The Impact of lean practices on inventory turnover

Just In Time (JIT) and Lean production (LP) is essentially the same thing. Lean production is, “JIT in a broad sense, which is a philosophy of waste reduction and continuous improvement,” (Stevenson and Hojati, 2011, p.547). The execution of lean practices is expected to “result in improved operational outcomes such as inventory leanness, which, in turn, should enhance performance,” (Hofer, 2011, p. 357). Since LP is such a broad topic and can cover so many areas of production, it comes down to your business characteristics and strategies to determine your LP system. There are certain elements, Figure 1. that management can focus on when looking at LP. The main objective of LP is, “to satisfy customer needs on the highest possible level through the elimination of waste,” (Demeter, 2011, p. 154). With this in mind, lean production is a strong managerial strategy to improve the satisfaction within an organization as well as externally.

According to Demeter, LP is practiced at two levels. The first is strategically, where LP helps one to determine customer value and identify the value stream. The second is at the operational level, where multiple practices and tools are bundled together to eliminate waste and force continuous improvement, (2011, p.155).

Image

Fig. 1. Elements of lean production.

Since there are numerous practices that can be applied under Lean Management (LM), a popular LM technique is to bundle these practices together. There are four different bundles that are generally used in LM, which include Just In Time (JIT), total quality management (TQM), total productive maintenance (TPM) and human resource management (HRM), (Demeter, 2011, p. 156). TQM, TPM, and JIT all share similar goals such as continuous improvement and waste reduction, and it has been known from previous studies that implementing joint application of bundles such as JIT and TQM increase quality standards and productivity more than one of these alone. It is also known that bundling HR practices with any of these manufacturing practices leads to a better performance, (Demeter, 2011, p. 156).

Image 

Fig. 2. The bundles of lean manufacturing.

Inventory turnover is a ratio that many organizations strive to optimize. High turnover means that a company has less capital in raw materials (RM), work-in-process (WIP) or finished goods (FG). One of the goals of LM is to reduce/eliminate excess inventories as a form of waste, as well as reduces overproduction since it leads to higher FG inventories that have to be stored and may never be sold. When implementing JIT and TQM into LM, organizations saw large improvements in lead times, delivery cycles, productivity/quality levels, and customer satisfaction as well as a reduction in fixed goods and work-in-process stocks, (Demeter, 2011, p.156). Firms also saw an improvement outside of their organization where “they document better performance for stock portfolios with lower inventory level relative to their industry peers over time,” thus having greater stock market returns, (Hofer, 2011, p. 359).

An organization can start lean thinking by:

  • Document their current inventory management performance
  • Define value and eliminate waste
  • Identify undesirable effects and determine the root cause to target the main problem
  • Solve the problem by redesigning the inventory management process
  • Test to ensure that more value is flowing to the customer

(Melton, 2005, p. 668-669).

Based on the previous information, Demeter conducted a study on the high tech industry, sending out over 4,000 surveys and obtaining 711 returns from 23 countries between 2005-06. The main methodology of their study was to determine how lean practices affect inventories.

Different sizes of organizations affect the usage of LM systems. Large manufactures are more likely to implement lean practices than small because they have the resources to train, large production sizes as well as solid relationships with suppliers, which affect the consistency of inventory delivery, (Demeter, 2011). Figure 3 shows that in SME, management uses traditional inventory methods more than lean, and it is opposite in large businesses.

Type/size

SME

Large

Total

Traditional

196

84

280

Lean

159

171

330

Total

355

255

610

Figure 3. Relation of company size and leanness.

There were specific performance measures used in the study, which you can see in Figure 4, to break down and compare the overall performance of organizations that use lean and traditional management practices when dealing with inventory. You can see from this figure that most typical lean measures in large companies outperform traditional companies.

 

Traditional

Lean

F-test

P

Small companies

       

Ratio for JIT delivery from suppliers

36.1

42.8

3.2

0.077

Ratio for JIT delivery to customers

47.0

53.1

1.9

0.169

Throughput time efficiency

53.5

49.6

1.0

0.309

Late delivery

10.1

10.9

0.2

0.666

Scrap and rework costs

3.59

3.98

0.3

0.595

 

Large companies

       

Ratio for JIT delivery from suppliers

26.1

40.5

9.4

0.002

Ratio for JIT delivery to customers

37.1

55.4

11.5

0.001

Throughput time efficiency

38.6

48.7

3.9

0.049

Late delivery

8.46

8.65

0.0

0.918

Scrap and rework costs

3.03

3.26

0.1

0.713

Table 5. Performance measures of traditional and lean companies.

The study focused more on large businesses using lean methods because they fit better with line production systems than job shops, which is a popular practice for SMEs. The results showed that the turnover of every type of inventory (RM, WIP and FG) was higher when using LM than traditional methods. Various contexts provided different results, where the type of production system has the biggest impact on turnover. The second significant factor is the ordering policy used, which applies to the inflow and outflow of inventories and has the largest impact on raw materials and finished goods. The third important factor is product type, (Demeter, 2011).

Overall, inventory management is a complex system where different contingency factors affect different types of inventories. LM can be applied in all industries, however business characteristics determine which methods to use as well as the effectiveness of LM. Higher inventory turnover and LM practices can provide customers with faster delivery time; however pose a larger risk of default on delivery due to delays and lack of backup stocks. To improve inventory turnover, organizations need to identify the type of inventory they want to address and take the appropriate steps towards fixing it, generally by using LM techniques.

Question: Why are large organizations more likely to perform lean practices than small?

Bibliography

Christian Hofer, C. E. (2011). Lean, leaner, too lean? The inventory-performance link revisited. Journal of Operations Management , 29 (4), 356-369. Accessed from, http://www.sciencedirect.com.ezproxy.kwantlen.ca:2080/science/article/pii/S0272696310000367, on March 14, 2012.

Demeter, K. (2011). The impact of lean practices on inventory turnover. International Journal of Production Economics , 133 (1), 154-163. Accessed from, http://www.sciencedirect.com.ezproxy.kwantlen.ca:2080/science/article/pii/S0925527310000393, on March 13, 2012.

Melton, T. (2005). The Benefits of Lean Manufacturing: What Lean Thinking has to Offer the Process Industries. Chemical Engineering Research and Design , 83 (6), 662-673. Accessed from, http://www.sciencedirect.com.ezproxy.kwantlen.ca:2080/science/article/pii/S0263876205727465, on March 14, 2012.

William Stevenson, M. H. (2011). Just-in-time and Lean Producton. In M. H. William Stevenson, Operations Management (Vol. 4, pp. 546-568). Canada: McGraw-Hill Ryerson.

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