Toyota’s model of production caused ripples throughout the manufacturing world when their introduced lean manufacturing and total quality management into their business. They identified two components of lean manufacturing that must be understood, these being Muda (waste) and Kaizen (continuous improvement).
The lean manufacturing model also denotes waste as being anything that uses resources while providing no value to the company or its customers. Since then, lean manufacturing experts have identified seven major types of waste, of which inventory waste is one of them. The other six include transportation, motion, waiting, over-processing, overproduction and defects.
Inventory is necessary for a company but it can also be a major source of waste if not managed correctly. There are known opportunities for waste in the five main classes of inventory including finished product, sub-assembly, raw materials, stationery and office materials and waste to do with maintenance, repair and operations/overhaul (or MRO). In this article, we consider inventory’s contribution to business waste and how this might be reduced.
Finished products or goods ready for sale are by far the most expensive items of inventory due to the amount of time and money invested in them. Furthermore, a certain amount is often retained in inventory to ensure a company has the ability to fulfil customer demand in a timely manner; few companies operate a zero-finished-goods inventory policy. However, too much inventory will also significantly cost the company. These costs either erode the bottom line or are passed on to the customer.
This inventory refers to those partly assembled components that form a unit which can be quickly used to create the finished products as customer orders roll in. This type of inventory must also be monitored closely as it still has a significant cost attached to it and can easily accumulate. Sub-assembly inventory should be monitored very closely as it can have a two-way negative impact if levels become too high. The first is that the sub-assemblies have their own dollar value attached to them but also, if all the raw components are utilised in one type of sub-assembly, they are unable to be used in another product which could jeopardise the company’s ability to meet demand for that product.
Raw component inventory
There are two sides to the coin regarding storing raw components en masse. By ordering larger quantities, expedited shipping costs associated with hurried orders can be avoided and fluctuations in customer demand can be mitigated. On the flipside is the financial cost. While it might be great to cut costs by taking advantage of bulk-order savings and shipping, the lack of cashflow and cost of storing materials can often be significant, off-setting any savings that were possible. This usually represents the largest of a company’s inventory waste and so it is imperative to understand it fully. Instead, businesses might consider optimising production so that lead times and stored inventory can be reduced.
Office consumables can form a significant part of inventory waste and are often underappreciated as they go seemingly unnoticed. A risk of this is that reasonable amounts of money are spent on their purchase and storage, while they are also at risk of pilferage due to items being multi-purpose, generic, household consumables. Therefore, it essential to identify this form of inventory and actively control it so that waste can be minimised.
Maintenance, repair and operations/overhaul
When a machine breaks down and spare parts are needed. If these spare parts not kept on hand, it can often result in machine downtime and a waste of resources (machine time, materials and staffing). However, by keeping too many replacement parts, inventory waste is inevitably created. So, what is the solution? Businesses can develop a preventative maintenance program to minimise sudden breakdowns and give enough time to order replacement parts or inform staff of machine downtime. It will still be necessary to hold some components which have longer lead-times, however, this could be an area for improvement and subsequent reduction of waste by working with suppliers to optimise lead-times and consistency of supply.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.