Is Inventory Your Crutch?

Holding large amounts of inventory can be costly and cover up problems that need to be addressed.

Most of us are well-acquainted with the perils of holding large amounts of inventory. Some of us have probably seen first-hand how excessive inventory can eat into capital and stretch limited resources. Excessive inventory can be costly in many ways, including:

• Initial cash outlays for the inventory when it is acquired
• Spoilage, loss or obsolescence
• Space needed to store the inventory
• Equipment required for storage and handling, such as motorized vehicles, ladders and racks/shelves
• Labor used to conduct all inventory transactions, such as picking, counting, putting items away, relocating items in the warehouse and recording the transactions
• Systems (and the associated time investment) to accommodate inventory tracking
• Procedures to ensure inventory accuracy, such as periodic physical counts and more frequent cycle counts
• Insurance premiums, which are generally high in warehousing due to the workplace injuries that are common in such an operation.

Yet many companies still have more raw materials, components, hardware, work-in-process, finished goods, supplies, tools and equipment than they really need. Even with all the negatives associated with inventory, it is still viewed as a viable “just in case” solution to problems that might occur. Put another way, inventory is the perfect “crutch” we can rely on to solve problems. Unfortunately, inventory does not really solve problems, it simply covers them up.

Many have seen the classic “boat on the river” analogy that demonstrates this point. The river represents the amount of inventory on hand—the deeper the river, the greater the amount of inventory. Typical problems are shown as rocks (or perhaps more accurately, boulders) below the surface of the river. As long as the river is deep, the boat can sail along without fear of striking any of the rocks.

With enough inventory, we do not need to be concerned with problems; in fact, we probably will not even know they exist. After all, with lots of inventory, who needs to worry about long vendor delivery times, critical machine breakdowns, long equipment setup times, production schedules not being met, absenteeism or even quality problems that lead to low production yields? Inventory provides the perfect mask for these and a host of other problems.

However, when we are forced to lower inventory because we simply cannot absorb the high cost for extended periods of time, that water level goes down and we begin to see the problems as the underling rocks are exposed—and this is a good thing. Exposing problems presents us with opportunities to do things better.

If the problem is poor housekeeping, or not knowing where anything is, there are ways of dealing with this. 5S organization techniques and visual controls can be employed to better manage the things we need while eliminating the things we don’t.

If quality problems are occurring on a frequent basis, teams can be established to identify root causes and develop corrective actions. If long setup times are identified as a major source of machine downtime—preventing us from making the parts we need in the quantities we need them—Single Minute Exchange of Die (SMED) techniques can be used to streamline the process and ensure we have everything we need for a setup prepared in advance and ready for use. If long vendor deliveries are a concern, this too can be addressed through clear communication of expectations, close vendor management and, if necessary, development of alternate sources of supply.

Fortunately, most companies today do recognize the problems that excess inventory can present and have taken appropriate steps to “right-size” what they have. They also have started to add a time-factor metric to their inventory. To simply measure inventory in terms of pieces or even dollars does not present a complete picture.

For example, an inventory level of $1,000,000 is meaningless by itself. Now, if we reference that inventory in terms of time, such as sales days on hand or the number of times per year that the inventory turns (is depleted and then replenished), that $1,000,000 means something. If we sell $500,000 of that inventory each day, that means we have just two days of inventory on hand—not an excessive amount by most people’s standards. However, if we sell only $25,000 of that inventory each day, we have 40 days of inventory on hand. Most would agree that is a lot to hold and have to pay for.

If you are using inventory as a crutch in your organization, it may be time to throw that crutch away and expose the problems that have been hiding for too long.