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Why Reducing Inventory is a Goal of Every Lean Factory

August 24, 2015

 by BrianNowland

Most Chinese factory managers are generally quite switched on when it comes to running their operations or at least that what it seems like on the surface.

One common shortfall most of them have is that they can’t see past where they are now from an operations point of view, it’s almost like they are following the old saying of “if it ain’t broke, don’t fix it”, in other words, if something is working adequately, leave it alone.

This approach in today’s busy Chinese factory is somewhat short sighted and when there are many areas within operations that can be made more efficient, it should be the responsibility of the Management Team to take action and start to improve ‘how things are currently done’.

If a factory has taken the initiative or is working with one of their customers to implement lean then one of the focus points has to be to reduce inventory. Inevitably, most Chinese factories run their operation plant with excessive inventory.

Having excessive inventory costs factories money, this may sound like an obvious statement, but it is costing the factory money in different ways:

  • Cash is tied up in the inventory; the factory will not get paid until products are sold.
  • Inventory stored on the production flow takes up valuable space; space costs money particularly if the factory is rented, look at the cost per square meter.
  • Management time to ensure inventory is maintained correctly; missing or damaged inventory is a big problem for many Chinese factories.
  • There is a danger that WIP inventory may become obsolete if a change request is implemented and the WIP inventory can’t be modified in-line with the changes required.

Another real problem of having excessive inventory in WIP is that if hides quality issues. If a machine is producing parts that are out of specification or a number of parts have been pushed through the systems that are defective, they could sit in the WIP inventory undiscovered. At this point there is a high probability that more defective parts will be produced which could ultimately result in a high scrap rate.

If problems and issues at identified at the source then these issues can be addressed and corrective actions put in-place thus preventing defective parts being passed on further into the workflow.

Lean manufacturers gradually lower the level of inventory to make these problems appear and to address them as soon as they become evident.

If we look at a simple physics equation for a minute we can see the correlation between it and the workflow in a factory

Force = Mass x Acceleration

Amount of WIP = Throughput at Bottleneck x Cycle Time for Production

Taking the throughput at bottleneck element of this production equation, this is generally the area that inventory builds up within the workflow; consequently there is always excessive inventory at any bottleneck throughout operations.

If we transpose this equation to view it from a different perspective we can see the effects of cycle time from a production standpoint.

equation

The consequences of having WIP build up at any bottleneck are that it increases the overall cycle time of the batch. The greater the batch quantity the longer it will take to complete the entire batch, therefore more inventory will be held within the production workflow.

We often see the effects of this simple equation in larger factories that have plenty of space. What tends to happen is the production manager or the planning team will see there is physically more space at each workstation; therefore they will increase the batch size thinking that operations will be able to reduce cost of each part.

This is a wrong assumption as we have seen from the equation, if anything, part price could increase. One thing is for sure, inventory will increase which has a number of negative effects on the cost of operations.

What do you think?


 

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Topics: Lean Manufacturing

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