it's all about frequency (or interval as in EPEI).
    2. I see Art sees forecast/MPS errors as driving buffer stock. In pull flow it will only be demand variability and this only at the FG level as upstream you'll have smoothed it through the heijunka board. So no forecast error impact on stock as in traditional supply chains policies.
    Best regards,

  4. Rob, You are certainly right on with frequency. That can have a bigger impact than lead time alone.

    Thanks for contributing to this post.