Gemba Keiei Chapter 9: Reduced Inventory, Increased WIP

“We reduced inventory” the manager of one company told Ohno, hoping for praise.
This was raw material inventory so Ohno asked “Won’t the lack of raw materials cause problems for production?”

“Not at all” came the reply. Going to the factory Ohno sees increased work in process (WIP) inventory. They had reduced raw material inventory by turning it into WIP. Convenient for manufacturing perhaps, but bad for business.
Taiichi Ohno argues that raw materials should not be considered inventory. He is very direct about this and my first reaction was “?” since raw materials are still clearly inventory.

He says that if you know the price of the materials will go up, you might as well buy extra while it’s cheap. Taiichi Ohno is recommending commodity speculation. Perhaps in the days of continuous growth in the Japanese automotive industry (or the days of high steel prices due to demand from Chinese manufacturing) this is sound advice. He goes as far as to say that excess raw material inventory really doesn’t have an affect on the running of manufacturing company.

Raw material inventory is clearly still inventory so perhaps he is taking an advanced position. I think he means that you shouldn’t focus on reducing raw material inventory when doing kaizen since there are usually bigger fish to fry. Reducing raw materials is usually low impact kaizen, and not a big challenge in Lean manufacturing. Changevoer time reduction through SMED and setting up kanban systems helps do this.

Taiichi Ohno continues with his theme of eliminating overproduction. He says it is easy for a factory to take the raw materials and produce WIP inventory to keep idle machines running, to let fast machines run at top speed rather than waiting for a pull from the downstream process, falling into the traditional accounting trap that high utilization and equipment efficiency means low cost.

“We don’t produce what we are not selling” says Taiichi Ohno. Let your machines be idle rather than run under the delusion that high utilization lowers cost. When you overproduce this uses extra energy, more wear and tear on the machine, extra raw materials and racks for their storage.

Then comes the computerized inventory management system to show you where you have put all of that inventory that you produced at such a low unit cost. Ohno points out the irony of this by asking with a touch of sarcasm “Why add cost in this way after working so hard to achieve low cost production?”

Ohno has taught us that overproduction is the worst of the 7 wastes of Lean manufacturing. The unstated lesson here is that the presence of raw materials is the evidence of a lack of overproduction.

Taiichi Ohno closes the chapter by warning against making process flow decisions based on unit cost calculations. Ohno was faced with the argument, ‘If a factory worker transports materials, this cost is part of the unit cost. If a logistics company transports materials, this is general overhead. We’ll take care of reducing overhead if you will take care of reducing manufacturing cost.’ This is a big mistake, says Ohno. There is no way to know how much this type of process will actually cost you. In fact as you fail to reduce overhead cost this drives the wrong decision even further.

Is Ohno directing these last comments towards Toyota? This book was written in 1982. That’s about two-thirds into of Toyota’s 55 year process of developing TPS and doing kaizen. It’s speculation, but he may be giving us a very interesting glimpse into the Lean implementation challenges of those days. He may be showing us a TPS that was maturing, wrestling with integrating software tools and traditional cost accounting methods, much as many companies are today.