Monday, August 27, 2012

Short on cash, buried in stuff

Warehouse by Eridony
Warehouse, a photo by Eridony on Flickr.

Today is part one in a series of posts on reducing cost by eliminating waste.

Unless they have a bone to pick with their employers, employees don’t intentionally create waste.  They aren’t seeking to produce bad product, or to slow things down.  Typically, waste arises out of processes that aren’t working properly.

You won’t find all of the waste related to your processes in the garbage can, or in the scrap heap or recycling bin.  Waste is sneaky, so you have to look in all of the nooks and crannies in your business if you want to find it.

Believe it or not, some leaders are a bit reluctant to look for waste because of fear that they will find it.  They think that waste is reflection on them, and they’d rather continue to hide their eyes rather than have their prior unawareness exposed.  But that’s not you, so we’re going to talk about where you might look to find the sneakiest consumers of time, energy and cash in your operation.

Waste #1 - Inventory
We’re starting here because inventory has some of the most readily noticeable impact, in the checking account balance and in the storage areas of the company.  There are several dimensions to inventory-related waste:
  • When inventory is stored in multiple locations, orders for replenishment are often made unnecessarily.  One location is low while another location is bursting at the seams, and someone at the low-stock location places an order for more.  One aspect of this is when individuals hoard popular supplies for their own use (the good pens in the desk), and therefore unnecessarily increase the expense for office supplies.
  •  If orders are made separately, the company may miss out on quantity pricing, and will often pay more for fragmented deliveries rather than consolidated ones.
  • There may be more inventory on hand than is needed to cover a reasonable amount of work process.  If there is inventory delivery available within 48 hours at reasonable cost, a smaller quantity can be kept on hand (tying up less cash) and still meet the demands of production.
  • More inventory means more time invested in counting, and more in moving it around.  Sometimes multiple people are needed to maintain it, when it could be a one-person job.  In extreme cases, more cost is incurred because more storage space is needed to hold the inventory, and that can mean more people, higher rent expense, and even more equipment expense invested, just to maintain and move the inventory.
  • Some companies maintain out of date or obsolete inventory, increasing the cash investment needed for their overall stock without increasing their ability to generate cash by producing product with it and/or selling the obsolete goods.
  • Paper when electronic will serve the purpose.  Buying paper, storing paper, and handling paper add to cost.  This sometimes happens due to ineffective electronic systems - a shadow system to compensate.  Sometimes it's the result of people not trusting the electronic system, whether it's working or not.  And in other cases people default to paper because they are used to having paper.  Simple as that.
  • Office furniture kept in storage is inventory waste.  It sometimes flies under the waste radar because it's not purchased in direct relationship to the production of finished goods.

This list is not intended to be all-encompassing, but rather to be a thought starter.  The best way to find unnecessary inventory is by walking around, opening doors and drawers, etc.  It might sound simple, but in the crush of daily operations it doesn't happen as routinely as you might think it would.  

It's dangerous to make assumptions about inventory without obtaining the input of the individuals using it in their daily work.  What appears as "extra" to an outside observer might be there for a valid reason - like known long lead times for raw goods, or upcoming large orders - for which there has been an intentional increase in items on hand.

Although Inventory is the most readily identifiable of the wastes, there are several more we’ll discuss over the next few posts (Transportation, Motion, Processing, Producing Defects, and Overproduction).   They are also contributors to over-investment in time, energy, and cash.  Stay tuned.

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