Inventory

Inventory is the collective term for finished goods that you intend to sell, and the components that go into those goods.

Inventory is a necessary evil of production. Without inventory, nothing could be built, and nothing could be sold. But too much inventory drives up costs. Inventory must be stored, managed, moved, and insured. Obsolete inventory must be disposed of. Large quantities of inventory require large warehouses, forklifts, and staff. Plus, there is, of course, the capital (invested money) that goes into purchasing the inventory in the first place. The majority of these costs fall into a category called “holding costs”.

In Lean, excessive inventory is viewed as a symptom of poor processes. Long setup times, for example, drive batch production. Lack of standardization allows batching in production areas. Poor inventory management systems require extra inventory to keep from running out of items.

When Lean principles are applied to the underlying processes, the need for inventory drops. In the best case, flow is developed, in which a finished part from one process is handed directly to the next process. In the absence of perfect flow, kanban is often used to stabilize inventory levels and provide a foundation for inventory reduction.

In the Lean office, things like office supplies are obvious inventory, and are often the target of inventory reduction efforts. But the actual work—orders, files, etc.—behaves much the same as physical inventory does on the shop floor. Large piles of work are also symptoms of underlying problems.

Inventory reduction, though, has two things working against it. The first is volume pricing. There is a perception that buying in bulk is cheaper, because it is the part of the cost that is directly linked to the product. Other costs don’t have that obvious relationship. The other issue is that inventory is carried as an asset on the balance sheet. Lowering that asset quickly in the initial stages of inventory reduction can hurt the perception of fiscal strength if it comes down faster than liabilities do.