Manufacturers: Stop Leaning Out Inventories

Time was, companies that aspired to operational excellence and Lean manufacturing cut their inventories to the bone. This year, we learned what a mistake that can be.

 

Here’s a bitter pill to swallow: Six months in, 2011 had already become the costliest year on record for natural disasters globally.

The somber bill of lading includes floods in Australia, an earthquake in New Zealand, the earthquake and tsunami in Japan, and in the United States: drought, wildfires, tornadoes, floods, and other storms.

According to MSNBC:

The first six months saw $265 billion in economic losses, well above the previous record of $220 billion (adjusted for inflation) set for all of 2005 (the year Hurricane Katrina struck), according to Munich Re, a multinational that insures insurance companies.

Economists now predict that the tech industry will fully recover from Japan’s catastrophe by this fall—a half-year after the fact.

Mercilessly, the disaster trend seems to continue apace. This isn’t an invitation to political debate; no matter who or what you blame for the increase in disasters, the trend line promises more disruption. The disasters of 2011 have ravaged homeowners, tested the durability of businesses, and threatened or dismantled supply lines. They’ve also brought in for scrutiny that nagging brand of operational excellence that says manufacturers must be laser-focused on reducing inventories—a core tenet of Lean manufacturing.

When your inventories are low and disaster hits, how do you maintain operational excellence and customer satisfaction? You don’t. How much operating capital do you spend trying to get back to normal operations? As much as you saved by keeping your inventories trim, I might guess.

Maybe buffer stock doesn’t look so wasteful now.

I don’t claim we’re on a straight-line path to Armageddon, and I’m no predictive modeler. But if I were running a manufacturing business for the next five to 10 years, I wouldn’t worry too much about my inventories. I wouldn’t define operational excellence, or even Lean manufacturing, by that metric. Instead, I would create highly efficient operations and root out waste in my plants. But I wouldn’t consider inventory waste.

This counters many long-held beliefs. For those who need an antidote to the bromide that inventory is always bad, think of inventory as insurance against customer disappointment and lost sales. In a world increasingly prone to disaster, insurance can be a business’ best friend. It’s a smart way to run a business. Running operations without inventory in a disaster-prone world is reckless.

Don’t agree? Check out Lean manufacturing granddaddy Toyota, which, after the carnage in Japan, rolled out a plan to disaster-proof its supply chains. Guess what’s front and center?

“The second step involves suppliers further down the chain,” reads a recent Supply Chain Digital article, “who will be asked to hold as much as a few months’ worth of inventory of specialized components to safeguard against manufacturing problems.”

What do you think?

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5 Comments

  1. Posted September 27, 2011 at 12:25 pm | Permalink

    Lean manufacturing is not about cutting your inventories to the bone… it has always been about cutting your inventories to the minimum you are comfortable with taking into account possible risk. If you are strictly cutting inventory for the sake of cutting inventory… well… that was dumb.

  2. Posted September 27, 2011 at 9:21 pm | Permalink

    Operations Research / Industrial Engineering have many tools to find out what is the correct amount of inventory GIVEN THE ASSUMED RISKS in terms of probability, gravity and duration. One solution is through optimizing decisions related to inventory level and production planning in simulations, with short-term refinements through scheduling. It is part of the growing field of applied analytics to operational decision making.

  3. John B.
    Posted October 3, 2011 at 5:18 pm | Permalink

    Sounds like we’ve flipped cause and effect (again?). Does reduced inventory lead to operational excellence, or does operational excellence lead to reduced inventory. It’s kind of like the guy who puts the paycheck first (before the work). I hope op ex can return to focus on execution. Inventory has always been about balancing risk. Perhaps we forgot that? Or perhaps we’ve advanced to the point that much of the risk mentioned in your article is externally imposed risk (earthquakes and such) and less internally imposed risk (equipment breakdowns, etc.). Regardless, I agree, some adjustments seem warranted.

  4. Woody Till
    Posted October 3, 2011 at 6:15 pm | Permalink

    I once had a mentor that told me “Manage the business correctly and the inventory will be what it should be.” Reducing inventory for inventory reduction sake is putting your company at risk. Lean Enterprise focuses on the elimination of waste and reduction of non value added in processes. It seeks to control inventory through Kanban’s and Supermarkets. TOC focuses on increasing throughput with reduction in inventory and expenses 2nd and 3rd. So focus on business excellence (Which includes risk mitigation) and the inventory will be what it should be.

  5. Tom Swovick
    Posted October 12, 2011 at 9:41 am | Permalink

    I agree with several of the comments above … inventory is a frequently a resultant measure as opposed to the primary objective. In an society that continues to evolve towards mass customization … what state do you hold inventory in (so as to avert the affects of national disaster). With sufficiently robust process that are fundamentally flexible and adaptable, it would seem that the only place one would consider holding inventory is in it’s rawest (least value add) form possible.

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