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Why Making to Stock and Over-Production are Costly for Factories

    Lean Manufacturing- The Persuit and Elimination of Waste

    Lean manufacturing, in a sense, is the pursuit and elimination of waste. And the most serious form of waste is over-production.

    First let’s understand why it is quite tempting for a manufacturer to work on larger batches and be 'making to stock':

    • Purchasers are in a stronger position to negotiate favorable pricing and terms;

    • Fewer batches going in production mean lower complexity;

    • Fewer changeovers from one type of product to the next mean less time wasted this way.

    • Having extra stock acts as a safety mechanism in case there are quality issues or an urgent orders from a customer.

    • Production operators can be paid by the piece (very common in China) and are happy to work on long series. They feel they get more efficient when they work on the same order for days.

    However, making more products than orders are calling for also has many downsides.

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    Why is over-production considered the most serious form of waste?

    Because it causes other forms of waste. Here are a few examples:

    • It increases inventory of materials and finished goods, which has to be moved around multiple times and stored.

    • The working capital needed to finance stock is in the 7-12% a year range for Chinese manufacturers. It is better to avoid borrowing too much money at that rate!

    • Some of the components might get obsolete (e.g. in the electronics industry) or past expiration date (e.g. in the food industry). That’s a pure loss.

    • It increases the amount of work-in-process inventory (WIP), which takes up space, forces materials to be moved (lack of available space means processes cannot be next to each other), and extends lead times. It is obvious once it is drawn this way: freeing up 2,000 pcs on the shop floor means the batch will be completed in twice the amount of time!


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