The Waste of Inventory

Overview of Module
Formally defined, the waste of inventory is any material or work on hand
other than whats needed right now to satisfy customer demand. And as
you might imagine, inventory comes in many shapes and sizes there is
work in process, finished products, supplies, excess documentation, and
even unread email is a type of inventory.

Cash Flow
Inventory is directly related to cash flow. In other words, if youre
converting inventory into healthy profits times are likely good from a cash
flow perspective but if you have excess inventory that youve already
paid good money for simply sitting on shelves taking up space chances are
your cash flow situation has looked better.

Types of Inventory
Cycle stock is inventory needed to cover normal demand. Cycle stock is calculated by multiplying
the average daily average by the lead-time to replenish. In other words, if the lead-time to replenish a
part is 3 days and 1,000 units are needed per day, the Cycle Stock will be 3,000. In this example, cycle
stock must be enough for 3 days of steady average demand. The two factors that influence the
amount of cycle stock needed are the average daily demand and the replenishment lead-time.
You may ask, What about late deliveries, demand changes, or other unpredictable changes? This is
where the other 2 types of inventory - Buffer Stock and Safety Stock - come into play.
First, buffer stock is used to hedge against sudden, unexpected, demand surges. To calculate buffer
stock we use standard deviations to calculate the probability of a demand surge exceeding a certain
amount during the replenishment period. There are many factors that influence the amount of buffer
stock needed such as forecast errors and demand swings.
Finally we arrive at safety stock which is inventory used to safeguard against parts being lost due to
downtime, scrap or other factors that are a reality in our world. This number is calculated based on
the factors you select and measure over a period of time sufficient to give you an idea of the maximum
possible loss. Things such as scrap, rework, downtime, and late deliveries might play into the
percentage you choose. This is an area youll need to continuously improve and update, as the fewer
problems you have the lower your safety stock inventory can be.

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The Costs of Inventory

Most organizations vastly underestimate the cost of inventory since its much more than just the
interest paid on the money to buy the material.
In addition there are costs to keep and manage the inventory, the cost of obsolescence, the cost of
price erosion, and opportunity cost for making products that are put in storage instead of making
products that could be sold.
And perhaps the greatest cost of inventory is the false sense of security that these buffers give
people. You see when you have high buffers your problems are often buried below the surface.

What Causes Inventory Waste?

The fist reason is many companies making extra parts in case of scrap. In other words theyre
using inventory to mask things like quality problems or careless manufacturing mistakes.
Another common cause of inventory occurs when employees are measured and rewarded
based on the number of units they produce no matter if theyre producing more than the
customer is willing to buy.
Next, unleveled or choppy production schedules often make it very difficult to maintain
consistent and healthy inventory levels.
And finally, but certainly not least, when companies attempt to build to forecasts problems
often arise, since those forecasts no matter the industry usually have a common theme
theyre wrong!

Tools to Battle Inventory Waste

The first tool we can use is SMED, which stands for single minute exchange of dies. The basic
premise behind SMED, which is often referred to as quick changeover, is to do as much of the
setup while the machine is running so that when the machine does stop we can quickly get it
ready to produce another part.
The next technique many lean producers utilize to lower inventory and increase throughout is
one piece flow. The basic premise with one piece flow, or make one, move one is that each
worker produces one piece and passes it onto the next process only when that process needs
it. The work is balanced to takt time and each operator is fully aware of what is happening
upstream and downstream.
Next, the use of kanban is another powerful way to reduce the amount of work in process in
any operation. To learn more about kanban please reference the pull module in our
transforming your value streams course where youll also learn about what is referred to as a
downstream pull system. This type of pull system work by scheduling one process, in this case
assembly, which then triggers a series of pull signals to the other processes before it.

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