Lean

The Right Inventory is an Asset!

By Ron Pereira Updated on January 13th, 2011

Most lean practitioners, myself included, spend lots of time talking about how calling inventory an asset is hog wash.

We use analogies like how lowering inventory is the same as lowering water in a river… eventually all those pesky rocks (defects, etc.) appear and the boat (our factory) is sunk. Usually cheesy PowerPoint slides with bad clip art (see above for example) are used to present this scenario.

Before the purists jump all over me I too want to free up working capital by reducing inventory. But I think we sometimes get a little carried away with all the “kill inventory” diatribe.

The right inventory is indeed an asset as it will be turned into sales. That is pretty much the text book definition of an asset isn’t it? The trick is making sure the inventory we carry is indeed the “right” stuff. There lies the challenge and the true reason one piece flow and excellent material replenishment systems (e.g. heijunka, kanban, etc.) are so important.

Reducing inventory should never be our goal. Instead, we should be focusing on making sure the inventory we do carry is the right stuff. If we succeed things like doubling inventory turns and increasing cash flow will take care of themselves.

That’s my take on it at least.

Ron Pereira

Ron has more than 20 years of experience in various manufacturing, supply chain, and senior leadership roles. Ron has held the titles of process engineer, engineering manager, master black belt, and director of manufacturing & continuous improvement. In 2002 Ron was the first American to win the Nokia Global Six Sigma and Overall Quality award in Helsinki, Finland. Ron holds a bachelor's degree in automated manufacturing and an MBA in technology management.

Andy Wagner
October 20, 2007 - 9:21 am
Reply

Ron,
I think one reason that “kill inventory” has become such a passion of lean enthusiasts is because so many factories operate with inventory that is completely out of control, or maintained at levels that are high beyond reason.
Intuitively, and technically, there is a point of diminishing returns with regard to inventory reduction. That said, you probably aren’t anywhere close to it!
What’s important in dropping inventory levels is that you fix your problems as you do so. In the cheesy PowerPoint image you show, you wouldn’t suddenly drop the water level to expose all three rocks. You would expose them one at a time and remove each completely before continuing your journey.
Ron Pereira
October 20, 2007 - 10:45 am
Reply

Great points Andy. Thanks for commenting.