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Jeff Liker

Jeff Liker: Inventory Reflects Variation In the Process

By Jeff Liker, - Last updated: Thursday, April 22, 2010 - Save & Share - Leave a comment

One way to think about it is like a tight rope walker.  You would not want an amateur trying it without a net.  It takes a great deal of talent to earn you way to increasing the height and eventually eliminating the net.  The equation for calculating inventory in lean is pretty conventional–enough inventory to handle the replenishment time plus safety stock.  The amount of safety stock needed depends on how stable the consuming operation is and how stable the supplying operation is.  In other words, more variability means more need for inventory.  The goal of TPS is not zero inventory.  The goal is to meet the company’s business needs.  Toyota found that more inventory correlates with more variation in both directions–more variation means you need more inventory but also the more inventory you have the less motivation there is to reduce variation.  So inventory reduction is a driver of continuous improvement.  Companies that have variability everywhere and are doing nothing to solve problems at the root cause may mistakingly reduce or eliminate inventory buffers assuming then they will be lean.

Interestingly it is not unusual for a lean expert to recommend adding inventory in key places.  When we create a supermarket we figure out how much inventory should be kept of each part.  A supermarket is simply a controlled inventory buffer.  We typically find too much of some parts and too few of others.

Now as the company gets stronger and needs less inventory and we reduce the safety stock we certainly are subjecting the company to greater risk.  If there is a sudden disruption, such as a key supplier’s plant burning down, then it will cause a disruption much more quickly than if we have a warehouse full of inventory.  The view of Toyota is to think long term.  Over the long term those emergency disruptions are very rare.  So they would rather focus on the normal situation and hold relatively little inventory thus driving  continuous improvement rather than plan for the worst case scenario and promote waste in all processes as a standard condition.  Sometimes we hear about the big disruption, like the Kobe earthquake, and pundits conclude just-in-time is a bad idea.  They are right it is a bad idea during that big disruption, but it is a good idea the other 99 percent of the time.

Of course if the consequence of a major production disruption is that your customer will shut you down and you will go bankrupt you cannot afford the risk.  Few companies are in such an extreme situation.

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