The vertical axis in this chart represents “quantity” while
the horizontal axis stands for “time.” The broken line shows
the “amount received” and the solid line the “amount sent.”
Manufacturing lead-time is what fills any gap between the
amount received and the amount sent. Wider gaps mean
longer lead-times. Moreover, longer lead-times mean larger
amounts of in-process inventory.
In other words, the relationship between manufacturing
lead-time and in-process inventory can be described using
the following two equations.
Manufacturing lead-time =
in-process inventory expressed in day units
Amount of in-process inventory =
manufacturing lead-time × daily production output
Although our example refers to in-process inventory, it can
be applied similarly to inventories of products or materials.
If we cut our product inventory in half, we need to cut
our lead-time in half, too. The same goes for our material
inventory. If we cut that in half, we need to cut the delivered
lots in half and double the number of deliveries.
In the factory, problems crop up in all kind of areas,
including delivery deadlines, quality, and inventories. None
of these problems exist independently of the others. They
are all interrelated, and we must learn how they connect.
Factories having trouble meeting delivery deadlines are
probably also suffering from excess inventory, difficulty in
switching to wide-variety and small lots, and ongoing missing
parts and other defects. All of this relates to what we call
“the character of the factory.” The most visible aspect of this
“character” is inventory. The inventory situation is so visible
that a JIT consultant can generally appraise it immediately
upon entering the factory.
Inventory is the JIT consultant’s best teacher.
Lesson 14. Inventory Tells the Whole Story
Why Is Inventory Bad?
Many of us think of inventory as a “necessary evil.”
During times of booming markets and brisk sales, we
appreciate the necessity of inventory as the “ammunition” for
doing business. But when the market boom fizzles out and
sales slump, we suddenly feel the “evil” of inventory, too.
Inventory is thus a two-faced entity, sometimes an angel and
sometimes a devil. In JIT production, inventory always has
only one face: the Devil’s.
If you were to ask me why inventory is a bad thing, I could
give you the following general reasons.
1. Inventory adds weight to the interest payment burden
Anytime we need to procure capital, we must pay the
cost of such capital. The general term for this cost is
“interest.” For whatever amount of time the materials
purchased with such capital sit “idle” as inventory, the
invested capital does nothing except incur interest debt
and is therefore a pure and simple addition to the company’s
interest payment burden.
2. Inventory takes up space
Obviously, inventory has some bulk and therefore needs
space. If we allow inventory to accumulate, we soon must
either put up with cramped factory floors or must invest
further capital in new shelves or new warehouse facilities.
3. Inventory creates the need to convey and handle waste
Stopping something to keep it in one place implies
movement before and after the stopping. Moving things
to intermediate locations from where they will need to
be moved again, and loading and unloading these things
from the conveyors are all forms of waste.
4. Inventory invites defects
If left idle long enough, “nonperishable” items will begin
to rust or otherwise suffer time-related deterioration.