The Waste of Inventory
21
often be sold off at discount, disposed of, or maintained until inventories even-
tually become depleted.
Many companies realize that working within
a shorter planning horizon
holds several important benefits. First, it allows a company to rely less on the
long-range forecast, which we all know will inevitably be wrong. By relying
less on the forecast and more on actual demand, we can reduce the risk of
miscalculating the future and, in turn, hold less inventory. The shorter planning
horizon also supports more frequent replenishment and smaller lot sizes, which
should translate into fresher products available for customers and less risk of
obsolescence.
When demand is highly seasonal, we often must engage in long-range plan-
ning, buying materials and producing products well in advance of the peak
season, given an economic inability to make everything necessary to satisfy the
seasonal spike in the immediate term. Still others concern themselves little with
the
fact that continuous, large-batch production leads to excess inventory. In
many process industries like petroleum refining and paper milling, shutting
down the machines is the equivalent of shutting down the ocean; you just cannot
do it. Achieving the lowest per-unit production cost is still the single highest
priority in many industries today. This mind-set also leads many companies and
entire industries to seek offshore manufacturing activity to reduce production
costs.
That speaks to the normal scope of business activity, but what about when
something strange happens in supply or demand? Imagine an unplanned plant
shutdown at a key supplier. Imagine all of the ports along the western coast of
the United States being closed for an indefinite time period. Imagine the de-
livery truck that gets slowed by inclement weather
or stuck in traffic or the
driver who simply gets lost. Unfortunately, it does not take a wild imagination
to conjure up these images; they can happen at any time to any company. And
what about something positive like the new product that really soars into the
marketplace, exceeding anyone’s “realistic” sales expectations? Or what about
the sales promotion that really had traction? Demand, too, can surprise us. And
so we hold extra inventory to cover us in these situations when an unexpected
hiccup occurs in a supply chain process or demand exceeds the forecast. What
is interesting is that we NEVER expect to use the safety stock; if we did, it
would be factored in the planned cycle stock.
These occurrences represent the many different ways in which variance
manifests. It is the goal of Six Sigma to control the variation, to improve supply
chain processes so that the job gets done better on a consistent basis. Six Sigma
also captures the experience and
expectations of the customer, reducing the
likelihood of developing products and services that are inconsistent with market
wants and needs, but also alleviating the risk of being caught off guard when
22
Lean Six Sigma Logistics
a product tanks or skyrockets. Those companies that engage in offshore manu-
facturing experience the brunt of these swings even more when they send their
operations away from the home market, often moving operations away from not
only the customer but also away from the predominant supply base. While
production costs most definitely can be reduced through this action, most
companies have learned that offshore manufacturing leads to an entirely differ-
ent set of problems in the supply chain: variances. Variances in inbound and
outbound logistics and variances in production
control areas such as quality,
quantity, and time make many question whether it was worth the leap. All these
variances instill greater need for inventory.
Extra inventory is sometimes acquired for reasons other than protection from
supply chain disruptions and demand spikes. Companies in many industries take
on inventory for speculative purposes given the possibility that supplies might
come into shortage or that price increases are on the horizon. Scrap recyclers,
for instance, make a necessary habit of acquiring high-quality scrap materials
whenever they become available. Dealers of limited-edition automobiles and
other collectibles engage in similar
opportunistic buying. Meanwhile, commod-
ity dealers like those in the oil and gas industry,
precious metals, and grain
marketing keep close eyes on the futures market, with the prospect of arbitrage
(buy low now, sell high later) driving their purchasing behavior.
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