Not So Hidden Inventory

Recently, we were asked by the management of a manufacturer to help them assess why inventory levels were so high and trending upward. We went to the manufacturing plant to survey the scene, to see if we could determine the root cause of their inventory problem.

Clue #1: The earnest young materials manager we interviewed stated, “We don’t have any inventory. We only buy and make what our customers order.”

There was a major disconnect here. This gentleman was telling me they had no inventory, but I had a corporate controller with a balance sheet stating in black and white they had too much inventory.

Where was the inventory?

Upon further discovery we found a couple more clues.

Clue #2: The commitment to the customer was inside the total lead time. This meant some of the inventory had to be purchased ahead of the forecast or they would miss delivery targets and fail to meet customer expectations.

This meant someone was guessing how much material they needed to buy (or produce) to support the stated customer delivery commitments. I’ve learned that whenever you build/buy to forecast you end up with materials you don’t want or no longer need which ends up in raw materials on the balance sheet.

This can also lead to critical shortages if you guessed incorrectly or failed to take into consideration the uncertainty of demand and supply. Indeed this was the case with a fair amount of semi-finished product sitting in WIP, just waiting on something.

Clue #3. “We don’t hold safety stock.”

It was true. There was no official safety stock. But there was inventory buffer in different forms. One of these forms was in lead time, which was padded to provide safety time to cover supply and demand variability.

Another interesting source of extra inventory was a lack of vendor delivery management. They would order 300 units of product X to be delivered in May and it would all be delivered in one big shipment, somewhere within the calendar month of May. Without managing the vendor to smooth the delivery schedule you can be faced with a big bulge of early-delivery inventory that acts as a form of buffer and takes up storage space. Or it may be delivered on the last day of the month causing great stress to the receiving system and production process.

Another form was in rules-of-thumb stocking policies. The earnest young man showed me how most of the production components were delivered on milk runs by the vendors pulled into the assembly line with a 2 bin system.

o Me: “How do you determine the kanban size?”

o Earnest Young Man (EYM): “We calculate the average usage and hold 10 days-of-supply.”

o Me: “How often do you recalculate them?”

o EYM: “I don’t think we do…”

This means the company has 40% of its product content driven to a blanket ’10-days-of-supply’ inventory rule of thumb. Compounding this was the seasonal nature of this business and the fact those rules of thumb were not time phased (e.g. few days of supply for off season, more days of supply for peak season).

Another was the disconnect between assembly and fabrication.

o Me: “What is all this product/material?”

o EYM: “This is our supermarket where we store the fabricated items that are pulled into the assembly line.”

o Me: “How do you figure out how much to fabricate?”

o EYM “We explode the demand. Then the welding and fabrication shops build to efficient batch sizes.”

Clearly the premise of manufacturing only and specifically to direct customer demand fell apart when it got to fabrication and they were building those quantities that allowed them to minimize setup costs and level load the shop. This caused a bit of a bulge in the ‘super market’ that showed up as WIP.

The Reveal: We found the company was trying so hard to not hold safety stock. However, they were, in the end, creating uncontrollable inventory buffers up and down the supply chain. There was extra inventory in transit, in purchased parts, in fabricated WIP, in partially assembled WIP, and in finished goods.

Even in a customer demand driven environment, there will be inventory. It is inevitable. What you do with that inventory and where it is placed are the questions you need to ask. And, they are opportunities to investigate.