by Keith Carruthers MBA, SCMP

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Saturday, May 5, 2007

Do stockless inventories save money?

During a recent academic class I was participating in, a discussion took place regarding differences between traditional manufacturing systems, just-in-time inventory systems, and stockless inventory systems. This discussion was focused on the idea that although companies can save money going from traditional manufacturing systems to just-in-time systems (basically by pushing the responsibility for storing materials back to the suppliers), they could actually achieve even more savings by moving to a stockless inventory system.

In a traditional manufacturing system, inventory exists at the suppier, in the manufacturer's raw material warehouse, and on the shop floor. Moving to a just-in-time system would reduce the amount of inventory at the manufacturer's warehouse, but simply push it back to the supplier. Under stockless inventory systems, it would reduce the manufacturers inventory even further by eliminating inventories to an even lower level throughout the manufacturers organization, again by pushing the inventory back to the supplier. These apparent savings, however, can be very misleading.

Lean manufacturing systems (which is basically what we are referring to when we discuss JIT and stockless inventory systems) are much more than simply "pushing inventory back on suppliers". Although if one takes a narrow view of their organization, they will "perceive" gains by saving required square footage to warehouse goods, and costs of carrying the inventory. (Although I believe the gains mentioned above are not real and only perceived, there are other associated benefits such as the reduced cycle times illustrated below, but this is only a fraction of the total gains available by looking at the entire supply chain on a more holistic level).

Why would these savings not be real and only percieved? The reason lies in the fact that the costs in question have not been eliminated, but simply pushed back to the supplier. This forces the supplier to build these costs into the price they are charging you.

The real benefits in these systems are to use lean technologies and world class supply chain management strategies to eliminate the need for these inventories altogether, thereby removing the cost from the entire supply chain. This will result in efficiencies for all supply chain members, reduce overall costs, and allow members of this supply chain to achieve a competitive advantage over others in the industry.

A great example of these types of gains are the supply chain management systems used by WalMart, in which generation of stock replenishment comes directly from the POP systems used at the cash register. This allows for real time accurate data, allowing for quicker more accurate decisions, which in turn reduces the amount of forecast uncertainty thereby reducing the amount of inventory required (by both Walmart and their suppliers) to meet the demands of the customers.

Keith Carruthers, May 5, 2007

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