The Evils of Inventory

Inventory is probably the biggest and most detrimental impediment to the flow of the value that your business delivers.
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Inventory is probably the biggest and most detrimental impediment to the flow of the value that your business delivers.

This series of articles is all about making your companys value delivery machine as reliable as possible. Your company should do the right things for the right reasons, and do them without fail, every time. It is certainly easier said than done, and one of the most difficult operational areas in which to apply this principle is in material control, or, more generally, inventory.

In the second article, I presented the idea that when value is made to flow, the operation of the company inherently becomes more reliable. By contrast, the interruption of flow creates random operational effects, and these decrease the reliability of your business. Interrupted flow also increases lead-time, which we discussed as well, and painfully affects your bottom line.

In response to these concepts, the best manufacturers focus on doing everything in their power to reduce lead-time. There have been spectacular results in terms of financial performance, competitiveness and product quality in the manufacturing sector as a result of these efforts. Yet, the lessons learned throughout the manufacturing world have yet to hit our industry with much vigor, and that leaves tremendous opportunity for the most forward-thinking among us to gain a competitive edge.

Manufacturers in other industries have been forced to rethink conventional wisdom regarding inventory. Inventory is probably the biggest, most expensive and most detrimental impediment to the flow of the value that your business delivers. Conventional wisdom, however, regards inventory as a positive thing. It is even carried on the books as an asset. But, eventually, manufacturers began to view it as a liability instead, and a big one, at that. Truly, inventory is the addictive drug of the value-delivery chain. When you dont have it, it is scary, nerve wracking and cause for great angst. And ordering and receiving it can be such a rush! But, make no mistake; inventory beyond what is truly necessary hurts your business.

All of us know that inventory is like tall stacks of dollar bills sitting dormant on shelving in your shop. There are some rather obvious, yet substantial, costs of inventory that are quite familiar to many people (yet are still tolerated):

1) Time value of the money spent to buy it
2) The rental/lease of the space to store it
3) The time and effort to count it and track it
4) The time and effort to resolve issues with the counting and tracking of it
5) The fast rate of obsolescence of it, and the resulting discounting of it when it is no longer the latest and greatest
6) The great inertia of it when faced with the decision to change brands and product lines
7) The double/triple/etc. handling of it as storage space is reallocated on a regular basis
8) The cost of covering defects when the manufacturers warranty clock started ticking long before your client received the item.

There is a far more insidious cost of inventory, though, and this one is far less commonly recognized. Inventory covers up operational problems so they never get rectified. Its a Band-Aid, or a crutch. It helps you tolerate an illness inside your company. It helps prolong disease and delay a cure. There is an expression in some of the Just-In-Time circles that encourages you to "make problems ugly." Make them so bad that you cant possibly ignore them. The worst thing you can do is hide the problem or patch over it with a temporary fix, because you didnt prevent its reoccurrence.

Inventory is pure evil because it makes problems invisible, and thereby assures their continuance. Inventory should be tolerated only when you cant figure out a way to eliminate the need for it.

So, you need to dig into why your company needs inventory at all. You will likely find that the only true need for it is when the lead-time for us to get the inventory for the client is on the critical path of the overall value delivery chain. For example, if a client wants a plasma TV installed in his house, the house is just being framed and it only takes a week to purchase the TV, then the lead-time for the purchase of the TV is not on the critical path. A longer or shorter lead-time will not necessarily result in a slip in the overall schedule.

A simpler way to think about this is, "If we can be surprised by the need for the item, we then cant get it quickly enough to meet the need and failing to meet the need would be a problem, then some inventory is justified." There is nothing really new in justifying the need for inventory this way. However, manufacturers have relentlessly attacked each and every premise of this statement to avoid concluding that inventory is necessary. For example, if the need for the item can surprise you, work on fixing that. Why was the need a surprise? List the possibilities: the item fails too often; someone forgot to order it in a timely fashion; a customer can walk in the door wanting to buy one, etc.

Take each listed cause, and figure a way to eliminate it. Be creative, but be relentless. For example, we all know that failure of components is a very serious matter, but shrugging off the problem because "stuff happens" is giving up too easily. You cant give up on this one. Not only does it upset your client, but also it forces you to carry more inventory. Its a very expensive problem, so do something about it. Put pressure on the manufacturer, improve the cooling in the rack, put in a surge protector, etc.

The second premise relates to the manufacturers delivery lead-time. If its too long, then do something about it. Short of changing product lines, which is always a possibility, you can be creative. For example, work with the manufacturer to support an advance-replacement program. Work with other dealers to help each other out in a pinch. Or maybe have an older generic loaner spare. The bottom line is, of course, that you want to carry products that you can get quickly and reliably. There are a variety of ways to get there, but stay focused on getting there.

Finally, an item listed was that the client would be upset if you could not deliver in a timely fashion. Its a stretch, but if you have fine-tuned your line to be only products with a reliably short lead time, and a client insists on buying something outside that line, then have an up-front agreement about each others expectations for the system. If he really understands and agrees to burden a delayed response time in fixing inevitable problems, then youve still eliminated the need to carry more inventory of that item.

Obviously inventory has to be purchased before the system is installed. The investment needs to be made, but the key is to make it as late in the game as possible while still keeping the project on track and the client happy. Investing too early is parking money on the shelf for unnecessary periods of time, and its an indicator that you have an internal business process that is not repeatably excellent.

Look at inventory in a new light, and go after repeatability with great zest. You will be pleased at the improvement on your bottom line.

The next article in this series will present one of the major hurdles overcome by manufacturers in their relentless quest for "lean" operations: the universal human tendency to be a pack rat. In "The Waste of the Pack Rat" the case will be made that the tendency itself contradicts the idea of a repeatable business.