The Truth About Inventory Waste

This is Part 2 of the Pyzdek Institute Lean Concepts Study.

To recap from Part 1: We are all fortunate to have the accumulated knowledge of manufacturing industry titans to help us improve processes and reduce costs. In the Lean context, Taiichi Ohno and Shigeo Shingo stand out. They taught us much about the process improvement mindset, visual control systems and the like. Both indicated the need to relentlessly identify process waste and do something about it. We started with the list of 7 Deadly Wastes and eventually added safety and wasted talent as Deadly Wastes #8 and #9.

In the spirit of continuous improvement, The Pyzdek Institute proposes taking that list even further.

The Original List

1) Transport	6) Over-production
2) Inventory	7) Defects
3) Motion	8) Safety
4) Waiting	9) Under-utilized talent
5) Over-processing

Improving the List

We propose adding other forms of waste to this list and we’ll cover the particulars of the list expansion in future blogs. One example is the waste of bad data.

Meanwhile, to benefit Lean Thinkers everywhere, The Pyzdek Institute has accumulated real-world examples of The Nine Deadly Wastes to make available to Lean Thinkers everywhere. To that end, please post in the comments section below any examples that you’ve encountered. We’ll add them and in the future, we’ll post downloadable documents to the Pyzdek Institute website. Additionally, please highlight examples where one form of waste causes another (see last bullet point below).

A Brief Overview of Inventory Waste

While some stock of material may make business sense, excess stock of finished product, in-process product and raw material are considered Inventory Waste. An example is excess raw material inventory in place to get “volume discounts”. This approach to inventory management might make the purchasing budget look good, but there are significant financial consequences. These consequences almost always outweigh the benefits:

• ties up capital
• vulnerable to degradation
• vulnerable to obsolescence
• usurps valuable floor space from value-added processes
• consumes energy
• consumes labor
• more theft

The root causes of Inventory waste include a poor understanding of demand, unstable processes and a poor understanding of the cost of capital. Inventory waste is easy to identify, it’s all the material that doesn’t move. Inventory waste can have a devastating effect on safety. Examples include pallets that are stacked in an unsafe manner and leakage of liquid raw material due to container degradation. Inventory waste can have a devastating impact on profits. Examples include the high cost of buildings and other physical plant and the high cost of labor to manage excess inventory.

In addition, inventory waste hides other forms of waste. Examples include the use of inventory to account for a problem with defects and the use of finished goods inventory as an expensive countermeasure for raw material lead times.

Inventory Waste Examples

• Warehouses full of excess raw material
• Forty foot rented shipping containers full of excess raw material
• Warehouses full of excess finished goods (Sales said we’ll sell it before the end of the quarter “for sure”)
• Rental of additional warehouse space to store excess finished goods
• Excess office supplies

Inventory Waste that Creates Safety Hazards & Defect Waste

• Line-side raw material creates tripping hazard
• Line-side raw material chaos results in wrong material selection (I don’t have time to get that material!)
• Overloaded shelves (but where else can we put it?)
• Additional fork truck and pallet jack traffic
• Toxic byproducts from material degradation (anti-microbial additives no longer effective…)

Meanwhile, we have effective countermeasures readily at hand. First, abandon the batch & queue mentality in favor of pull-based production. Second, improve work cells using 5S and cellular layout. And, consider staffing and other variables that provide steady product flow.

The #1 Countermeasure to Inventory Waste

Finally, experience shows that the best countermeasure to inventory waste is rarely taught in Lean Training classes. As it turns out, Statistical Process Control plays a vital part in the reduction of inventory, over-production and other forms of waste. Without control charts, we don’t hear the Voice of the Process. Without hearing the Voice of the Process, complex production processes remain vulnerable to the influences of outside forces. The consequences often appear only after the customer has the product in hand. But with the persistent use of control charts, we can act immediately when a change occurs. With a stable process, manufacturers can reduce all forms of inventory waste.

As a friendly reminder, please add your examples of Inventory Waste in the comments section below.

Next time: Motion waste