Fire the Inventory, Not the People!

Inventory is a costly, if necessary, evil in automotive manufacturing. Without SOME inventory the assembly lines may starve and we won't get cars. But with too much inventory we tie up too much cash and we go out of business.

The theory behind the Toyota Production System and other "lean production" systems is to get the right part to the right stations at the exact moment that is needed and carry no more inventory than these Just In Time deliveries require. That's the theory.

In practice, inventory is often kept at significantly higher levels as a "security blanket", insulating the plant, to a degree, from changes in demand, supplier shortages, transportation delays, etc.

We have what we think may be a new lens through which to "see" inventory. Inventory can be seen as the price of having imperfect information. If one absolutely KNOWS that the schedule won't change, that the suppliers will all hit their targets, that there will be no absentees, no rejects, no downtime, then one can run on very little inventory.

By the same token if one KNOWS that only these two suppliers will be late and by how much, and that customer plant demand will shift from 'X' to 'Y' by 'Z' units and can infer that normal downtime and absenteeism will apply then one can run at a low but slightly higher-than-ideal inventory rate.

It appears that in the case of inventory cost, KNOWING is PRICELESS - or at least the price of excess inventory.

Alas, Clausewitz's "Fog of War" applies just as much to the factory as it does to the battlefield. The less perfect your knowledge of the real time state of all the key variables of production and the future state of these variables over the next several hours then the more inventory you are likely to carry.

Lean initaives that fail to provide a system for accurate, real time information and a Knowledge / Math Based decision model for proactively detecting and preventing potential disruptions are doomed never to capture and send to the bottom line the reduced costs they promise.

These potential profits are, instead, chained in the cost of excess inventory - the price of imperfect information.

What is needed is complete and accurate real time visualization of what is running down the line (by variety and by quality status), what material is needed where and when for at least half a shift, what is REALLY in-bound and out bound, and the same sort of view of what your customers are running planning to run. With this information, even high variety, flexible assembly processes can be run at World-Class inventory levels. Moreover, many millions in no-longer-needed inventory can go directly and permanently to profits.

And there is a "hidden value" to all of this. It is announced in the title of this section.

Management that "fires the inventory" can afford to keep more people on, converting them to earning back market share. That is, management gets a work force with higher morale and better attitudes toward productivity and quality.

We have personally seen a company receive a Letter of Commendation from the president of a Union for installing such a process, thanking management for "Improving the Quality of Work Life" and "preserving jobs." That wasn't the only reward for management. They cut inventory costs by 33% in a single quarter and sent it all to earnings.

Please comment here on other methods of producing lasting profits, jobs, and quality through specific examples of inventory reduction.