Process Improvement Blog

    The Obvious Perils of Ignorance

    Posted by Bill Waddell

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    Jan 9, 2014 5:08:09 AM

    Hey, here’s a good idea: Let’s just stop carrying all of this inventory. We’ll make out suppliers deliver just in time and get rid of all of our work in process and finished goods inventory. That will make us a lean manufacturer just like Toyota.

    Apparently there are quite a few people with impressive enough jobs and big enough paychecks to know better, who think the concept of lean and those who suggest it are really that simple minded.

    On a site called Supply & Demand Chain Executive (which bills itself as promoting “global solutions for supply chain ROI”) “If the focus on supplier rationalization leads to extreme concentration, dependency and heavy emphasis on lean manufacturing leads to minimal buffers and tightly interconnected systems, disruption risk is further increased.”

    That “heavy emphasis on lean manufacturing” results in minimal buffers and increases risk, you say? That would be a pretty dumb thing to do, wouldn’t it?

    Or over at CFO they think that there are “hidden perils”. They tell us, “There are also risks involved in lean manufacturing and just-in-time inventory. At many manufacturers, of course, since most of the cost is associated with purchasing goods and services, keeping stock levels low seems like a sensible thing to do. Both lean and just-in-time manufacturing focus on controlling the stock levels of the sourced materials. Finished goods and internal sub-assemblies are within the control of the manufacturer, after all. Unfortunately, this is also where the highest risk in the supply chain resides: Disruptions in the supply of raw materials can cause missed customer shipments or, worse, shut your customer down.”

    How about that? It seems lean manufacturing “focuses on controlling the stock levels of the sourced materials”. Here I thought it focused on eliminating non-value adding wastes.

    You have to wonder just why they think these perils are hidden? Just who is it they are hidden from? Who is unable to see them without the smart folks at CFO pointing them out?

    The fact is that these folks do not understand lean at all. The tsunami in japan a few years back caught their attention and these manufacturing and supply chain light weights noticed and came to the brilliant conclusion that there’s a chance of things not working out as we expected – a risk – and inventory can buffer us from the consequences of those things going wrong. The fact that it took a catastrophic event such as that for them to get the point does not speak well for their intelligence levels.

    Let’s help them out:

    There are two reasons for carrying inventory: To gain the false economies of scale – batch manufacturing and buying by the truckload to minimize labor and freight costs. Lean principles are built around a different economic view that enables us to see that those economies are false, that carrying that inventory drives all sorts of bad things, and that there are far better alternatives.

    More to the point, inventory protects us from risk – not just tsunami risk, but all sorts of risk. Finished goods inventory protects from the risk that the forecast is wrong. Inventories protect from the risk of buying or making defective stuff. Inventory protects from the risk of machines breaking down, suppliers not delivering on time, and on and on.

    Simply eliminating the inventory without eliminating the cause of potential risk is a really, really, really stupid thing to do. That is why lean companies get quality straightened out, then eliminate the inventory buffers protecting them from defects. They reduce cycle time to reduce the dependence on forecasting, and then eliminate the inventory buffering them from forecast inaccuracy. They deploy predictive and preventive maintenance tools to get machine reliability up, and then eliminate the inventory protecting customer deliveries from machine break-downs.

    Inventory is not the problem, and eliminating it is not the goal. It is the underlying bad things that create the need for inventory that lean goes after. The ability to operate risk free (or risk minimized) and therefore without the need for the inventory is the goal.

    Eliminating the inventory without addressing the drivers of the need for the inventory has perils, all right, and not hidden ones. They are very easy to see, unless, apparently, one is a regular reader of Supply & Demand Chain Executive or CFO, in which case the obvious to most is quite obscure.

    Topics: Supply Chain, Accounting & Finance

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