June 2012 | Commentary | The Lean Supply Chain

Inventory…What a Waste

Tags: Lean

Paul A. Myerson is Professor of Practice in Supply Chain Management at Lehigh University, and author of Lean Supply Chain & Logistics Management. 732-441-3879

We all know that inventory is a necessity. When you fully understand its purpose and cost, however, you realize why lean practitioners consider it one of the Eight Wastes.

Inventory can be among a company's most expensive assets, representing up to half of total invested capital. The major reasons for carrying inventory are to decouple or separate various parts of the production process, cover demand and lead time variations, take advantage of quantity discounts, and hedge against price increases.

Some companies may not realize the carrying or holding costs associated with inventory, however. These costs—which can range from 15 to 40 percent of the cost of inventory—include capital, taxes, storage, obsolescence, damage, and theft. The longer you carry the inventory, the more it costs your business.

In lean terms, inventory adds no value for the customer, because it covers a process's variations or wastes, such as long setup or changeover times, late deliveries, scrap, and downtime.

Diagnosing the Problem

Excess inventory is a symptom of underlying problems in a process. If we can get at the root cause of these variations and inefficiencies, we can lower inventory to just-in-time levels, and transition from a "push" to a demand "pull" environment.

Many tools can be used to identify and eliminate the causes of inventory inefficiencies, such as:

  • Value Stream Mapping. Similar to a flow chart, this tool maps the current and future state of a process, separating value-added and non-value-added activities.
  • Root Cause Analysis. This set of problem-solving tools aims to identify the root causes of problems or events.
  • The Five Whys. Lean practitioners use this technique to examine the cause-and-effect relationships underlying a specific problem, ultimately leading to identifying its root cause.

Downstream in the demand chain, tools such as Collaborative Planning, Forecasting, and Replenishment (CPFR) help identify excess or insufficient inventory levels.

CPFR involves cooperatively managing inventory through joint visibility and product replenishment all along the supply chain. Information shared between suppliers and retailers aids in planning and satisfying customer demands.

Programs such as CPFR enable companies to minimize the bullwhip effect—the trend of increasingly larger swings in inventory in response to changes in demand, as you go farther back in a product's supply chain. These tools improve forecasts, and increase inventory turns and customer service levels. They allow businesses to use their supply chain as a competitive weapon.

Upstream in the supply chain, tools such as Vendor Managed Inventory and just-in-time systems ensure materials arrive when they are needed and help identify opportunities to work with suppliers to increase productivity and quality.

Once we determine the root causes of excess and unbalanced inventory, it is easier to solve the problem. To aid that endeavor, we must understand and consider the remainder of the Eight Wastes as they contribute to excess inventory, fail to add value for the customer, and limit supply chain capacity, quality, and velocity.

The 8 Wastes

  1. Transportation
  2. Inventory
  3. Motion
  4. Waiting
  5. Overproduction
  6. Overprocessing
  7. Defects
  8. Underused employees

Parts of this column are adapted from Lean Supply Chain & Logistics Management (McGraw-Hill; 2012) by Paul A. Myerson with permission from McGraw-Hill.