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.
Why Do We Have Inventory?
There are three reasons why we have inventory. For simplicity’s sake I include all parts that are needed for manufacturing in inventory, including raw materials, work in process, and finished goods. In order of priority, these three reasons for inventory usually are:
The primary reason is to decouple fluctuations. Fluctuations are any unexpected changes in your value stream. This includes suppliers (delayed shipment, bad quality, …), your own value chain (machine breakdown, workers calling in sick, mix up in the schedule, capacity constraints, …), and your customers (order early, order more than expected, order less than expected, changing orders …). All of those mess up your plans. A buffer inventory will keep your customers happy and your workers busy, even if there are (smaller) fluctuations. If you need more than expected, you decrease your buffer stock; if you need less than expected, you increase your buffer stock.
Of course, inventory is only one way to decouple fluctuations. The others are capacity and time (see The Three Fundamental Ways to Decouple Fluctuations). However, ramping capacity up and down quickly is difficult, and there are usually upper and lower limits as well. As for time, if you can let the customer or your workers wait, this will be an option. However, often this is not possible. In sum, inventory usually is the workhorse to decouple short-term fluctuations.
If you would have no fluctuations whatsoever, you could order every part to arrive on time (or in Japanese English: Just in Time or JIT) for processing, have it processed right away, and ship it out immediately. All parts would never be idle but always on the move. In this case you would need (almost) no inventory. The only inventory required would be the one you are currently working on.
You Need Something to Work
This brings me to the second reason why you need inventory: You actually have to have a part if you want to work on a part. At a bare-bone minimum, the part you are working on needs to be there. However, usually only very, very few parts in your inventory are currently worked on. With respect to inventory cost, this part is usually negligible.
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.