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Inverse Inventory Effect

Conventional thinking says, “The more inventory there is on-hand the better the serviceability rating and on-time delivery rate.”

Have you heard that one before?

Lean thinking says the inverse is true.  “The lower the inventory on-hand the better the serviceability rating and on-time delivery rate.”

How can this be?

I have read studies and heard others talk about the lean perspective.  Even more compelling, I have implemented and witnessed the lean thinking perspective be proven right time and time again.

Traditional thinking of more inventory is better seems to make sense, but what happens is the inventory is never of the right product needed at that time.  The economic scales of mass production says to produce a lot of the product when running it to minimize setup and overhead costs.  Following this thinking means the company does not switch over and start to produce Product B early enough and is out of stock on Product B when ordered but there is an abundance of Product A in the warehouse.

Lean thinking produces just the amount of each product needed so when it is ordered there is enough and overall there is less inventory.

I watched as assembly line employees got upset because we took 80% of their component inventory away from the assembly line storage.  The assemblers thought they would never have enough product to keep the line running.  We explained they would have only 2 hours of component stock at the line and the line would never shut down.  By the end of the third day, the assemblers were happy with the new inventory system because they had more space, but more importantly they had the right components at the right time.  They reduced the time the line was down waiting on components by 90% compared to when they had a ton of inventory at their finger tips.  This occurred one-by-one across all five assembly lines in almost exactly they same manner.

Less inventory does deliver better serviceability and on-time delivery rating.

This does not mean just go out and reduced the inventory without a plan just to reduce it.  It is being mindful of what is needed, when and how to get it there on-time.  It is easier to see what is there when there is less.

What is your experience with reducing inventory?

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Guest Post: What is Lean?

Joe Wilson has worked in a variety of continuous improvement, problem solving and engineering roles in manufacturing and distribution functions  in the automotive, electronics, and food/grocery industries. He was responsible for site leadership of Lean implementation during the launch and ramp up of becoming a supplier to Toyota and was able to work directly with their personnel and the Toyota Supplier Support Center.   His training background includes courses in Lean/TPS through TSSC and the University of Kentucky’s Lean Systems program.  He is a Six Sigma Black Belt and a Shainin Red X Journeyman in addition to training in Kepner-Tregoe problem solving techniques.  Joe also has a BS degree in Engineering Management from the University of Missouri-Rolla.

If you are asked to explain Lean in simple terms to the uninitiated, how do you do that?  Here’s my take:

As a tookit, Lean is about establishing methods to define and solve problems in your business.

As a business philosophy, Lean is about providing your customers the best possible value for their money (Quality, Cost, Delivery) while maximizing the company’s profitability (or viability for a NFP) for the short and long term.

As a mindset, Lean is about constantly striving to (or believing that) you can be better at everything that you are doing than you are right now.

What do you say?  Am I oversimplifying this or leaving something out?  Is this straightforward enough to make people want to learn more or at least not reject it out of hand?