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Diminishing Returns

By John P. Collins, CFPIM, CSCP, and Eric P. Jack, PhD, CFPIM, CSCP | January/February 2014 | 24 | 1
Find the value in your inventory

In the January/February 2010 issue of APICS magazine, this department discussed diverse perspectives, such as the dichotomy caused by surplus inventory damaging the bottom line. We demonstrated that too much of a good thing—even an asset such as inventory—actually can reduce return on investment. As further proof, almost all continuous improvement strategies (lean, total quality management, six sigma, and more) share the theme of reducing waste. Excess inventory is most certainly potential waste.

Many of you will agree with our assertion, while others will contend that inventory that’s not obsolete isn’t waste. After all, it increases the value of assets shown on the balance sheet. Plus, as long as it can’t deteriorate, it always will have value. Perhaps revisiting this issue four years later will be enlightening.

At what level are your inventory turns? How many turns would imply too much inventory? And what are you doing to determine if you have too much? Granted, acceptable inventory is a moving target for a variety of reasons—some of them legitimate. In a perfect world, inventory should exist only to support the uninterrupted creation of a value-added event, whether it’s a purchase or the production of something.

If we examine the processes by which real value is added, then inventory in existence during non-value-added events can lead to wasting space, under-using otherwise investable dollars, getting in the way of work being done, and the like. Therefore, deciding on the correct amount of inventory becomes a key managerial decision based on a company’s specific circumstances.

Logical levels

A plant had begun continuous improvement processes the previous year. A great deal of effort had gone into measurements of outcomes, such as productivity, on-time deliveries, work center productivity, scrap, and overtime reductions. Banners were even put up, exalting, “Work smarter, not harder!” Although the CFO was pleased that inventory turns were at almost five, there still had not been any actual process changes that resulted in waste reduction, as illustrated by an overabundance of both raw materials and work in process. The evidence pointed to continued work center optimization and a lot of “same old-same old” processes.

To be fair, the relatively new CEO recognized the starting point miscue and described it as the beginning efforts to adjust the workforce to a continuous improvement culture. Frankly, he was probably correct: A lot of his workforce seemed unaware of the alternatives available to them.

The challenge for all of us is to decide what continuous improvement looks like and if the evidence—especially inventory—supports that decision. Has this issue been resolved at your business? Share your thoughts at feedback@apics.org.

John P. Collins, CFPIM, CSCP, is president of Sustainable Solutions. He may be contacted at jcollins@ssi-spm.com.

Eric P. Jack, PhD, CFPIM, CSCP, is dean of the School of Business at the University of Alabama–Birmingham. He may be contacted at ejack@uab.edu.

 

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