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Vishwadeep Khatri

Inventory

Inventory

 

Inventory - is defined as the products or material that an organization holds for future sale or for repairs/warranties/replacements etc. Inventory can be classified as following

1. Raw materials required for producing goods (raw material inventory)
2. Unfinished goods (work in progress inventory)
3. Goods available for sale (finished goods inventory)

In financial statements, inventory is classified as an 'Asset' as it has the potential of generating cash in the future. However, as per lean philosophy, it is considered as a 'Waste'.

 

 

An application oriented question on the topic along with responses can be seen below. The best answer was provided by Priyer on 30th January 2017. 

 

 

 

Question

Q 70. Explain the meaning of the word “inventory” as one of the “seven wastes’’ in Lean Philosophy for different industries. 

 

Note for website visitors - Two questions are asked every week on this platform. One on Tuesday and the other on Friday.

 

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Inventory in Lean Philosophy is one of the 7 Wastes in 7+1 MUDA.   Inventory stands for stocking of raw materials, finished goods, WIP Items created or piled, for future usage and deployment. It has evolved from Manufacturing where batch processing was on the rise and we had fewer customization of products. It made sense at that time, to stock materials well in advance, so that the products can be created on demand and manufacturers can reduce the time to market for their products, thus beating competition and becoming the differentiator.  Over time when this differentiator became the basic requirement, companies that had invested hugely in stocking various items in warehouses had found the cost of storage pinching their bottom line. That is when “Inventory” was identified as a Waste rather than a Vice.

In Lean Terms, Inventory is anything that is stocked, backlog, work in progress in a process, function or department that the Customer is not paying for. Only when the WIP is sold, then it can be converted to Revenue and add Value to the organization. Till that time, it is always cost.

Inventory in various industries can be as follows

Industry

Department/Function

Example of Inventory

ITES

Customer Support Desk

“Open Customer Tickets/ Requests” that have not been resolved.

Engineering

Development

# of Change requests at various stages of the SDLC Cycle. (Design, Develop, Test, Deploy)

Research and Development

Product Management

# of Product Features queued for Backlog to be released in Platform

Automotive

Painting

# of Units of Unfinished Doors to be painted

Banking

Derivative

# of Transaction records to be resolved at Security Exchange at EOD.

Hospitality

House Cleaning

# of Bedsheets that needs to be washed and dry cleaned

Food

Buffet

# of Plates left unused.

Entertainment

Cinema Hall

# of Unoccupied seats in a Cinema theatre for a film.

Transport

Airline/ Tour Bus/ Train

# of  Unoccupied seats on a route.

Medical

Doctor Prescription

# Excess tablets remaining once the patient has recovered well before the completion of the course

Real Estate

Construction of High end homes

# of Units unsold in a Project

Fashion

Home

# of Clothes Accumulated over a period of time leaving the Wardrobe bursting out and not used.

Home Furnishing

Furniture

Excess seating capacity like the # of Chairs in a House that is a waste of space and money.

Education

Class IV

# of Pencils /Story Books that a student possesses in excess to their requirement

 

The only way to Tackle this Waste, is to attach the demand of any resources to the Demand of the Customer/User OR to address your personal need. Easy availability of Resources and lesser time in procurement can help in Just in time procurement and usage of these resources.

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  • 1

Inventory

 

Inventory is any component that is used to build finished products/services or Inventory can be the finished products themselves as well, until sold. Though inventory is a little differently conceived in Service industry, Inventory in any industry effectively means 'idle cash' and businesses try to liquidate inventory to achieve business values. Inventory is therefore considered as a waste among the 7 wastes in Lean approach. Inventory is definitely a must for products or services but it must be carefully controlled to optimize business value.

 

Inventory has different 'avatars' in different industries.

 

Retail: In retail industry, all goods waiting to be sold is Inventory. Business target to reduce the shelf-life of inventory and lesser shelf-life clearly means better turnover ratio.

 

Manufacturing: In Manufacturing industry the meaning of Inventory is rather straightforward and widely understood as the raw materials and work-in-progress components. It includes the finished products as well and they are expected to have as shorter shelf-life as possible.

 

Healthcare: In healthcare area we can take examples of a pool of patients waiting for treatment ( and effectively billing). This can be considered as 'inventory' as the pool can only be 'liquidated' when served. In a certain customer base, less number of patients waiting surely denotes the process effectiveness in terms of timely turn around.

 

Airlines/ Theatres: In the case of airlines or theatres, unsold seats can be treated as Inventory. It is understood that those 'idle opportunities' can turn into wastes when a plane needs to take off  and the theatre needs to start the movie with empty seats.

 

Service Desk: In a Service Desk environment ( BPO, KPO, Network management), inventory can be in a number of forms. All requests/ incidents either unattended to or being worked on can be considered as inventory as until they are served to/ resolved, 'liquidation' does not happen. Similarly, emails waiting in inbox can be considered as inventory as well depending on the process objective.

 

Defence: In a defence regiment, all unused bullets and warheads can be considered as Inventory as they block cash. Soldiers awaiting deployment can as well be taken as Inventory using Lean Philosophy.

 

Training:  Let's take an example of a pilot training centre where simulators are used, The simulator ( hybrid structure of hardware & the associated software) can be taken as inventory when not in use. Similarly, any procured but unused license can be considered as 'idle cash' or inventory.

 

Looking at the above examples, it is evident that not all industries will try to just 'reduce' ( manufacturing)inventory but some will like to ' fill up' ( airlines), 'use more' ( license) or 'optimize inventory size' ( defence) depending on the industry & the specific process objectives.

 

 

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Inventory is a detailed list of articles, goods, property, stock, assest etc

Understanding and classifying the inventory in any industry will help to plan and also help to achive the best business results 

Inventory is categorised into 3 major groups 

1 Raw material :eg ingredients for example in a hotel industry food inventory is considered, similarly in a construction field, logistic is what considered

2 work in process inventory :WIP are any unfinished goods that business has made example Furniture 

3 Finished goods inventory: this works in retail business

 

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There is a proverb...(even elixir turns poisonous when taken in excess) that anything excess than need is poison...For example, Doctor advised to take 2 tablets per day for 10 days and the patient take all the tablets to reduce the 10 days timeline is serious than taking the normal routine of 10 days...Same way, for the lean...we need to consider, the need to fulfill and buffer to a limit will save lot of costs. as example, hotel can stock some perishable goods (like eggs, green vegetables) as minimal stock with buffer and keeping more inventory of them really cost us in everyway...

For example...an Business analysts, available data is inventory where he /she process and add value. Too much of analytics will lead to analytical paralysis...

  • Too much of demand will increase the costs (not good for public) and too much of supply will reduce the prices & costing to supplier (not good for supplier)...Anything that above / below the need will affect the performance in terms of economic, cost etc.

 

 

Edited by Ganesh Jothivel
the question on inventory is slightly revised

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What is Inventory:

Inventory is conventionally referred in supply chain management for the goods which is additional in quantity and intended to cop-up crises such as lead time of procurement/ process / as selection choices to customer / meet emergency requirement or volume based sourcing .

 

Lets take following examples for detailed understanding across various industries.

1. Manufacturing industry (Inventory to suit best lead time)

In manufacturing based on product making process each product has to go through various stages. Each stage has different process time and inline with this manufacturer has no of machines. If it is an assembly unit different parts will be used at different stages and hence the requirement in terms of number varies in greater margin. In this case the goods /parts procured to meet lead time in optimum way is a proper inventory.

 

2. Medical stores  (Random need inventory)

Medical stores are of different kind of business, here the lead time for any goods requirement is not clear, some requirement depends on medical professional doing practice nearby, some product are seasonal type. This kind of mix demand a store keeper maintainers based on season, medical professional recommendations , known customer periodic needs( eg diabetic and blood pressure patients) and maintaining standard inventory to satisfy regular needs. 

Here few products are purchased without looking at bulk offers and few inventory is kept keeping in mind the offer they are getting.

 

3. Cloths retailer (Choice based inventory)

Clothes retailer business needs highest inventory as more and more variety of product the probability of sale increases. Each  product increase the probability of selling higher. More variety of product, different kind of material, design, different colors all are choice factors for customer.

 

4. Online product sale (Sourcing based inventory)

In current scenario online line sale of product has increased to a greater extend. Customer compare price on fist level along with service history rating. To remain competitive in pricing the  vendor aims to increase volume of goods during procurement, they adopt different sourcing technique mainly when the product is assembly of child parts, to offer optimum service like procurement from different vendor, bulk order, process at different location, process in some particular optimum route.

 

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Inventory is stock of products either in finished, partially finished or unfinished form that is primarily meant to reduce to loss of business due to stock-out or long lead-times of procurement or manufacturing, reduce cost of reordering when ordered through Economic Order Quantity and enable easy availability of products as required for further use. In my view, inventory is applicable only for industries which produce a tangible product. A service industry cannot have inventory w.r.t the service offered.

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The inventory together with six other type of wastes forms the deadly combination of seven wastes identified by Lean (traditionally). The inventory in any industry or sector simply means any order (units, packages, tickets, requests) which is unfinished, unprocessed raw materials, work in progress, assigned, new, basically anything that is not yet being used or in custody of consumer accounts to Inventory.

While Inventory is important to the supplier however, if not accurately calculated it can lead to heavy losses to the supplier.

The Just in Time approach can help in holding manageable inventory.

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Inventory is anything which has been produced more than requirement and stable or not moving. All business revolves around the cash flow inventory is actually reducing the cash flow and generating one of the waste which is more a time hidden loss.

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The “Inventory” is one of the seven wastages in lean Philosophy, which basically indicates:

excess material,

- Work in Process(WIP)

- or Finished goods.

 

Any of the above 3, or all of the above 3, when is more than the immediate requirement, represents cash or monies held up in the form of material laying dormant- It is difficult to turn into cash quickly. The inventory also occupies space which is very dear in the current times with real estate prices on a continuous upward trend.

 

The Causes for inventory can be many including-

-       Waiting time in the process when the input material is ready, but the processing of the same is not started and has to remain dormant.

-       Gap in Process handoffs wherein a prep work is done but there is waiting time before the next sub-process starts

-       Overproduction- More output than required

-       Defects- when goods have to be held back for rework to avoid type 2 errors

-       Rejects- When the produced output has to stay as is not accepted by the customer for any reason.

 

Inventory needs to be managed with due diligence, else can lead to wastage through undesirable occurrences like spoilage, pilferage, breakage depending on the type of goods stored- Sometimes an inventory in the ever-evolving software industry can become obsolete if not employed within an appropriate time of demand.

Also, Inventory can also result in depletion in cash flow and eventually profitability due to loss of business opportunity due to low inventory turnover.

 

The concept of inventory management as a lean concept is relevant across a wide range of industries including:

 

Food Industry- Any underutilized/ dormant inventory can go waste or deem unusable as most of the times the raw material used is perishable.

 

In the QSR Industry, where the food stock is frozen with a defined life cycle, added to the relevance mentioned above, inability to manage stock and hoarding non-selling products for long leads to holding up of monies and thus impacting cash flow till the said inventory is not sold off. Such inventory also adds on to storage cost of not only space but also the cost of maintaining the products in a refrigerated condition.

 

Retail Clothing industry may suffer due to ever-changing fashion trends. Likewise is the Telephone hardware industry, wherein the value of a model keeps dipping every day, holding on to an inventory of telephones for long will only reduce the ROI exponentially. In fact, similar relevance can be sighted in all luxury related industries like Automobile industry also.

 

Software industry can become victims of wastage as Inventory can become obsolete if not employed within an appropriate time of demand.

 

Health/ Pharmaceutical Industries- any expiry of material/ products due to mismanagement of inventory can cause a serious hazard to the life of beings.

 

In the Contact Center Industry, the calls waiting in the queue also can be considered as WIP and hence Inventory. Too Long Waiting times/hold times can lead to customer dissatisfaction and/ or loss of business if it is an inbound sales call, as the caller may disconnect the call. Similarly, any business process with Queues like in the airports or for that matter any counter service with waiting time will consider the queue as the WIP- Inventory.

 

The maximum relevance of the concept of Inventory and inventory management is probably in the Warehousing Industry, where it is very important to ensure that the available space is used optimally and the goods are not held for longer than the business dictates.

 

Thus the Inventory as a wastage in the lean concept is relevant in many industries including the ones mentioned above.

 

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Inventory is a simple word - and we all knows about this more or less. Now as per Lean phylosophy a inventory can be a wastage.

 

Almost all industry is having some inventory of something. Now have few names of industry having inventory which can be a wastage -

A. Manufacture

B. Service Business

C. Retailers & Distributors etc

 

Now, when we are thinking of wastage most of us actually thinking about finished good as inventory, NO, there are many types of inventory which can lead us to a wastage. Now, I will let you know about types of Inventory -

 

1. Raw Materials Inventory

2. Work-in-progress Inventory

3. Finished Goods Inventory

4. MRO Goods Inventory

5. Transit Inventory

6. Buffer Inventory

7. Ancipetory Inventory

8. Decoupling Inventory

9. Cycle Inventory

10. Theoritical Inventory

 

Well, now you think about manufaturer industry its not only finished goods it has all the ten above said inventory which takes area, man power/resources to maintain, damages due to natural calamity or due to decay or even a mice can damage a product in any level/types.

 

If there is no Over Production[7 wastages - WORMPIT] we dont need a bigger inventory for finished product and if can make it safer that a finished product does not get hampered - we can save a big chunk of our loss, simply because if a damage happens in between there was less resources used for the part-product implies less uses of money. That is one of the biggest reason now a days we often sees - FLASH SALE, they knows the consumer base via registration, than normal sale in shop - here they are saving inventory! From production house to direct customer! 

 

Even a less production also increases Raw Material inventory, again can face loss via damages or calamity or via several ways.

 

Lets take another example - say Mr Gupta is working on a BPO[Service Business], so what could be inventory? Well NO OF RESOURCES/TALETNS they have to handle calls, now if calls are far less than total capabilities leads to business LOSS. So add more client to your business so that you can utilize full of your resources.

 

Now Say, I am middle man who buys a product, say Nokia mobiles, from parent company and distributes among other retailers, here also I need to maintain a stock from above point 3 to 7. And again the same story goes....

 

Hope it gives you all a good idea....

 

 

 

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In the below cases of industries, I have explained where does Inventory get accumulated as a waste in each of the scenarios

 

Any flight on land for cleaning or for the clearance from Airport authorities to takeoff is a kind of waiting waste in aerospace industry

 

The agricultural produce being transported to storage is Transport waste. Agricultural produce being stored in cold storage or any storage is an Inventory waste.

 

Excess of cash lying with the banks beyond cash reserve ratio with any bank waiting waste in banking industry

 

Several residential units of buildings built but not sold is Overproduction waste

 

Large arms and ammunition produced and bought by armies which are not used is Inventory waste in Defense industry

 

Over qualified professional applying for jobs with less requirement of qualification is an Over-production waste in educational sector where their qualification will be inventory which cannot be utilized completely.

 

Crude oil being transported in tankers is an example of Waiting waste in Oil Industry. Charged solar panels is an example of Overproduction waste

 

Web-series(serials) being filmed in advance of telecast is an example of Over-processing waste in Motion-picture industry

 

Usage of same type of utensils to serve all the customers or using the same equipment to prepare food items is an example of Over-

processing  waste in Food & Beverage industry which is stored in more than required qty.

 

Having more number of work-force or sq-foot of residential area to service the customers is an Waiting waste in Hospitality industry

 

Having more workforce than required in IT industry is an example of Over-production waste. Employees not assigned to any project are an example of Waiting waste.  Having software Products developed without having enough market to sell is an example of Over-processing waste. Holding the data of the company in more than 1 server as a back-up is an example of Inventory waste. Transferring the data from Local PC of employees to server for backup is a Motion waste. Bugs leading to halting the software development is an inventory in workforce due to defects and Testing team awaiting the code for Testing is a Waiting waste.

 

Unsold automotives in warehouse are Over-production waste and raw material to be processed in both Waiting & Inventory waste.

Unsold/vacant seats in any mode of transport is Over-production waste in transportation industry

 

Unutilized phone lines and over buffering of data is an example of Over-processing waste

 

 

 

 

 

 

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Prasad, Sabyasachi Jana, and Kanwaljit Bhambrah have provided notable responses. On the basis of better industry coverage, Prasad gets the best response award for this question beating Sabyasachi who is a close second.  

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1. An itemised catalogue or list of tangible goods or property, or the intangible attributes or qualities.

 

2. The value of materials and goods held by an organisation (1) to support production (raw materials, sub assemblies, work in process), (2) for support activities (repair, maintenance, consumables), or (3) for sale or customer service (merchandise, finished goods, spare parts).

Inventory is often the largest item in the current assets category, and must be accurately counted and valued at the end of each accounting period to determine a company's profit or loss. Organisations whose inventory items have a large unit cost generally keep a day to day record of changes in inventory (called perpetual inventory method) to ensure accurate and on-going control.

 

Excerpts from www.businessdictionary.com

 

Inventory as 7 Wastes: Raw material, work in progress or finished goods which is not having value added to it.

 

SL No

Industries

Inventories

 As per  7 Wastes of lean

1.

Agriculture and allied industries

Healthy Seeds, water, fertile land and of course farmers to carry out the job.

Storing healthy seeds more than its shelf life.

2.

Automobiles

Auto components

 Broken or uneven components

3.

Aviation

Pilots & aircrafts

 Aircrafts with manufacture defects

Or incompetency of Pilots

4.

Banking

Banking/Financial products, interest rates, and not to forget the RBI rules

Interest rates not attractive or long term lock in periods.

5.

Cement

calcium carbonate, silica, alumina and iron ore

  Ore not up to the quality or not reaching on time.

6.

Consumer durable

Stock eg. Washing Machines, Fridge, A.C’s

 Defective pieces, damaged goods, or packing issues.

7.

Education and training

Teachers & courses

 Incompetency. Adding to the latest is lack of patience while handling a student.

8.

Financial services

Financial Products

 1. Less returns

2. long Lock in periods (F.D’s and close ended schemes)

3.  Not having a secured job

4. High inflation rates.

9.

Gems and jewellery

Stock of metals, diamonds and gems.

  Designs not attractive or expensive designs.

10.

Healthcare

Healthcare Equipments, rooms, Doctors

Lack of patients, equipments under repair.

11.

Infrastructure

Roads, cement, bricks, sand etc., along with resources

 Low quality materials.  In this case, it’s the human resource associated with the industry contributing to the lean wastes.

12.

Insurance

Insurance products

Long term commitment.  High premiums. Unstable jobs. Claims procedures challenging.

13.

IT & ites

Clients

Under utilized Soft ware engineers, lack of projects, bugs.

14.

Manufacturing

Raw materials

 Quallity of raw materials, damaged, uneven raw materials, cancelled orders.

15.

Media and entertainment

Resources & technologies

 Quality of projects/entertainment programmes. 

16.

Oil and gas

Crude oil

 I guess, inventory cannot be considered as 7 wastes in this industry. (not sure though)

17.

Pharmaceuticals

Chemicals and molecules

 Excess production, expiry dates, short shelf lives, not able to transport to the end users on time.

18.

Ports

ships

 

19.

Real estate

Projects / buildings

Shortage of building materials, non-availability of land, labour.

20.

Retail

Stocks

  Excess products, anticipatory stocks, cancelled orders.

21.

Science and technology

Scientist & related technologies, infrastructure

  Lack of research reports reaching on time, over production,

22.

Services (Tourism and Hospitality)

Resources and infrastructure

 Expensive, not meeting the standards, facilities not up to the mark, lack of cleanliness

23.

Steel

Steel

 

24.

Telecommunications

Connections for large masses

 Lack of resources, supply is less, overlapping of geographical locations

25.

Textiles

Cotton and cloth

  Infected, not matching the quality standards.

 

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