What are excessive inventories?

Excessive inventories, are those inventories that by their quantity exceed some norm, standard. Most often they result from another Lean waste, namely overproduction. Overstock is very closely related to the meaning of the word “lean” in the context of production. Lean production – the so-called lean system means a minimum level of inventory on production. Such a state can be compared to an athlete who has little body fat. This makes this athlete faster, more agile and more efficient than a person with much more of this body tissue. What conclusion can be drawn from this? A company with a Lean system in place is like a successful athlete.

What are inventories?

Inventory includes three main components. They are:

• Raw materials and semi-finished products from suppliers.
• Semi-finished products in production, i.e., semi-finished products resulting from WIP (work in progress).
• Finished goods.

Why do companies maintain excessive inventory levels?

We don’t want to excuse companies that buy raw materials in times of crisis such as a pandemic or war. However, the fact is that such business decisions are made, so they should be evaluated on a case-by-case basis each time. However, there are situations when there are other reasons for excessive raw material inventories. Let’s focus on the causes that are within the company’s control.

Inadequate planning

Excessive inventory can result from improper planning. Even at this stage, excessive inventory can simply be planned for. Often in the planning department, questions can arise: will there be enough raw materials, will production be stopped, will we deliver everything on time? These doubts that arise at the planning stage are the cause of later raw material inventories that companies simply accept.

How to prevent this from happening?

What should be done to ensure that the amount of raw materials in stock is neither too much nor too little? You need to develop cooperation with suppliers who will 100% ensure on-time delivery, supporting them in solving their problems, and analyzing the flow of materials not only from the moment of delivery to the warehouse, but much earlier – from the moment of production at the supplier. It is also worth supporting suppliers in building their work culture. Diversifying suppliers is also important, so that in case of supply chain problems, a second or even third supplier can be supported.

Another thing we can do is to set a minimum quantity of raw materials we can order at one time. If we have to order an entire truck instead of a pallet, or an entire pallet instead of the required few boxes (and such orders will last us several months), then we are creating excessive inventory. In order to avoid this, it is necessary to carefully analyze the possibility of setting minimum deliveries at higher frequencies. Of course, on the one hand, there will be higher costs, but these should be compared with the costs of storage and the costs of the various irregularities that excessive inventories cause. What irregularity-related costs can excess inventory cause? For example, they increase the time to look for a particular material, or make it more difficult to maintain the FIFO (first in first out) principle.

Excessive WIP (work in progress)

Another type of inventory is the so-called WIP, meaning work in progress. This type of inventory is most influenced by the company. WIP levels are most often managed by production managers together with planners. As with the planners, they, too, ask themselves: what can be done to keep production from stopping, to deliver the product on time? Paradoxically, larger amounts of inventory make certain problems invisible. For example, machine failures that are not production bottlenecks at high overproduction are not visible, because while the failure is being corrected, production goes on, relying on inventory. And even when the breakdown is at a bottleneck, there is little movement in production either, because at a glance almost all machines or stations are producing. When we have manual production or manual assembly, we also don’t see excessive inventories. Everyone around is working and problems are not noticeable.

The description given above is a grand illusion of a well-functioning enterprise. In such a situation, we do not think about the failures and causes of production problems. Excessive inventories often hide a lot of shortages, which for some reason lose identification. Then it is impossible to find out who, when and how the semi-product was produced, and it is difficult to identify the cause of the problem.

How to prevent it?

In a company where there is no excess inventory, each failure is analyzed, remedial action is taken so that the situation does not happen again. Employees produce only what is needed. When a mistake is made a few operations earlier, it is immediately detected and corrected. Shortages, which are often drowning in excess inventory, are instantly detected in the case of so-called continuous flow. Unfortunately, when “hoarders” come to the fore, that’s when everything looks like the iceberg diagram below.  Downtime, failures, poor work organization or defects hidden beneath the surface go unnoticed.

Excessive inventory of finished goods and unfavorable requirements in trade agreements

The third type of inventory is finished goods. As in the previous cases, here, too, the reason may be fear of not delivering on time to the customer. In addition, it often happens that the customer himself includes requirements for so-called “safety stock” in commercial contracts.

How do we prevent this from happening?

First of all, you have to win the customer’s trust by telling them that our inventory is under control and our production is reliable. Such facts are always appealing. But it’s not always the customer who requires inventory, often excess inventory is the result of mistakes made in the pre-production stages. Such a situation is the result of a bad plan, poor organization and a lack of knowledge of one of the most important lean wastes.

So is it worth it to produce exactly as much as the customer wants? Here it is important to take into account what level of development the company is at. The higher the level of lean implementation, the more predictable the production and the more uninterrupted the flow, the more it is necessary to adjust production results to customer orders. However, if we have a lot of problems in the production process, we need to have a greater safety margin in the form of small inventories.

Remember that lowering stocks should not start with the business command “from today we don’t do stocks!”. Instead, you should strive to solve the problems that excessive stockpiles cover up, because after all, “hoarders” sometimes know what they are hiding and do it consciously.