Over-Inventory is the king of the deadly wastes. It can be disastrously expensive as it ties up vital cash flows and potentially drives down the value of your product and, by extension, your brand.
Cost upon Cost
Producing inventory costs a lot of money. You need to buy the raw materials, get them shipped, hire and train staff, invest in equipment, and spend money on overhead. A useful exercise is to calculate how much money goes into each product that you make. Write it on a sticky note if you want and stick it right onto the product.
Whatever cost went into making the product equals how much cash has been frozen into it.
Until that product is sold, that cash is as good as gone. Until that product is sold, it will cost you to store it, every time you move it, to heat or cool it, and keep track of it.If the product doesn’t sell, you may need to discount it, which could potentially devalue your brand. If it sits there too long, it may go obsolete and become worth less than you’ve invested into it. If it gets damaged and you need to throw it away, the cost of doing that is an extra kick in the pants.
Close to the Rocks
Think of your inventory as water level in a bay, and your company as a ship. When the water rises, it lifts the ship with it and hides all the rocks and dangers that were visible during low water levels. Those rocks are the other deadly wastes; one of the worst things about over-inventory is that it hides many other wastes within it. It’s harder to identify wastes like defects and transportation with high inventory because they’re not as visible.
Staying close to the rocks means keeping the water level low. While sailing on the smooth open water of high inventory can be very comfortable, it will cost you dearly in the long run. Just-in-Time production, a hallmark of Lean methodology, is a radical shifting of production methods from company “pushed” to customer “pulled.”
In Lean, the apparatus of production is pointed at the customer, and shifts into gear when the customer places an order. While it may take time to implement, just-in-time will dramatically reduce over-inventory waste in the long run.
