Inventory as many of you already know is one of the 8 wastes in any organization. Along with Over-processing it may be one of the deadliest forms of muda there is. Without a clear demand attached to inventory there are many risks involved in storing large amounts of stock. While there are many ways to reduce inventory it is often times a combination of tools that follows a detailed analysis and assessment of why inventory keeps "piling up." Today we will address a few key elements to take into consideration when looking to reduce the waste of inventory.
We should note first that there are 4 main types of inventory which include: raw materials, work in progress, finished goods and MRO items that are often used to support operations and any other organizational functions that may be necessary. This is a concept that often gets overlooked, however what it tells us is that inventory can be built up and cause waste all throughout the value stream. One other key concept that should be taken into consideration when looking to reduce or mitigate the effects of inventory is what inventory is actually used for. There are many reasons why a company might choose to have inventory on hand, some of which are: supporting the organizational strategy and its operations, support financial objectives and finally as a buffer to balance supply and demand.
While inventory is one of the deadliest forms of waste often times it can not be "completely eliminated." However, it should be at the most effective level so as to be seen as an asset and not a cost that is eating up your balance sheet. So how can we reduce inventory to an effective level without creating bottlenecks and losing customers? Well there are many different ways but here are a few that may support your efforts and move you closer to a "perfect balance."
Eliminating waste in general will lower inventory
Now that we understand there are multiple different types of inventory and not just the "stuff" sitting in stock awaiting an order it is much easier to understand that items "waiting" in queue are considered work in progress, and those bulky packages that are being "transported" to and from areas, well those items are the in-transit inventory that often never get accounted for. These are only two examples of how inventory can almost always be lying silent behind other forms of waste, by removing or reducing transportation, motion, waiting, over processing and any other form of waste you will move product much quicker. This ultimately increases your "inventory turns" and inevitably creates an environment where your funds are not invested quite so long in the inventory items that are being produced. One of the most effective ways to identify inventory and any other form of waste is to map processes, product lines and services out. By doing this you can make visible the types of waste that are in your value stream and ultimately plan for their mitigation.
Produce based on demand generated at the customer's pull
One of the most common reasons associated with the waste of inventory is working to a forecasted demand or "pushing" products through the system. Push systems and forecasts are often a build to plan type system, additionally they build to that plan and at times set aside changes or fluctuations that may occur. This can result in excessive inventory and waiting. When we build to external customer demand that flows into internal customers we have a better view of what the "customer" is actually pulling for. One method associated with pull systems is the kanban system. Much like a sales order triggers the recipient to fulfill a need or solve a problem kanban helps to connect actual needs with the associated information. Often times kanban can be a powerful tool to reduce inventory and move towards the ideal single piece flow environment. The same concept is used when our MRP systems have accurate lead times and actual demand being driven. For instance a sales order is placed in ERP/MRP which in turn drives a "project" for engineering to review and then get's flowed down to a planned order in the exact quantity that the sales order was put in the system, unless of course there is some "safety stock" built in. This is of course assuming that it is a make to order environment. None the less when we build only to the pull or demand of the customer we can infact produce only what is needed when it is needed.
Be cautious of bullwhip effect
The bullwhip effect is the idea that demand is generated by and through the customer, however as the demand travels up the supply chain or an extended supply chain "worry" sets in at each level causing more and more safety stock to be built in at each entity in the chain. So if the customer wants one, from the retailer, the distributor might order two and the manufacturer might produce three causing somebody in the chain to have some inventory. Often times this can be mitigated through communication methods such as S&OP and providing an accurate amount of visibility into the actual demand of the customer.
Utilize Six Sigma
There are some instances where inventory is held in order to prevent a constraint from becoming a bottleneck. This is a very common practice in organizations that utilize a strategy known as the theory of constraints. While the theory of constraints is a very effective method of acknowledging that there is in every process at least one constraint, we should also recognize that there is a fixable root cause that can usually assist the constraint. Sometimes that method is to reduce variability coming off of lines. One common example of this concept is when a company has a poor yield rate or they continually get "defects" coming out of a process. In order to deal with the defects they place a calculated amount of inventory in a strategic location to make up for the poor yield rate. While the defects may be common cause or special cause reducing the variability to a sigma level and controlling it may be the answer.
While all four of these points can be a powerful way to reduce inventory, you will only really know what to do after analyzing and assessing how much inventory is actually needed vs. what is being held and answering the "why" element. In closing there are many different ways to lower inventory but again be very cautious that one action does not affect others in the value stream. You wouldn't want to solve one issue only to create another.