Lean Six Sigma - Inventory is Evil

Inventory is Evil
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Jay Arthur
888-468-1537
303-756-9144
KnowWare International, Inc.
DBA LifeStar
2253 S. Oneida
Ste 3D
Denver, CO 80224

We work with companies
that want to fire up their profits using
Lean Six Sigma

I just finished reading an article about Time Cook, the operations guru for Apple Computers. I was struck by his statement that "Inventory is fundamentally evil."

Over production which creates excess inventory is one of the seven speed bumps of Lean. However, my mind seems to respond with more energy to the phrase "Inventory is fundamentally evil."

The article goes on to say that "There are two basic ways to great profit margins: Charge high prices or reduce costs...Cook's operational savvy keeps costs under control."

How Stale is Your Inventory?
According to the article, Apple's days of total inventory has been as low as 0.4 days and now stands at 10. Dell computer has been as low as 3, now at 7. HP, however, is at 33 days.

What Kind of Inventory?
There are three main kinds of tangible inventory:

Raw Materials
Work in Process
Finished Goods

If you warehouse or store any of these types of inventory, then there are costs associated with managing, moving, rearranging, and tracking them. It takes space, time, and people. None of it adds value to the product or service. It just eats profit.

I've worked with companies that have hundreds of millions of dollars of raw and finished goods inventory, far more than they need to meet the needs of their customers.

Intangible Inventory
The same kind of thinking can be applied to back office functions. Have you invoiced what you've produced? What is your inventory of unbilled goods or services? What is your inventory of accounts receivable? How stale are they? What about purchasing and payments?

I've worked with healthcare companies that have hundreds of millions of dollars in insurance claims being negotiated with insurance companies. These claims can be over 300 days old.

Here's My Point
The carrying cost of tangible and intangible inventory can devour the profits of a company.

Inventory is fundamentally evil!

Set a big hairy audacious goal for "days of total inventory" and aggressively improve the process to achieve your goals.

The Genius Behind Steve, Adam Lashinsky, pp: 71-80, Fortune, Nov. 24, 2008.

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