Moving toward zero inventory

With the widespread adoption of technologically advanced planning software and supply-chain communications, the zero-inventory door has opened wider than ever. So why are many distributors and manufacturers still finding it difficult to reach their inventory-management goals?

The concept of zero inventory has been around since the 1980s, and it's simple: Pare your inventory to a minimum and boost your profit margins by eliminating the need for warehousing and other associated expenses. Recent technological advances have made it easier (at least in theory) to execute a zero-inventory strategy.

At the fore is the development and widespread adoption of nimble, sophisticated software systems such as manufacturing resource planning (MRP II), enterprise resource planning (ERP), and advanced planning and scheduling (APS) systems, as well as dedicated supply-chain management software systems. These systems offer manufacturers greater functionality. For example, they can calculate resource-limited schedules, track orders of raw materials and monitor shop-floor production. They also can elevate both the visibility and transparency of internal order-fulfillment and manufacturing processes.

A second key technological advance - the development of more-robust security systems - also enables organizations to provide a high level of transparency and insight into inventory-management processes. Manufacturers can grant suppliers access to their planning software, typically via the Internet, with confidence that only appropriate, designated information will be viewed.

As a result of these developments, when a customer places an order, suppliers can immediately see that the manufacturer needs additional raw materials. Or, if a customer cancels an order, suppliers can immediately stop their activity. This increased level of responsiveness and awareness creates better cash flow and increased profitability. It also fosters less adversarial, more partnership-oriented relationships between suppliers and manufacturers. As a result of these technological advances, manufacturers can be more responsive to both their suppliers and their customers - that is, of course, if they follow through with everything else it takes to effectively move toward zero inventory.

Zero inventory: Pie in the sky?
Even after embracing MRP, ERP, APS or other technologies, many companies haven't even scratched the surface when it comes to reaching zero inventory, inventory-management experts agree. That maybe because the concept of zero inventory is an unreachable, theoretical ideal.

Steven A. Melnyk, professor of production and operations management in the Eli Broad Graduate School of Management at Michigan State University, prefers to speak of "lean" rather than "zero" inventory. This shift in nomenclature is just the beginning of a systematic approach that Melnyk says any business can use to reduce inventory in a productive, ong-lasting way.

"Inventory is not the problem; it is a symptom," says Melnyk, a widely recognized authority and consultant on supply-chain management. "Inventory is the result of waste and variance. The way to reduce inventory is simple: You get rid of waste and you reduce variance."

Such an approach sounds basic, but many companies aren't willing to do what it takes.

"Instead, they jump around from program to program, trying to slash inventory here and there, like a dieter trying to lose weight," Melnyk says. "Just as a dieter can't realistically expect to stop eating for a day, jump on a scale, and magically hit his weight-loss goals, a company can't take a few superficial steps and significantly reduce inventory."

Indeed, experts agree that most companies striving for zero inventory must fundamentally change their manufacturing and handling processes. That requires going well beyond simply investing in the latest software to making key operational changes in order to make real progress.

Low-hanging fruit
"If you attack from the right perspective, there's lots of stuff you can do to reduce inventory," Melnyk says. "This is low-hanging fruit."

Melnyk offers the following tips to get started slashing inventory:

Revisit your customer base. Ensure you understand who your critical customers are and what they value. Then communicate that data throughout your organization so your employees can focus on creating value for key customers instead of trying to satisfy everyone - an unfocused approach that can lead to unnecessary inventory.

Examine your processes and establish a baseline. Before you can address problems,you have to recognize them. Consider the surprising experience of an engine manufacturer. An internal audit revealed that one component of the company's engines stayed in its system for 1,500 hours, traveled four miles, was touched by 106 people and passed through 122 steps - of which only 27 changed or added value to the component.

Identify your company's critical processes. Focus on critical processes to quickly identify which parts of your overall system most significantly affect inventory, then begin to make necessary changes. Critical processes include bottlenecks or constraints in your system, processes visible to your customers (your customer will judge you on the basis of process), unique core competencies or skills, the process withthe highest amount of variance, or the process that requires the most resources.

One proven strategy for improving inventory management is a "kaizen event." In a kaizen event, a small team gathers for perhaps several days to focus exclusively on revamping a process. By changing the process, you can reduce the need for inventory. Once you improve one inventory-management process, you can move on to another.

Staying focused
Like most management efforts, controlling inventory requires ongoing commitment.

"Really successful companies understand the basics and master them," Melnyk says. "They keep doing the simple things right, all the time. They understand that you need inventory - you can't ever get away from it. But you have to manage it intelligently."

Experts recommend the following tips to distributors and manufacturers zeroing in on inventory management:

Develop a lean infrastructure. Establish a program, place someone in charge of it and be sure senior managers support it.

Recognize and reward successes. Publicize your successes and the people who helped achieve them to underscore their importance.

Share information. If some parts of your organization become more adept than others at minimizing inventories, they should spread best practices across the company.

Be patient. Give employees enough time to install, learn and become proficient with new inventory-management systems.

Zero inventory may be wishful thinking, but embracing new technology and processes to manage your inventory more efficiently could move you much closer to that ideal.