Lean Waste 2: Inventory
Eradicating Waste: The 7 Muda (+1 for the road)
Whether processed stock or raw materials, inventory costs money, it costs money in services and of course, in input material. You need to add value. That’s essential. However, that value doesn’t get realised until the asset or service is liquidated. Specifically, until you’ve sold it. If you don’t sell it,indeed, until you’ve sold it, it’s waste!
Shocking definition, I know. Investment is waste until it yields all of itself back. It gets worse.
If you spend £10,000 on a thing and intend to sell it with a 20% margin in 12 months, then you’re down at least £10,000 (plus bank interest if you want to be pedantic) for that 12 month period. If you do that every month for 12 months, by the time the first investment starts paying back, you’re £120,000 down. If that’s your intent, then you have to start out with at least that amount in capital to begin with.
However, let’s assume you intend to sell it in 1 month. The first month, until you recoup the investment you’re down the same £10,000. But by the end, you’re up £2,000. The next month, you spend £10,000 which means you’re only effectively £8,000 down. The same period in the old model, you’re down £20,000 and ‘owed’ £24,000. I use the word owed loosely, since if nobody has bought by then, it’s waste.
By the end of the 12 month period, you will have turned over £144,000 whilst the old model is still waiting for the first £10,000 to be returned or rather, £12,000 to come in. All you have to hold on to is the first £10,000 in capital investment, compared to the £120,000 liability you’re left with in the old model.
It gets better. Imagine your income stream dries up month 3 after three months have been paid out. The amount at risk in the old model is £30,000. In the leaner model, with its ‘DRIP’ fund, the risk is only £6,000, since by that point £24,000 has been generated from the £20,000 paid out and you’ve paid out £10,000.
This is one of those things that is ‘fractal’ you get the same effect between departments or within multidisciplinary teams. It also links very closely to waiting as well, though it’s the widget that waits, not people.
Lowering inventory is an absolute no brainier. However, you have to see it to improve it.
Tip: visualise invisible inventory. This is especially important when the work is tiny or intangible.
Following my talk at Northern Change Facilitators on the 14th April 2016, as promised, the first in a series of blogs on the 7 Lean Wastes, which I am writing and publishing each day for the next 7 days. If you want to check out the session slides I used on Lean Enterprise experimentation, visit:
http://www.slideshare.net/EtharAlali/agile-games-60944230
Lean systems’ roots go back more than 70 years. Made famous by Toyota in the 1970’s and 80’s it’s the centrepiece of lean thinking in today’s world. It aims to improve quality, increase efficiency and efficacy, reduce waste and continuously improve (based on the principle of kaizen) when don’t well, it’s an extremely elegant solution. Get it wrong, and you dishearten forever. Needless to say, it’s benefits can be amazing, if you do it right.
