Why does inventory accumulate in organizations?

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  Many companies use inventory to combat such problems as late deliveries, defects and various other problems.  And, while it may help to mitigate these problems, it can also create other problems.  You see when companies create inventory buffers to meet customer demand, they tie up cash, take up space and cause inventory to accumulate throughout the production processes as well.  There are two distinct strategies that have been used for some time now to combat inventory build up:

• The Just in Time Strategy.
• Lean.

  These two strategies are customer focused strategies that focus on pulling materials, rather than pushing them through a production process.  This in turn helps eliminate many of the causes of inventory build up all throughout a company's value stream.  To do this however, you must be able to understand and find where and why inventory accumulates.  We will focus on why inventory accumulates.  Just remember, these reasons are general by nature and you may have some more specific reasons for inventory accumulation in your organization.

1. One of the most common reasons that inventory builds is because many processes have difficult or lengthy changeovers which cause machines to experience downtime while workers change: materials, tooling or other settings to begin production.
2. Another reason that inventory can accumulate is to combat shelf life.  Sometimes when a material has a shelf life, companies will overproduce to try and use all the materials before they expire.  This causes excess inventory.
3. Just in case production is another very common reason.  Just in case production is an inventory strategy where companies keep large amounts of inventory on hand just in case of a sudden increase in demand.
4. In addition to this, inventory often accumulates or depletes quickly as a result of those pesky close of the month rushes.
5. Inventory can also accumulate as a result of unbalanced production.  When capacity is not balanced correctly it can result in bottlenecks throughout a process.  
6. Another very common reason for inventory accumulation is when inventory is built in batches and must be transported from larger machines or processes to smaller ones.  This often results in queues of inventory.
7. The final reason that we will suggest is that inventory accumulates as a result of frustrating and complex processes.  Many companies will build excessive inventory because the process is so complicated and they do not want to build it again.

Buffering for demand changes and unexpected changes is not the worst thing that a company can do.  Where the problem often gets out of control is when too much excess is created.  Some safety stock on hand can be beneficial and help a company to combat sudden changes in demand or in production.  While techniques like safety stock and buffer inventory often give the appearance of protection one must also note that they also seem to hide many problems within a process too.

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  As we’ve discussed in before, a pull system reverses the flow of materials and information and triggers the production of items and information that is based on real customer demand.  For example a kanban system can assist in pulling demand through the value stream as workers begin to adapt to the new system.  As time goes on suppliers begin to understand that building to the demand of customers can create flow that is based on real demand.  This in turn makes work easier and drives waste out of an organization.  One way that companies can gauge their progress of pull implementation is to regularly observe how flow is within an organization and watch as work in progress inventory begins to lower. 
Challenge
Now before we go, we’d like to ask you a few questions that you can answer in the comments section of the community or in the upcoming assignments section:

1. What do you think the value would be in eliminating excessive amounts of inventory?
2. What concerns might you have about shifting from a push system to a pull system?

Share your thoughts in the comments section below and receive a coupon to one of Lean Strategies International LLC's courses.

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