As I prepare several posts tonight for next week, I have been mentioning a lot about WIP, inventory, and why they are bad. I wanted to take a couple of paragraphs to explain why they are not necessarily a good thing.
First of all, WIP, or work in process, can be a waste. Lean, by nature is the relentless removal of waste to a process. Waste, is defined by anything that the customer is not willing to pay for. If you are creating WIP that you do not need, then you are not adding value to the process. If you were supposed to run 1000 widgets and you run 2000 because you wanted to get ahead of the schedule then you have created a risk. Risk can be a potential cost. What if something was to happen and the WIP get destroyed while waiting? If you made the extra today off of tomorrow schedule and now the customer doesn’t want the product – what can you do with the WIP now? If that happens then all of the raw materials are tied up in an item you do not need and cannot be converted to another item which you could produce for value. The cost of any of those losses increases labor waste, not to mention material waste. If a company has waste then at some point the COGS (cost of goods) will increase based on the inefficiencies.
In addition WIP or inventory is a cost from available cash flow. If you have your goods and materials tied up then capital that would be free if not tied into inventory or wip cannot be liquidated for some other use. This may create a loss in opportunity. These events could happen at the same time and in combination with other events. Regardless, the costs will be there and only contribute to your P/L (profit and loss) statements which will inturn reflect upon your cost of goods (COGs). If COGs go up then the company will either have to pass on to the customer which may purchase less based on the sales equilibrium (supply, demand and ideal cost or price point) or the company will absorb the loss which will cut into budgeted funds for things such as marketing spend, pay increases, innovations…
It does not even have to be that complicated. Inventory can be supplies taken to the workstation (though already purchased so you would not take the hit from materials needed or not). If you bring the entire days run of materials to the workstation and the schedule changes at the last minute then man hours will be used that were not needed to remove the extra inventories on the line. Again, this will contribute to inefficiencies.
When you consider inventory, WIP, and schedules consider a flow that pulls. The supplies are taken to the line just as the operator needs them and just as the secondary are needs the WIP, the first production area creates it to transfer to them. We will go into JIT (just in time), Kan Ban, Push / Pull etc. at another time. I just wanted to get some logic out there around WIP, and inventories since many of my posts over the past and next week will discuss these topics.
Categories: Business: General