Director of Sales: I’m afraid we’ll miss some sales if we don’t keep a large stock of items on hand just in case demand increases. It only makes sense to me to keep large inventories in order to assure product availability for our customers.
Director of Purchasing: I’m very concerned about moving to a just-in-time system for materials. What would happen if one of our suppliers were unable to make a shipment? A supplier could fall behind in production or have a quality problem. Without some safety stock in our materials, our whole plant would shut down.
Director of Manufacturing: If we go to just-in-time, I think our factory output will drop. We need in-process inventory in order to “smooth out” the inevitable problems that occur during manufacturing. For example, if a machine that is used to process a product breaks down, it would starve the next machine if I don’t have in-process inventory between the two machines. If I have in-process inventory, then I can keep the next operation busy while I fix the broken machine. Thus, the in-process inventories give me a safety valve that I can use to keep things running when things go wrong.
How would you respond to these managers?
Answer:
The Hawkeye Machining managers are displaying typical fears to a just-in-time processing system. Just-in-time removes the safety provided by materials, inprocess, and finished goods inventory balances. Indeed, these types of comments reflect conventional manufacturing philosophy, which views inventory as a necessary buffer against surprises and other unwelcome events. The just-in-time philosophy focuses on removing the causes that require a need for inventory.
In the case of materials inventories, a just-in-time philosophy requires all suppliers to provide high-quality materials on a daily basis in just the right quantities needed for a day’s production. If the supplier has unreliable production schedules or quality, then the sources of unreliability would need to be fixed before moving to just-in-time delivery. Only when suppliers are reliable can Hawkeye Machining move to a just-in-time strategy without exposing the company to significant risk.
The in-process inventories can be reduced significantly if the underlying manufacturing processes are made reliable. The director of manufacturing is correct in his observation, but his solution is wrong. The solution is not to increase inventory but to improve the reliability of the machines so that they do not experience emergency breakdowns. Thus, the manufacturing operation must be improved to produce the right product, in the right quantities, at the right quality, and at the right time. Only with this level of reliability can a plant responsibly remove in-process inventories from the system.
The finished goods inventory can also be reduced if the manufacturing system can be made responsive to customer demands. A company will no longer have to stock warehouses with product based on guesses at what the customer will want
many weeks ahead of demand. Rather, goods are produced at the time the customer orders them. This is what Dell Inc. does. It builds a computer to order, rather than stocking the computer and selling it from inventory.
In other words, inventory covers a “multitude of sins.” When the “sins” are removed, the inventory can be removed.