Inventory is a concept that key business owners have never really been able to interpret correctly. On the one hand it boasts the massive functioning of the organisation with all its raw materials, it’s cycle inventory, the inventory in transit and so on, but on the other hand it poses as a hindrance to success, and the major downside being that it’s effects are usually hidden until when it can’t be unseen anymore and the damage has already been done.
Inventory can be defined as a total of all the raw materials, and finished products that a company holds with the ultimate goal of sale/resale. While the term seems straightforward, it has a much broader view. It revolves around key elements such as Consumer Behaviour, Supply Chain and Capacity Management. Inventory management runs through all the major functions of the organisations such as Marketing, Accounting etc. It involves forecasting the market requirement and the tastes of the consumer and having accurate records of all the materials so as to prevent inventory build-up and ultimately incur loses. However, the world today is really dynamic, and the customers demands are ever changing which ultimately poses as a challenge to the organisations as to how much inventory to own and what strategies to implement so as to reduce costs.
While there are advantages of having inventory like meeting demands on time etc, there are several disadvantages as well:
• The most basic disadvantage is that of storage costs; raw materials and finished goods need to be stored safely in a warehouse and this incurs costs.
• If products are stored in for too long, they might become obsolete as a new and better alternative might become available, and there is an enhanced possibility now than ever with the rapid technological improvements. Apple’s world class inventory management can be taken as an example, they mainly focussed on forecasting demand and customer preferences so as to avoid excess inventory. They believe innovation is a major threat as it can reduce the value of the products in the inventory and hence aim to keep up with major technological advancements.
• While in storage, the products may get damaged or deteriorate. This adversely affects the quality of the product. And as seen in the Sand-cone theory (Ferdows and De Meyer;1990) quality forms the very base of the product which adversely affects the elements which follow such as dependability, speed and so on. The damage may be due to avoidable or unavoidable situations like a worker’s error or a natural disaster.
• Inventory when kept idle due to slow downstream/upstream activities can lead to the wastage of a very important resource i.e time, which ultimately blends in with the theory of cost with respect of time. A company fails to capitalise on the building market due to slow processes. Example: Samsung’s Galaxy Fold set the trend for folding smartphones in the market, but when Samsung had to take back the devices from customers due to poor design and quality, several other competitors like Huawei entered the market with products like Huawei Mate X and made profits while Samsung was working on the problem at hand and low raw materials to work on the phone.
• It uses up space that could be used to add value. A company is defined by its effectiveness and efficiency and the quality of the product rather than its massive stock of materials and its ability to house them. Inventory uses up space that could help improve the productivity of the company.
• Holding inventory involves incurring high administrative and insurance costs. The products held in inventory need to be insured so as to reduce the risk of massive loses.
• Holding inventory usually ties up money if there is no quick inventory turnover and a slow-paced lead time.
• Holding Inventory may lead to the introduction of digital databases so as to accurately collect data etc, but this in turn may lead to setting up costs, training and hiring of new personnel, and there is a risk of losing data as the memory may get corrupted.
With all these disadvantages, several approaches focus on how to effectively manage inventory management and how to reduce costs. One such approach is the Lean Approach.
The focus of lean is to achieve a flow of materials, and information that delivers the perfect quality of the product for the customers in exact quantities exactly when needed, exactly where required and at the lowest possible cost (Slack, N., Brandon-Jones, A. & Johnston, R., 2016. Operations management Eighth.,). Lean is ultimately concerned with elimination of all waste. It aims to develop an operation that is faster, more dependable, produces higher quality products and services and mainly operates at a low cost. It is also called the Toyota Production System (TPS) or the Just in Time System (JIT).
Overproduction is one of the major types of waste (Muda) that Lean focuses on. Apart from excessive inventory, overproduction can further lead to more unevenness and irregularities (Mura) within the organisation which finally leads to Muri which essentially means overburden. The overburden mainly affects the employees of the organisation, such as doing dangerous tasks, taking up risks, doing more hours etc. All this directly affects the morale of the employees and the environment of the organisation. Before working with the inventory, the organisation needs to work with their most valuable resource and instil a feeling of trust and safety so as to improve their performance and reduce wastage which is the ultimate goal of Lean. This can be done so by utilising Maslow’s Hierarchy of needs ( Maslow,1943) and fulfilling their top level needs such as esteem and self-actualisation needs.
When it comes to inventory, the following techniques in Lean can help overcome the disadvantages in holding inventory:
• Pull system: The pull system is a technique which only authorises production when signalled by either the downstream or upstream activities. The resources are not kept busy just to increase utilisation. This helps reduce the inventory as production is not always in motion and hence excessive inventory is reduced. This helps in making sure products and materials are not kept idle for a long while hence reducing the chances of damage and deterioration.
Example: Dell follows the Pull system wherein the suppliers have all the inventory rather than Dell itself. The suppliers wait for Dell’s order to produce and then send the product to Dell to assemble and finish. Dell has managed to significantly reduce costs with this method.
• Jidoka: This technique revolves around the idea of “making an equipment or operation stop whenever an abnormal or defective condition arises”. It prevents overproduction because the equipment stops when the required amount has been produced. Since the production stops when a defect arises, the quality of the products doesn’t decline which is a benefit for the company as the customer’s initial contact with the company is through the product itself. Moreover, the control of abnormality becomes easy as improvement activities can be focused upon the stopped equipment and the person who stopped it. The process acts as an aid for Total Quality Management (TQM) as it helps for overall management of quality at a much broader level.
• Levelling of Production: When it comes to overburdening (Muri), levelling of production can be used wherein the cycle time for each specification is calculated. A balanced production is derived from a sequence to help operate in a steady state which requires less capacity and manpower.
Example: In 2016, Ralph Lauren decided to layoff several stores to level the production, and also invested in a new “fabric platforming” system that required less effort and manpower.
• Market Requirement Planning (MRP): This revolves more around the planning of the materials requirements taking into consideration, forecast demand, Bill of Materials (BOM), planned order releases and so on. It makes sure no excess products are held and only works as per the requirement. This in turn reduces the storage, transportation and insurance costs linked with it.
• Lean Purchasing: Lean purchasing focuses on predictable demand, and depends on single sourcing rather than multiple. It prefers suppliers to be a part of the process so as to build trust and loyalty and to reduce costs and the element of uncertainty when it comes to new suppliers.
A lean approach with the techniques above can help reduce storage costs and the costs related to it such as insurance and administrative costs. Lean mainly focuses on Pull systems and is also called as the Just In Time system as it makes sure that it can satisfy the customers’ needs as and when they arrive, thereby wasting no time being idle as in the case of Samsung and their foldable phone. The effective processes as mentioned above also help maintain the quality of the product which was also a disadvantage of holding inventory. When it comes to Lean, money is not tied up as there is just a single efficient supplier who is trustworthy and loyal. We are aware of their functioning and their speed and hence are aware of the lead and turnover time, which helps us decide in advance. Lean leads to minimal wastage of raw materials. Lastly, Lean takes into consideration the workers of the organisation and revolves around making them more effective and efficient as well.
In conclusion, all the major advancements in the world have led to managing inventory being a major business function. These business functions are all concerned with minimal wastage of cost and resources.