CILT - No more lean times
October 10th 2007 Lean and mean is the current fashion for supply chains. But have we gone too far? Steve Sordy argues that having the right level of inventory can reduce the overall costs to a business, and welldesigned warehouses are a value-adding function.
The management technique known as lean can simplify business processes and reduce costs by eliminating ‘the seven wastes’. If the proposal that inventory is waste is accepted, then it is a short step for some to condemn warehouses as repositories of waste that are a costadding function. But a closer look at the seven wastes confirms that it is only unnecessary inventory that is waste. Furthermore, lean suggests that inventory is a tool that should be used wisely, and in fact most businesses need inventory. This article summarises why all inventory is not waste and why warehouses can add value to a business, and lists the trade-offs needing to be considered. In the interests of brevity, only finished goods inventory is referred to. The arguments put for finished goods and the warehouse that hold them may be readily applied to the raw materials and packaging inventory required by a business. They are, after all, the finished goods of its suppliers.
Why inventory is not waste
Most companies could do more to reduce inventory. There are many reasons why they do not tackle this, not least of which is that they may not know how. Some will not even perceive it as a problem; and increased inventory is seen as an apparently easy solution to a variety of problems, from volatile sales through to unreliable suppliers in faraway places. In many cases, the more inventory solution makes matters worse or introduces new problems. However, there are some genuine reasons why businesses need inventory and why it can be cheaper to hold inventory than to operate without. Decisions in this area are principally a series of trade offs.
In general, orders for a company’s products arrive daily, but if the products are not made every day then inventory is needed to cover the interval between production runs; even if the total sales volume is flat, cycling through the entire product range on a daily basis is an unaffordable option for many manufacturing processes that have significant changeover times.
Increasingly short order-to-delivery lead-times can make the proposal of make-to-order impractical, whatever the production cycle times. On a daily basis orders can exceed available production capacity, and inventory is required to smooth out peaks and troughs and to optimise factory utilisation; an absence of inventory means that increased instantaneous factory capacity will be required, lowering asset utilisation and maybe also labour utilisation.
Customers may place one order for many products that are not all produced in the same factory or all at the same time; time and therefore inventory is required to enable the assembly of the complete order; some customers may be incentivised to place orders by factory grouping, but in a complex supply chain this may not be practical. Some products require maturing before being ready for sale and factory space is either not available or too valuable to be used for this function. Some products need to be reformatted – for example, forming several standard products into a variety pack, also known as a multipack; even if specific multipacks have become standard products in themselves, it is often a lower total cost for this process to be carried out elsewhere than the factory premises
Imported goods may need repacking or quality checking upon arrival; suppliers could agree to supply in the format required or to warrant the quality, but cost, the complications of distance and language and the acceptance of suppliers’ standard products often work against this The amount of inventory a business should have will be a trade-off between all the costs of holding the inventory and the investment required in the rest of the business to manage without it and still deliver the agreed levels of service. Evaluating the optimum in such trade-off situations is a key part of a successful supply chain design.
Why we need warehouses
If you have accepted the need for any inventory, then clearly somewhere is required to keep it; but an effective warehouse is more than simply a holding area for inventory. So what are the value adding functions of a warehouse? Those functions that a warehouse would necessarily have in common with a factory goods-out area have been removed from the following list.
• Accumulation – to enable the accumulation of products from many locations – home and abroad – into the product range from which customers are placing their orders
• Marshalling – to provide space to assemble and despatch customer orders
• Customer collection – a location from where customers may collect their orders, if they so wish
• Maturation – to hold products, sometimes at a defined temperature, until they become suitable for sale
• Loss prevention – to hold inventory in a place that keeps it secure from loss by damage, infestation, taint, contamination, fire, theft and the host of perils inflicted by the climate; and to administer processes that prevent losses by ageing, identity loss or incorrect date rotation
• Temperature control – to maintain the inventory within the correct temperature range for longer term storage or for the extension of the sell-by date; both may be used to reduce instantaneous production capacity
There are some activities that are often carried out within warehouses, not because it is the only location in which they could take place, but because it is the lowest cost overall location:
• Late customisation – this may be a standard part of the manufacturing process, where standard components are packed to order to produce a range of standard multipacks for short-term storage or immediate despatch; or, by changing the packaging, late customisation can also used to put standard products into variants by customer
• Reformatting – taking a mix of standard finished goods to produce, for example, promotional multi-variety packs or seasonal mixes
• Reconfiguring – to reconfigure incoming product – for example, to palletise the contents of stuffed containers or to repalletise from Europallets to UK pallets, or vice versa for export
• Remedial work – even the most quality-driven factories have the occasional glitch, resulting in the affected product being held for review and subsequent action
• Returns and refusals – receiving customer returns or unloading orders that have been refused at delivery; these goods will need unscrambling and quality checking before returning to stock; the returns will also need inspecting to ensure correct identification; some products that have been outside the company’s direct control may need checking for signs of infestation
• Pallet sortation and repair – the wooden pallet is probably the most ubiquitous item in warehouses across the country; using warehouse premises to sort pallets, or even to make minor repairs, can significantly reduce the total cost of the pallet operation by reducing transport and pallet hire costs
A warehouse enables a company to operate more efficiently and with a lower asset base. It can deliver – or at least enable – the conversion of products that are not in the quality, format, configuration or time window that the customer requires. A well-designed warehouse adds value by carrying out this conversion more cheaply overall than any other method. Given that these functions need doing at all, the final despatch warehouse is often the most cost-effective location to perform them.
Note: once a need for inventory and hence warehousing is agreed, there are many further trade-offs to consider before the supply chain design is complete. These will include: the number and location of the warehouse(s); the size, design and operation of each; who owns and/or operates them; whether they should be dedicated or shared; and the impact of these decisions upon transport costs and the service to customers.
In conclusion
The fact that a company has inventory is not a sign of a badly run business that needs training in lean. On the contrary: if that company has a considered approach to what inventory is necessary, how it should be used and where it should be located, and if it has carried out all the sensible trade-offs to achieve optimum costs for the required service, then that company can be truly said to be lean. It could also, probably, be described as rare!
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