Part four of eight. Watch the others:
- Part one, A Focus on Muda
- Part two, Overproduction
- Part three, Excess Inventory
- Part five, Motion
- Part six, Waiting
- Part seven, Defects
- Part eight, Processing
Hi, this is Art Smalley, President of Art of Lean Incorporated. Today, on behalf of the Lean Enterprise Institute, I have another short video for you, this time on the topic of the waste of inventory.
Now on a previous video we talked about the waste of overproduction, and that's usually considered the worst of all waste because it gives birth to so many of the other forms, and inventory is one example of that, because what happens if you over produce? Well, obviously make lots of inventory. Sometimes that's in the form of finished goods, sometimes that's work in process, could be raw materials for example, or purchase parts. Various ways to categorize types of inventory exists.
But it's very naive to say that all inventory is waste and technically it's also incorrect. So in lean thinking, we have another way, okay. Let's take the topic of just the work in process, the market after the machine. Say say we have 25 pieces of inventory here. How do we think about that? Well, in lean thinking, we break it up into three categories for this type. Some of that represents what we call cycle stock. Some represents what we call buffer stock, and some represents we call safety stock.
You'll see some variation in these terms. When it's at the end of the value stream, the cycle stock is often also called shipping stocks, it's being prepared to ship. But in the middle of the value stream, it's generically called cycle stock. Sometimes the safety stock is also called emergency stock because it is held for emergency purposes. And if you want to know more, okay, even though there's not unanimous agreement, you can find some basic terms here in Lean Lexicon, and a more mathematical example and description in Creating Level Pull to see more about these, and of course there's advanced textbooks that even go farther on the topic.
But for today's purposes, we're going to come back to inventory here and talk about cycle, buffer, and safety. Now I'll put up a slide here that I hope helps makes the point. The cycle stock, or shipping stock if it's at the end of the value stream, represents the inventory being held to fulfill average demand. Okay? In an average, you have to hold that. If you don't, you induce the worst waste, okay, or another waste. You won't be able to ship on time, deliver on time, supply the next customer, or process on time. You might start with the machine, workers might wait, etc. So you have to have something and that's represented by cycle stock. Average demand needed to run the process.
Second comes buffer stock because in most times in the real world, average is just average. There's variation in the equation, okay. Some days it's higher, some days it's lower. So mathematically you need some inventory to represent that case we call that buffer stock.
Then third beyond that is also then the safety stock, or emergency stock for special situations, special categories, which are not covered the normal variation, so to speak. In lean thinking and in Toyota, we think of all three of these cases being necessary to comprise the right quantity for a market, whether it's finished goods, work in process, or purchase parts for that matter.
Now what normally it happens in the real world though is after you calculate what is cycle, buffer, and safety, you have more. They might've run this last night or on the weekend or last shift over produced, and you have more than that. What happens over time is if this goes unchecked, you have to put it in special containers like this one, fill that up, and maybe you damage parts in the process. It causes more material handling, more transportation, damaging parts, obsolete things come into play as well over time and put this up in the rafters or someplace in our warehouse out of sight. Eventually you deal with it, of course. But in the meantime, you've done a lot of waste, is the point.
So logically, we can come back to inventory and value add versus non-value add, how do we think about that? Well in general, the cycle stock is the minimum average necessary amount. So that's necessary, your value add, if you want to use that term in this case. Buffer and safety are also necessary inventory in this equation, this concept or this example, because you're covering for the variation and the special case. Then anything beyond that is the pure waste. The excess of inventory in the game that represents the result of overproduction in most cases.
You can't plan for everything in the real world. If you did it, wouldn't be just in time, it would be just in case you'd need two factories, two warehouses, two value streams for everything. But I hope this categorization of cycle, buffer, and safety helps you think about inventory and how much is needed and where the value add, versus non-value add, versus true waste component creeps in. Good luck on your improvement journey, I hope that helps.