Sunday, August 07, 2011

Do You Have "Good" Inventory, or "Bad" Inventory?

Imagine Glinda the Good Witch of the North (Wizard of Oz movie) observing your current value stream when she encounters piles of inventory. To each inventory bucket she would ask, "Are you good inventory or bad inventory?" Not all inventory is equally bad; some inventory is necessary given the current lack of flow and synchronization in your end-to-end value stream. Lean principles and industrial engineering tell us that inventory is an outcome of a lack of speed; and, eliminating inventory frees up cash that can otherwise be used more effectively elsewhere in your organization to generate growth. Unfortunately, many process improvement teams erroneously treat inventory as a critical 'x' in their Lean Six Sigma projects to improve value stream performance.  As a result many improvement teams focus on reducing the piles of incoming materials and/or finished goods inventory - by working with their supplier base to adopt vendor managed inventory, and/or working with their customers to try to improve forecast accuracy and/or extend the acceptable lead time. Unfortunately, the financial benefits are often short-lived because these improvements did not address the lack of stability and flow in the organization's value stream. Nor did the earlier changes address the culture of the organization that fundamentally accepts inventory as a necessary cost of business.

Instead, treat inventory is an outcome ('Y'). Speed - the lack of it - is a critical 'x'.  A focus on speed will transform the value stream. To become faster the value stream capability and stability must be improved. Flow cannot be sustained in an unstable, unpredictable environment. Increased speed results in increased productivity, yield, quality and reliability, improved product availability, predictable service levels, additional capacity for growth, and improved cash flow.

Speed can be improved through the removal of non-value-add work, fewer touches, elimination of waste, smaller batch sizes and shorter production run lengths, quicker changeovers. Inventory, when needed (e.g. due to lack of synchronization), now can be moved upstream where it is less expensive and more flexible.  So, if your value stream has excess inventory, Speed is the yellow brick road to your Emerald City.

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