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HIGH INVENTORY LEVELS
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Date: Fri, 3 Sep 2004 08:38:14 –0500
There are many companies out there that use forecasts to drive inventory requirements. Poor forecasting is one of the biggest contributors to inventory levels. Too much inventory, too little inventory or even too much of the wrong inventory is often caused by poor demand forecasting, not just operational issues.
Deb, CPIM
Date: Wed, 1 Sep 2004 23:16:50 -0700 (PDT)
I want to respond to this issue regarding inventory levels as an "indicator" not as a measurement of corporate financial health or manufacturing efficiency.
Firstly, to maximize profit, a company must have as one of its main objectives to minimize investment in inventory.
Secondly, we are all aware that inventory is utilised to hide manufacturing and other operational problems.
Thirdly, inventory serves the function of improving customer service levels (at a given cost).
We should focus on second issue, i.e., inventory utilized to mask manufacturing and other operational issues. Like a river or stream, inventory is water and rocks or Smooth stones in the river/stream are problems/issues. When inventory is increased, it hides or masks the problems. When inventory is decreased/reduced, it uncovers manufacturing or other operational efficiencies, and draws our attention to resolving/solving these issues.
As Furman aptly summarizes: "Companies protect themselves against poor quality by building up inventory. Does this inventory have cost? (Answer: Most Certainly, Yes it does!) If we improved quality would this inventory go away? (Answer: Yes, most certainly.)" Note: Answers in parenthesis are mine.
However, we are not able to accurately measure the magnitude of these "excesses of inventory" at this point. We are only able to accurately measure them once the fundamental problems (or "stones" in the stream have been identified in a preliminary fashion.)
To cast the answer in Holmesian rhetoric, "Watson, we are on to something!"
Once we reduce the excess or other inventory (we are running somewhat lean at this point), problems/issues are exposed which leads to more detailed and measured analysis of these issues.
Ergo, (excess) inventory is then indeed a cost of quality and should be a visual or preliminary indicator of quality issues looming in the manufacturing plant. However, this preliminary indicator should lead to more precise measurements to either validate or invalidate the preliminary hypothesis regarding manufacturing inefficiencies.
Step 1, Reduce, remove excess inventory or simply minimize inventory to uncover other
inefficiencies that may be hidden by inventory.
Step 2, Continue to more accurately evaluate inventory to determine if the excess inventory is indeed a true indicator of other critical issues/problems or is it merely an anomaly?
Finally, follow PDCA cycle to continuously improve process.
Ron
Ask yourself why do companies have excess inventory. Think about the reasons: safety stock, JIC something goes wrong, over production because of a long setup and poor quality, large lot sizes, etc.
Do you begin to see the picture? Companies protect themselves against poor quality by building up inventory. Does this inventory have cost? If we improved quality would this inventory go away?
Howard
The APICS knowldge base refers to the functions of inventory as being
Fluctuation ie safety stock
Lot size ie EOQ
Anticipation ie capacity requirements
Transport
Hedge
This type of categorisation should help to understand the reasons why
inventory levels are at their current levels and trace level changes to causes.
Just a thought,