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LEI's New Indicator That Can't Lie

2/22/2002
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I’m often asked by operations managers how they can know if their firm is really getting lean. My answer is simple: Just check your inventory “turns.” If they aren’t going steadily up, you can be sure you aren’t getting lean no matter how many future state maps you may have drawn and how many kaizens you may have conducted.

“Turns” are a great measure because they clearly show the velocity of product through your business and because every business must periodically count inventory to record on its balance sheet. All you need to do is to take your annual sales and divide this by the amount of inventory you have on hand to support this level of sales. (You can use inventory at the end of the year or on average during the year or at any point during the year for the numerator in your turns calculation. Just be sure that you measure inventory the same way every time so you can calculate an accurate trend.) 

In a future e-mail I will give a company example plus a plant example and walk you through the math, warning about a few temptations to avoid (e.g., moving your inventories to a third-party vendor and claiming you have increased your turns.) Today I wanted to inaugurate a new page we’ve just added to our website at www.lean.org that can give us a big-picture sense of where we stand. 

In the first of the two new charts on the site, we track inventory turns for all U.S. manufacturing during the long business boom from 1992 through 2001. We also show turns in retail and wholesale businesses and for the U.S. economy as whole.

What we see is steady although modest progress in manufacturing where turns rose from about 7.5 to 9.0 from 1992 through 2000, before falling off by the end of 2001. (Turns always fall during a recession because customers cut their orders faster than producers can react – unless they are very lean! As a result, goods pile up all along the value stream and most economists think that about 60 percent of the amplitude of a recession is simple inventory adjustment.) Wholesale and retail, by contrast, show very little trend toward improvement after the bounce back from the 1991-92 recession. Congratulations manufacturers! 

However, let’s not celebrate the achievements of manufacturing without a bit of further examination. We’ve prepared a second chart for different manufacturing sectors showing that all manufacturing isn’t equal. We’ve plotted the trend for automotive manufacturing, where turns went from 16 in 1992 to 24 in 1999 before the fall off in 2000-01. We can contrast this performance with aerospace where there is practically no trend in improvement: Turns rose only from 2.5 to about 3.0. Electronics is in the middle, with moderate turns to begin with (6.0) and a pretty steady increase (to nearly 9) before the recession set in. 

(In looking at the second chart, note that it’s the trend, not the absolute number of turns that’s really important. Automotive is a high volume industry compared with aerospace and higher volume will generally yield higher turns, even in an industry that still embraces mass production.) 

So congratulations to the auto industry and let’s hope the positive trend continues as we emerge from the recession. But what’s going on in aerospace? Despite a decade of lean initiatives, the trend in turns indicates that most firms are no leaner than they were in 1992. Maybe the root cause is that Toyota competes in automotive but there is still no “Toyota” in aerospace to lead the way? Who out there is going to create one? 

From this point, we intend to keep these charts current. In addition, we will add data on more sectors and other countries. We hope you will check the charts from time to time and that you will prepare a trend line for your firm or plant for everyone to see. It’s the indicator that can’t lie about your progress toward lean.

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