Inventory Reduction in a Lean Environment: Is inventory really a waste?
Our webinar on "Inventory Reduction in a Lean Environment: Is inventory really a waste?" is now available. Our guest speaker, Jim Gambill addresses important questions such as "is inventory is really a waste?". He walks us through the seven types of lean wastes, inventory valuation and reduction. He ends His webinar with a pair of lean solutions for managing inventory.
Our Guest Speaker, Jim Gambill has 30+ years of experience at General Electric. As GE Energy's Global Corporate Lean Initiatives Leader, he has hosted 250+ kaizen events worldwide. He practiced Continuous Improvement since 1994 and held site-level then worldwide Material Manager positions. One oh his achievements is that he reduced inventory between 20% and 60% while increasing availability and on-time performance. His Expertise includes: Synchronous Manufacturing; Demand Flow Technology; Six Sigma; Continuous Improvement; Toyota Production System (Lean). Jim currently works as an Independent Lean and Kaizen concepts consultant. Some of his clients are Rolls Royce, Shell, South-eastern Aluminum Products, etc. The Projects range from inventory reduction, to 5S, Kanban, Pull, training, to entire facilities layout design or redesign.
He holds a Bachelor's Degree from Denison University, OH. and is certified in APICS and NAPM.
In this webinar, Jim will discuss the following topics:
-7 wastes of Lean
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Disclaimer: This transcript was generated automatically by a software with 86% accuracy. Please forgive errors in the remaining 14%. Please listen to the video recording for exact accuracy. This automated transcript is provided "as-is"
Our guest speaker today is Jim Gambill, who will tell us about inventory reduction in the Lean environment and raising an interesting question, is inventory really a waste? Jim assures 30 years of experience, primarily at General Electric, where he was most recently GE Energy's Global Corporate Lean Initiative leader. He has held more than two hundred fifty Kaizen events worldwide. Pretty impressive. And he's been with the continuous improvement practice since nineteen ninety four. Also, very interestingly and on topic, he has reduced inventory levels from between 20 and 60 percent while increasing availability and on time performance. So you could see here a list of his expertise areas. He's also a consultant right now for a number of prominent companies that you see listed here, including Rolls-Royce, Shell, et cetera. So thank you so much for being with us today. Jim, before passing it on to you, just a few words about our sponsor, Sesasystems. As many of you know, we have a complete catalog of two thousand five hundred products used by fifteen thousand companies, actually, including many global corporations and thousands of smaller ones with both training games as well as Lean office furniture workshop, furniture, workstations, workbenches, and so on. Floor racks trolleys, Kanban systems for marketing, safety, signage, as well as digital peepy and management software and digital screens and visual management with magnetic whiteboards and accessories. So without further ado, pass it on to you, Jim. we have a complete catalog of two thousand five hundred products used by fifteen thousand companies, actually, including many global corporations and thousands of smaller ones with both training games as well as Lean office furniture workshop, furniture, workstations, workbenches, et cetera. Floor racks trolleys, Kanban systems for marketing, safety, signage, as well as digital peepy and management software and digital screens and visual management with magnetic whiteboards and accessories. So without further ado, pass it on to you, Jim. we have a complete catalog of two thousand five hundred products used by fifteen thousand companies, actually, including many global corporations and thousands of smaller ones with both training games as well as Lean office furniture workshop, furniture, workstations, workbenches, et cetera. Floor racks trolleys, Kanban systems for marketing, safety, signage, as well as digital peepy and management software and digital screens and visual management with magnetic whiteboards and accessories. So without further ado, pass it on to you, Jim. safety, signage, as well as digital peepy and management software and digital screens and visual management with magnetic whiteboards and accessories. So without further ado, pass it on to you, Jim. safety, signage, as well as digital peepy and management software and digital screens and visual management with magnetic whiteboards and accessories. So without further ado, pass it on to you, Jim.
Thank you very much, Jabril. So one of the one of the reasons we talk about him in inventory reduction is obviously it's one of the major wastes. But a lot of questions I get on an ongoing basis. Is inventory really a waste? I mean, we need inventory to make product, whether it's a physical product or whether it's a transactional product. So, you know, in a lot of cases, people believe that inventory is necessary, the more of the better just to make sure that we get the outputs that we're looking for. So why don't we dive right into it? These are the classic seven wastes in the Toyota production system. And this is the acronym Tim Would that a lot of people use to remember the seven waste inventory is right up there at the top. And as I mentioned, many companies are very reluctant to commit to lower inventory levels. They believe they never want to be able to run out of material. It covers up a lot of issues. I'll say we have a lot of pushback. You get is our demand changes all the time. Our product mix changes all the time. Our lead times do not satisfy customer requirements. And I also look at things like, you know, we have a quality issue, so we need to keep a little extra on hand to accommodate that. Also, a supplier may come to someone and say, hey, I'll give you a good price on something. If you have multiples or multiple quantities of high lot sizes or or a price break for an excessive amount of material, or I'm going to increase my price next month. Our product mix changes all the time. Our lead times do not satisfy customer requirements. And I also look at things like, you know, we have a quality issue, so we need to keep a little extra on hand to accommodate that. Also, a supplier may come to someone and say, hey, I'll give you a good price on something. If you have multiples or multiple quantities of high lot sizes or or a price break for an excessive amount of material, or I'm going to increase my price next month. Our product mix changes all the time. Our lead times do not satisfy customer requirements. And I also look at things like, you know, we have a quality issue, so we need to keep a little extra on hand to accommodate that. Also, a supplier may come to someone and say, hey, I'll give you a good price on something. If you have multiples or multiple quantities of high lot sizes or or a price break for an excessive amount of material, or I'm going to increase my price next month.
So you better stock up now. One of the other things I have encountered in my own personal experience is that it typically is not a metric on the on the producer, on manufacturing or in the transactional business the the flow of the owner that's processing the paperwork. You know, I've actually had positions where I was considered a inventory reduction manager and I was the only one that was really responsible for reducing inventory. My counterparts in manufacturing had no interest. So it it was kind of an interesting situation to be in. But they see it as a safety net. They see it as absolutely necessary to accommodate all of these reasons that potentially could pop up. And and as I said, if they messed something up or they get on paperwork or they've got a quality issue or customer changes their mind at the last minute, they've got more there to make sure that they can accommodate the output that they've committed. So tough situation to be in for the from the producer when you go to them and say we need to cut back on inventory levels. OK, next flight. So the reasons we carry inventory, as I mentioned, sometimes there are scrap or rework issues, maybe we have an unreliable supplier that is having some issues or just, you know, you're at the bottom of their priority list.
Sometimes our lead times are just too long. Sometimes that's driven by excessive setups, too many or too long. Our scheduling or lead time issues pop up to the surface. We've got capacity issues, so the flow is not getting through the facility at as appropriate. Maybe we have some issues with machining or that part of the producing workstation. It could be a capacity problem. It could be breakdowns, it could be a number of different things. But we got to accommodate for that. Transportation issues, unreliable transportation, either inbound or outbound, these could be potential issues or manpower, you know, we don't have enough people. We've got some illness issues. So in other words, we blew it up on inventory to accommodate and absorb all of these things. So you'll see there on the chart that this is a classic scenario or a classic classic example that you see many times about the rocks in the water where the problems are the rocks and the inventory rides over top of it because the inventory inflates and covers up the problems. So we have to address these issues if we want to address inventory levels. You can't just arbitrarily slash inventories and then break the system and disappoint your customers. So the one thing it will do is if you start to gradually reduce your inventory levels, the first thing that comes to the surface is the thing you have to address first tends to be the biggest problem or the biggest driver. So once we hit the hiccup, as we start to slowly reduce inventory levels, something comes up that we have to address and we go ahead and and put some fixes in place, corrective actions in place, once we've identified it, solve the problem and then we continue down the path of finding the next biggest issue.
So this is just a graphical representation of how that would work. But we have to make sure that we address them as we find them and in order to effectively lower the levels as we go. OK, so how do we let's talk about finance for a minute. Inventory evaluation. A lot of people think that it's really just how much does it cost or if you machine it or produce, add labor to it. It's just material labor. There's a couple of different nuances here. Typically, it's a calculation of material dollars, labor dollars, your labor rate and the number of hours, and then there's a percentage tacked on to the labor to accommodate overhead rates. And this is carried in your inventory so that when you output something, your inventory material, labor and overhead, when you leave the system of the inventory levels, there are also some cases where you may have reasons to put a miscellaneous material factor on the material. So maybe you've got some shrinkage or you always got an eight foot rod and you're only using seven feet. Maybe you just calculate that into the end of the equation in the material miscellaneous material.
So that's the basic evaluation of how you how you decide the value of your inventory. But you can fall into a trap where you think that that's the only that's the only cost associated with inventory. So and this is something that happens a lot in in sourcing or procurement where they look for price reductions. But and they report they go out there and they say, boy, I got something I can get for a few dollars less, but I got to buy it a little bit more. But what they don't address are some of these hidden costs, you know, the cost of the of managing the materials. So there's purchase orders cost. There's inbound transportation, there is receiving handling cycle counts. All of these things, headcount, lost parts, obsolescence, slow moving costs. So you tie up a lot of dollars with inventory, but a lot of times we don't really look at these additional costs. So inventory is more than just the evaluation of the inventory. There's a lot of indirect material costs and material handling involved with it. OK. So where do we start? Typically, what I like to do is come up with some kind of a segmentation. If you don't know what you're dealing with, it's very hard to address it. So we try to do some basic analyzation of your inventory. One way to do it is to divide it into those segments of active, slow moving or obsolete. And you set your own parameters, maybe activities. You're using it all the time.
Slow moving is something that you don't use for maybe a month or two obsolete. You haven't used it for over a year or whatever. Your parameters are appropriate in your business. Another way to do it segment it is to divide it into raw material, work in process and finished first if it's appropriate. Another thing we like to do in this can be done on an individual part number basis or by category or commodity or whatever to calculate your days on hand. How much do I have? OK, so I've got, I've got three hundred pieces of something but that's a year and a half slower. OK, so another way to look at your inventory days on hand, turnover rate, how quickly are you turning your inventory? And this again is another calculation of how quickly you go through it, how many times per year you rotate your inventories or aging, how long has something done in the facility or been in the system? So there's lots of different ways. There's also additional ways to do it, depending on on your business. But the best thing to do is to figure out where you have inventory tied up. So once you identify the pockets of of inventory, you can decide which ones you want to address first. So what we try to do is establish the causes of of of these build ups and maybe try to put in place some solutions and see if they work or not. So we look at the five whys fishbone cause and effect diagrams.
Once we identify some potential things, we may decide it's significant enough that we may want to put together a Kaizen event to address it. And if we do find some of the fixes that we put in place and then go and measure to see if it's making an impact. So this is a classic PDCA or plan do act rotation. So we try something. If it doesn't work quite right, maybe we address it, put another change in place and then continue to monitor it and improve. So some things more longer term, so we may want to develop a certain action plan as to how how to do this and what goals we expect to achieve and what kind of a time frame. So a dedicated action plan dates, names, all those good stuff to hold people accountable and and try to address the issues that we've identified. OK. So some of the things that that we try to do, it's it's very business dependent, OK, but the one thing along with the segmentation thing is we want to establish a baseline value screen so we know exactly where in our process we may have discrepancies, imbalances, inventory buildups. We may want to look at a just in time type of situation where you have a very good relationship with your suppliers and you develop a good rhythm with them so that you are getting material when you need it. There's a lot of.
I say controversy, I guess, not just in time, just in time, doesn't mean just running out or just in case or a lot of the other things they talk about, it's really having what you need when you need it. And there's nothing wrong with saying I need a little bit of extra something if if that's what you decide to do. But you want to make sure that you're not carrying excessive amounts of inventory to to address whatever issues you may encounter. The object is to get it when you need to use it and output it. So it's more of a flow type of thing that we have to look for. Another thing that we may want to do is shorten your production lead time. A lot of businesses have an awful lot of work and process. There's batching that goes on. So you're running big batches because you think they're more efficient and maybe there are gaps between the time it comes from one workstation to another workstation. There's maybe some offline processes, maybe it goes off site for a process. But the one thing we want to do is try to minimize the work and process and thereby getting it through the process much quicker. And that, in turn will reduce your working process. You may want to look at implementing Kanban and Kanban systems, really just our consumption based replenishment systems. We all come from a world of ERP and MRP, which are push systems which tell you when you need it and they just drive the material in and hopefully you're on schedule and you can absorb that material.
But a lot of cases and material, if you've got a hiccup or a problem, the material just keeps flowing in based upon the item master parameters you've put in place. And and material just keeps flowing in and building up. Whereas with Kanban you replenish as you use real time. And that's really goes hand in hand with converting from a push system to a pool system in manufacturing. We want to try to eliminate bottlenecks. If you eliminate bottlenecks, then your material flows through those areas faster, less. Whipp The entire system operates more efficiently. Supermarkets, supermarkets, very similar to to Kanban, but you may have supermarkets of at your supplier that you're pulling from shortens the lead time instead of having to wait six weeks for a manufacturer to make something. If he keeps a few on the shelf for you on supermarket, you can pull it immediately. On the on the manufacturers side, you may want to have more good goods supermarkets. You may want to have in-process, supermarkets you want to have may have finished the supermarket so your customers can Polanyi as well. All depends on the situation, but these are very effective, very rigid with rules, not just let's put a bunch on the shelf, then it's all calculated out, effective to the demand, and we try to minimize that and replenish things on a much faster basis. So use it, replenish, replenish, replenish, not buy a whole bunch and then run with it for six months.
So vendor vendor managed inventory. Maybe that's another option that where you don't own the inventory, you work out a deal with the supplier where he keeps his material on your site for a little while. There may be some additional agreements that are in place. You know that after X amount of time you may buy it or whatever. So you have to be a little bit careful on how this goes. But it's very effective. The supplier says, yeah, I'll keep some on your site and as you use it, I'll charge very common these days. Didn't used use be supplier contracts, maybe go into some long term agreements with with suppliers, gives them some stability, gives you a guaranteed flow of material. You've got locked in price and locked in delivery. So rather than going out there and negotiating all the time for every single order or contract or whatever it might be, you've got some long term agreements in place. You want to make sure that you look at your your parameters for stocking or you're part of the master data, you know, multiples, maximums, minimums, lot sizes, you know, sizes of all those kinds of things. You want to make sure you keep up to date and. Continually revisit to make sure that your demand hasn't changed, but you're still ordering based upon old information, so that that's an important thing that has to be done on a continuing basis.
So inventory, if you can get up, if you can determine standard work, you've got good inventory standards. As far as what your philosophy is about stocking inventories, then you can put in place rules and everybody has to run by those rules and you modify them as necessary as as time goes on and things change. Again, we mentioned in-process Kanban earlier. But another thing that we may want to do is evaluate what our ordering parameters are. Are we built or business or are we able to forecast business or are we to build a stock business? Those are some very big decisions that have to be made. Or you may decide that there are segments within your business where some things are building or other things are built. Stock and other things are built to forecast depending on the dynamics of the demand stream. So it has to be evaluated, has to come up with a policy. You just don't want to let things run as they as people decide, as the market planners, one guy decides one thing and decides another. They're in conflict. They don't have a common philosophy. So we want to make sure that we have a common philosophy as to a stocking and manufacturing build. Runners, repeaters and strangers are something that you've may have heard before, but runners have things that you build all the time, day in, day out, just always are running. OK, so those are very common things. So you can set those up.
You've got a good rhythm going on those things. Repeaters are things that tend to come in waves where you may build 20 of something and then you don't build it again for a little while and then you build a few more. So those things are repeaters. You've got good standard information on them, but you don't run them every single day. And the strangers are the one of the things that you run rarely. They can be something that is unique to a specific customer or a design that is unique for a one time shot. So those things all have to be addressed differently. So there are these tied back. Once you identify the the whether they are a random stranger, you can put the appropriate stocking policy or manufacturing policy in place to address them. So again, we were nailing down how this all works together, get our good hands around what we're making, how we're making it, who our suppliers are, what our customers are looking for. And we try to put an effective stocking and inventory strategy in place. Failure to do this will result where little will result in much higher inventories to cover over any mix or any issue that may come up. So, yeah, so those are just some of the possible solutions that could come up OK. Each situation is unique. You know, every single business, it's very hard to plug and play in a Lean environment. It's a very hands on action oriented philosophy.
So depending on who you are, what your philosophy is, what your goals are, I will say that sometimes people come to me and say, you know, why do I really want to reduce inventories? Well, and if you've got a certain amount of cash available in your business, do you want to tie it all up and inventory or do you want to have some free cash? Maybe for acquisition purposes? Maybe. What's NPI, a new product introduction development. But it's tying up cash that can be used elsewhere. So, you know, it's something's on sale at the store. How much to go and buy Obeya a year's worth. Now you find sort of what you need, and that's the same philosophy. So you can have cash flow to accommodate other things. But only a Lean professional can really help you with these types of things. So either you can look for consulting people who have got experience in this area or you can develop them internally as you go. So or hiring. But every experience is different. Everybody's got to be on the same page. And in order to do this, you also need a good influx of of support. One of them is a sesasystems. They've got great materials available to help you establish Lean within your facility. So these things in combination with each other, you know, you can pretty much address anything you want. But the most important thing is a willing organization and top management. Buy in and I'll leave you with that.
Thank you. Thank you, Jim. Thank you very much for your kind words about the equipment that sesasystems of we I'll show your contact information again on another slide before we move to the concluding slides. Just a couple of questions. The first is you did mention why companies consider or whether they can benefit types of inventory reduction. But one of the concerns that manufacturing companies have is they are hesitant to reduce inventory. Could you tell us more about that hesitation and how to to address those concerns that they may have?
Yeah, I think there's there's a couple of different ways, but typically the way this works is that your senior level management, you know, their balance sheet looks out of whack and they've got we've got way too much inventory and we're only turning our inventory two times. So the edict comes down because they need to free up cash, manufacturing or whatever your business tends to be, even if it's transactional, like I said, tend to want think that this is beneficial to them to have as much as they can. So there's a couple of things. One is that I think you have to drive the accountability down to the manufacturing entities so that each portion of your business owns their own inventory and then they have to be engaged in putting in place programs in order to drive the inventories down. So ownership responsibility has to be driven down to the people who are actually controlling the inventory, not somebody who's just been put in place to try to to facilitate it. So I think the other thing that has to be understood is that lower inventories makes things easier, not harder. If you've got less inventory than you know where things are, they flow through the shop faster. Things just operate more smoothly. Whereas if you've got stuff all over the place, very hard to find stuff, keep track of things, things get bogged down. So you've got to incentivize them to to to want to drive their inventories down. But again, top level engagement, drill down on the on the metrics to the people who actually own the inventories.
And our question, the total cost of inventory that you mentioned in one of your slides is much higher than what it appears at first sight. So even on the balance sheet is facing a number which may appear large. The reality is that the real cost is even larger. So do you have a sense of what that ratio is between what's the apparent cost of inventory and what you've experience is real cost once you add up all those extra losses? Well, you know, the cost plus the losses and inefficiency.
Yeah. And I've never really seen that that calculation. And I think it probably is business dependent, but I would venture to say very easily it is more than double, probably well in excess of that. I mean, I have seen places that carried so much inventory, they had to lease additional space, racking people to manage it for trucks. All of these things, if you total all of those things up and roll them somehow into your inventory costs would be astronomical. So very high. Very high.
Right. Sounds like a first step. Could be an assessment of what the what the actual cost is. And that can also help build some business case for. Right. This a big initiative, right.
I think I think a really good starting point is to do a high level value stream map of your business so you can look at your lead times, cycle times, inventory levels, the different phases of the of the thing just as a high level thing. Then you want to drill down into into more detailed segmentation as appropriate to. But you got to identify those pockets. You know, you've got X amount of inventory, but where is it? We always seem to be running out of stuff. OK, so where and where is it tied up? And then once we figure out what those are, we can address them individually.
Great. All right. Thank you so much. And again, the presentation we have today was part of a Sesasystems Academy, which is a physical space where executives from different corporations can come and check out equipment, some of it pretty simple, but can make a big difference, like what Jim mentioned, Kanban systems or Floor racks for Lean supermarkets, et cetera. So I'm a bit more advanced, including the digital design management. And a few hundred executives joined the physical space. But we also have several hundreds like you who join online. And we if you'd like to hear more about our webinars and be informed of our future webinars or listen to the prior once, you're welcome to join our group. We have almost 20 members now. Feels like, you know, spam. You can ask questions, but also simply track our webinar so you can find the group at LinkedIn dotcom stuff groups slash this number that you see here, eight six zero five eight four four. And if you're interested. Also, feel free to reach out to get a copy of our catalog, either PDF or paper, which is many probably more than fifteen thousand of your colleagues have the catalog on their desk and also happy to schedule online demos. So if you'd like to get in touch with Jim, you can find him on LinkedIn by email or on his website. And you have my contact information as well. Thank you so much. Again, Jim, and I look forward to seeing you all in the future. Webinar by.