J#(9)-20777777
• Lean thinking refers to approaches that focus on the elimination of waste in all forms, and smooth, efficient flow of materials and information throughout the value chain to obtain faster customer response, higher quality, and lower costs.
• Manufacturing and service operations that apply these principles are often called lean operating systems, initially developed and implemented by the Toyota Motor Corporation.
Lean
1. Eliminate Waste: Eliminate any activities that do not add value in an organization. Includes overproduction, waiting time, transportation, processing, inventory.
2. Increase Speed and Response: Better process designs allow efficient responses to customers’ needs.
3. Improve Quality: Poor quality reduces yields, requiring extra inventory, processing time, and space for scrap and rework. Do it right the first time.
4. Reduce Cost: Simplifying processes and improving efficiency translates to reduced costs.
Principles of Lean Operating Systems
Avoiding Wastes in Lean Systems
• Inventory is any asset held for future use or sale with objectives of maintaining sufficient amount and variety to meet demands while incurring the lowest possible cost.
• Inventory Management involves planning, coordinating, and controlling the acquisition, storage, handling, movement, distribution, and possible sale of raw materials, component parts and subassemblies, supplies and tools, replacement parts, and other assets that are needed to meet customer wants and needs.
Inventory Management
• Raw materials, component parts, subassemblies, and supplies: inputs to manufacturing and service- delivery processes.
• Work-in-process (WIP): partially finished products in various stages of completion that are awaiting further processing.
• Finished goods: completed products ready for distribution or sale to customers.
• In-transit inventory: items in in-bound or out-bound logistics links.
• Safety stock: additional amount of inventory that is kept over and above the average amount required to meet just-in-case demand.
Types of Inventory
• Inventory turnover, or the ability to make more sales with less investment in inventory: the higher the better (a measure of inventory productivity)
• Inventory carrying costs, the expenses associated with keeping inventory in hand (obsolescence, storage, moving, etc.)
• Shortage costs or stockout costs, or the costs associated with an item being unavailable to meet demand: the lower the better (to an extent).
Inventory Decisions & Costs
• When inventory level is high (service level or order fill rate is high): stockouts and resulted lost sales are less likely to happen but inventory carrying costs and obsolescence risks are high.
• When inventory level is low (low safety stock): costs of keeping inventory in hand are minimized and inventory turnover is high but there is an increased risk of running out of stock and the customers may not be happy.
• The question is how much inventory do you keep?
Inventory Trade-Offs
What type of driver are you and implications of your conscientious decision: costs (stops for gas, time, mileage, higher price of gas...), benefits (peace of mind, ready anytime), risks (running out of gas, fuel pump damage...)
Can you analyze this?
Driver A vs. B
Monthly Retail Sales and Inventories, United States, 1992-2019
Monthly Retail Sales and Inventories, United States, 1992-2019
Fact 1: Retail sales have been going up. Fact 2: Retail inventories have been going up as well. Fact 3: Inventories/Sales ratios have been going down.
Question 1: What does inventories/sales ratio mean? Question 2: Why are they going down?
Think...
What? Pareto again?
• “A” items account for a large dollar value but relatively small percentage of total items (e.g., 10% to 30 % of items, yet 60% to 80% of total dollar value).
• “C” items account for a small dollar value but a large percentage of total items (e.g., 50% to 60% of items, yet about 5% to 15% of total dollar value). These can be managed by automated systems.
• “B” items are between A and C.
ABC Inventory (Pareto) Analysis
ABC Inventory (Pareto) Analysis
• Just-in-Time (JIT) production system was introduced at Toyota a half-century ago.
• Traditional factories use a push system, which produces finished goods inventory in advance of customer demand using a forecast of sales.
• The JIT or pull system, products are not produced until the customer demand is more certain or confirmed. Then items are “pulled” from the source or the suppliers “just in time” to make the required parts and products for the customer. The result is lower inventory throughout the system.
Just-in-Time Systems
• Traditional accounting treats inventory as asset, the more the merrier.
• Just-in-Time (JIT) treats inventory as (necessary) evil and tries to avoid keeping it at all costs. Inventory is nothing but trouble (expensive) in a JIT system.
Just-in-Time Philosophy
Damages Mark downs Theft or pilferage
• VMI is where the vendor (e.g. a consumer goods manufacturer) monitors and manages the inventory for the customer (e.g. a grocery store). ⁻ Chevron monitors gasoline levels then delivers
fuels to gas stations…automatically. ⁻ Pepsi comes into Von’s to restock.
• Vendors love to do more for customers. Why?
Vendor Managed Inventory (VMI)
Who is responsible for making sure all products face front and shelves are fully stocked?
Who should be blamed for empty shelves? And who lost?
Inventory Velocity (Turnover)
Inventory turnover is a ratio that measures the number of times inventory is sold or consumed in a given period of time.
It’s also known as inventory turns, stock turn, and stock turnover. The inventory turnover formula is calculated by dividing the cost of goods sold (COGS) by average inventory.
Inventory Velocity (Turnover) Cash to cash cycle: time from the acquisition of a firm’s inventory to the time that specific inventory is sold and money received. It is usually measured in days.
Inventory Velocity Among Retailers Groceries: 13.5; Apparel retail: 3.5; Dept stores: 4
Costco: 12; Walmart: 8.5; Target: 6; Home Depot: 5
How Fast is Fast Fashion?
Turnover ratio 3-4 5 3 4
Zara Front-Positioned Inventory
Inventory Turnover: Amazon v Apple
Square root law: Number of stock points (warehouses or DCs or stores) increases by X times, total inventory increases by the square root of X times.
The Square Root Law in Inventory Management
How much inventory has increased at Amazon?
Amazon Fulfillment Centers
Amazon Growing Logistics Costs
Discussion Questions Please research the following questions and provide evidence to support your answers. Everyone: Compare and contrast Just in time and Just in case inventory management thoughts in the Lean context. Everyone: Analyze and answer questions of the slide on Monthly Retail Sales and Inventories, U.S., 1992-2019 Everyone: Discuss the costs and benefits of Type A vs. B drivers as shown in my PPT slide on inventory trade-offs. What’re the lifetime costs/benefits of type B drivers? Everyone: Why did Amazon’s inventory turnovers drop from 16 to 8? And what happened to Apple’s from 80-100 around 2012-13 to about 40 in 2017-20? Can you explain?
Group Discussion Be sure your group is ready to lead and/or discuss the following question in class, with research or facts-based evidence. This is the $64,000 question: Are you concerned about Amazon’s growing logistics costs if you were the COO of Amazon? What would you do if you think it’s a concern? What would your conversations be with the CEO and with the logistics managers?