As a part of the National Science Foundation’s Japan Technology Evaluation Center I had the unique privilege to lead a major study for the U.S. government comparing U.S. and Japanese logistics systems. During the study I interviewed business and supply chain executives in many large Japanese organizations. Not surprisingly, one of those was Toyota. I spent significant time with the developers of the Toyota Production System and their professor. One of the stories they shared explains more about the Toyota Production System than all the books I have ever read on the topic.
The Toyoda (the company name was created from the family name) family was a rice farming family. They became wealthy when they invented mechanical harvesting equipment for rice. At some point they decided that if they could make rice harvesting equipment, they could also make cars. Unfortunately the production concepts did not translate very well and the auto making venture almost bankrupted the family. The head of the family decided to hire a new engineer from outside the family and gave him one year to develop a new way to make cars. To make a long story short, that young man came up with a way to profitably make cars in an island nation (self-contained), with few natural resources (no waste), limited habitable land (no space), and locust-like industrial congestion (perfectly orderly). The Toyota Production System was born out of those unique geographic, business, and cultural conditions.
Those are not the same conditions that exist in the United States, western Europe, eastern Europe, China, Mexico, Brazil, etc. (The head of supply chain for one of the major automotive companies operating in those other countries shared with me that they call lean, “anorexia”.) There are many good ideas and concepts in the Toyota Production System and its paradigm children, but they are not all applicable and they are not all best practices. They were for Toyota, but not for everyone. That’s why we coined the phrase, “Don’t philosophize, optimize!”
There are myriad interdependencies and complexities in inventory decision making. The complexity overwhelms and discourages many. They often give up and assume based on the prevailing winds of trade literature and stock analyst exhortations that less is better. Sometimes they are right. Sometimes they are wrong.
Lean thinking is so ingrained and influential that adding inventory is considered almost criminal, as if there is an inventory police force lurking around every decision to catch someone adding inventory to a supply chain. Yet, in several of the supply chain strategies we have recently completed the answer was to increase inventory levels: in each case leading to improved financial, service, and operational performance.
In a recent project with one of the world’s most successful consumer products companies, well known for their inventory management, we found that their financial metrics for inventory performance had been neglected. When we used our RightStock™ financial metrics in combination with our service and operational metrics we found that the company was under- invested in inventory. Increasing the inventory investments helped the company gain significant market share, increase customer satisfaction, raise profits, and increase share price.
In a recent project with a large bottler we found that due to lean leanings and a proliferating SKU base, the company was running lot sizes half the size of optimal. Increasing lot sizes and related warehousing space led to significant reductions in total supply chain costs.
We are currently working with a large aerospace company on their supply chain strategy. The strategy revolves around one of the world’s most advanced engine assembly facilities. After touring the facility I was asked what I thought about it. I shared my concern that the facility had been built under an assumption of a nearly guaranteed, steady cadence of supply and demand; which given the global and competitive dynamics was unreasonable. It appears that a greater inventory investment will be required to operate their supply chain.
A few years ago we worked with a large provider of financial services software and terminals. The annual revenue related to each terminal dwarfs the annual inventory investment required to keep each terminal operating. Despite previous attempts to lean out the inventory, we found the inventory strategy required a much larger number of relatively inexpensive mice, keyboards, terminals, and cables to guarantee that terminal downtime impacting multi-million and sometimes multi-billion dollar decisions was not an issue.
I could keep going, but I believe you get the picture. Sometimes the answer is more inventory. Sometimes the answer is less.