In the 90’s I worked in an amazing old 4 story mill where we made replica football kits. Half of the bottom floor was dedicated to incoming rolls of material and outgoing finished shirts and shorts. While some problems were instantly apparent, like transporting all the material to the top floor to be cut, others were less so.
Our business was expanding and in 1 year alone we doubled the order book. I had to increase the workforce and invest in more equipment. The biggest increase in staff was for material handlers, we barely kept material flowing round the plant. We bought extra cages, opened up an old warehouse across the road and tried to breathe life into an old conveyor system.
Then one day the cutters on the top floor ground to a halt. “What’s the problem?” I asked. The young material movers took me downstairs to the warehouse. Every shelf was full of rolls of material – so why nothing to cut?
If you’re a long suffering football fan you’ll know there is a new kit available at least once every season. I found every shelf was full of obsolete stock. There was no room left to bring in any new material!
The person ultimately in charge of the business was an accountant by trade. As inventory is traditionally reported as a current asset on the balance sheet, he couldn’t bear to write it off.
Instead of getting rid, or moving it to a more remote location, we had to hire containers for the new rolls.
Fortunately since then, I have learned that excess inventory is one of the 7 Wastes. Excess means anything more than is required to maintain the process flow.
Now I’m in a better position to question an accountant’s logic.
Have a look at the problems that are associated with excess inventory.
- Physical storage for any inventory not being worked on – off site warehousing, shelving. And in non-manufacturing businesses – computer memory storage, archives and in trays.
- Upkeep of storage space – rents, rates and power bills.
- Cash is tied up in inventory, it is something you have bought but have not yet sold. Too much inventory can result in cash flow problems.
- Transporting inventory to and from storage – people, equipment such as FLTs, conveyors and trolleys. Add on the running costs and maintenance of that equipment.
- Cost of stock taking – people and equipment.
- Potential damage during handling and transport. Not just to the product but to infrastructure and injuries to people.
- Cost of protecting the material during storage – special lighting, temperature control, coatings and preservatives.
- Insurance for items in storage.
- Costs associated with stock rotation – people and equipment.
- Money and storage tied up in slow moving and obsolete stock prevents purchase and incoming deliveries of material required now. This can result in late deliveries to the customer.
- Holding high levels of inventory masks other problems:
- Raw materials hide supplier delivery problems.
- WIP hides bottlenecks, unplanned downtime, idle time and excessive operator motion.
- Finished goods hides quality problems which can lie undiscovered until the customer finds them.
- High levels of finished goods are a risk. They can become obsolete due to cancelled orders or a specification change.
Ask yourself “Do I incur any of these costs and problems?” and “What else could I do with the space, time and money tied up in excess inventory?”