Wednesday, February 29, 2012

The Lean Dashboard - A Starter Set of Metrics - TIO - Inventory

In my last post, I suggested using T-I-O from the well respected novel that introduced the world to the theory of constraints called "The Goal" by Eliyahu Goldratt. I covered the "T" thorough-put. Today, we'll discover the "I", that 9 letter 4 letter word, INVENTORY. 

There are three things I correlate with inventory. One, it is a very visible message telling me my process is not fast enough to meet customer demand, and second is the fact that it hides my problems (which I WANT to make as visible as possible). Strike three is that it is "sleeping money" that impacts my cash flow, the killer of more businesses than almost any other factor. As I suggest these 3 measurements of inventory for the dashboard, think time units for your process if at all possible.

1. Backlog of demand - How many "orders" are we waiting on and for how long? A simple number followed by a time measurement is all that needs to be posted on a consistent basis (once or twice a day). As the average wait time for your inventory of orders for that process decreases, your customer (or a downstream process) will smile with delight. It is an indication that your continuous improvement efforts toward one-piece flow is paying dividends. Take an average of all of your times for a week, and throw them on a graph, make it visible enough, and watch the number drop. 

2. Raw Material Inventory - This is the one metric you might want to record as dollars, and is one of the first cash flow benefits you will reap as you use the lean tools. At my company, simply by posting raw material inventory (in dollars) for each value stream and for the entire company once a week, on Friday, a million "WHYS" were generated. My raw material inventory is a reflection of how well I understand flow and pull, and how well I have communicated these concepts and actual demand to my suppliers. This inventory is the result of my supplier's lead time (plus transport time) being too slow, so I need to keep more "just in case". Utopia is when I get one, then use it immediately. I would actually pay a slightly higher agreed upon price if my suppliers would agree to smaller lots faster and more frequently. The people on the floor doing the work have a good feel with regard to flow. They KNOW how often they deplete a given unit of raw material, and they know which items are sleeping money and have been in the way for a long time. By dating raw materials in big letters when they arrive, and by using point-of-use-storage, days of inventory can be added up quickly and go on the dashboard. As this number decreases, I know I'm getting closer to pull and just-in-time.

3. Finished goods inventory - Are we addressing demand or being pulled by a supermarket? Or are we making large batches based on forecasts (or because our process is too slow for pull by the customer?) The 20% of products that represent 80% of your sales are what can be supermarket items. (the supermarket will be covered in an upcoming blog, and is how we cope with the fact customers don't always buy the same amount all of the time. Track finished goods inventory in dollars and/or average number of days sitting. 

It may take some brainstorming to tailor these concepts to your product or service, but it is essential to start measuring INVENTORY, because your cash flow situation will improve suddenly and quickly. Feel free to e-mail me at, or @whgref (Twitter) with thoughts or questions. I will get back to you in LEAN fashion, and thank you to those of you that have responded to past posts!

Next up on the Lean Dashboard - TIO: The O, Operational Expense

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