It is no surprise that inventory reduction is high on the list for many companies. In fact, the term “lean” by itself implies lower inventories. But why do we have inventory in the first place? And why is (too much) inventory considered evil in lean manufacturing? In this post I would like to tell you the reasons why we have inventory in the first place, and why too much is bad. In my next post I will explain what happens if you simply reduce inventory, and discuss in more detail better approaches on how to reduce inventory.
The third reason for inventory may be due to cost reduction. One possibility to reduce cost is batching. For example, when shipping parts, it may not always be sensible to ship each part individually. If you order screws, you do not order a screw every 45 seconds, but you order a box of 3000 screws per week. Hence, you have in average 1500 screws lying around even without fluctuations. Similar batches may apply to other transport or selected processes.
Similarly, you may buy more when it is cheap, and use or sell the material when prices go up. This is, in effect, also an inventory to reduce cost. In both cases you can save money, although you will also create cost due to an increased inventory. Ideally there is a trade-off. In reality, the cost of inventory can rarely be estimated accurately. The estimation of the benefit of batching may be more accurate.
Relevance of These Three Reasons for Inventory
In value stream mapping, you can calculate a timeline with the percentages of value add and waiting time. Usually, the fraction of parts actually worked on is somewhere around 0.05% or less (unless you have batch processes). The other 99.95% of the parts are waiting. Hence the parts actually worked on is usually the smallest fraction of your inventory by far.
As to how the remaining 99.95% percent of your inventory is used, it depends on your system. This inventory is used both for batching and to cover fluctuations. In fact, the same part may serve a dual purpose as a batch and a fluctuation buffer. If you are at the beginning of your batch, and, due to fluctuations, need more, you can simply use more from the batch. Only if you are at the end of the batch, there are no more parts left to cover fluctuations. Overall, most of our inventory is there to buffer and to batch.