spread of TPS over the last 40 years. In the companies that survived, manufacturing is now a finely tuned, lean process taking raw materials and turning them into finished goods. Global manufacturers have moved from batch processing of parts to JIT (Just-in-Time) manufacturing, as prescribed by TPS. This evolution means it is now economical to produce smaller batch sizes.
For example, before JIT, motorcycle maker Harley-Davidson needed 17 weeks to turn a bar of steel into transmission gears, build the transmission, assemble the bike, and ship it out. When JIT was introduced, the time was reduced to 1 week. Batch sizes (size of the run for a single SKU) were reduced from thousands to what was needed for just one or two shifts (dozens or hundreds at the most). Lower batch sizes encourage lower economical order quantities from the OEM parts business.
Automobile manufacturer Henry Ford had a massive, although somewhat primitive Just-in-Time manufacturing system running at the River Rouge facility outside Detroit. He coordinated the delivery of rail cars of raw materials such as iron ore, coal, and sand, converting them into cars in one continuous process.
The Kingsford Company was formed by Henry Ford and E.G. Kingsford during the early 1920s. Charcoal was developed from Ford Motor Company’s factory waste wood scrap. Ford, who had a large plant in the Upper Peninsula of Michigan, was always looking for new ways to combine resources. One day as the Model T cars were coming off the assembly line, he noticed many wood scraps being discarded. He directed that all wood scraps were to be sent to his chemical building to be made into charcoal.
RETAIL AND RESALE INVENTORY MODEL (FINISHED GOODS, TOO)
In a retail inventory (stock items to sell), profit comes from the margin between the purchase price and the sales price, minus the costs of sales and stocking. Effectiveness is measured by how quickly the inventory turns over; sales/profits per square foot; and an absolute minimum of goods damaged, stolen, made obsolete, or otherwise left over and not sold.
The company repurposedMaterials serves as the marketplace between sellers (who have retired, decommissioned, and scrap products and materials) and buyers (who are looking for materials that they can convert, or repurpose, into other uses.) The company’s web site is http://www.repurposedmaterialsinc.com and we will look at them again when discussing the purchase of excess inventory.
In their company newsletter, Larry Kirchner writes about repurposing during the early days of Ford Motor Company:
More fun Ford facts: When Ford Motor Company ordered heavy items like transmissions and axles, they specified wood boxes be used for shipping. They further specified that each board of each box be prepared by drilling holes that were unnecessary for shipping the object. When the transmissions were delivered to Ford, the crates would be disassembled, and, due to the pre-drilled holes, the boards were immediately usable as floorboards in the automobiles (Figure 2-1).
Clearly without inventory on the shelf there is nothing to sell. So the goal is usually not to push the inventory to zero, but rather to have enough stock so that every customer that wants an item can get it, with no additional goods in stock.
FINISHED GOODS
One fairly recent change in the inventory of finished goods is the development of built-to-order products. Look at the Amazon print-on-demand (POD) model where you order a book, after which it is produced, packaged, and shipped (and makes Amazon a profit). This process allows Amazon to store millions of books virtually, making one at a time, and making money on that. The key is that there is no cost for storing the inventory. The only revenue to be made comes from getting the product in the customer’s hands in a reasonable time.
Figure 2-1: Converting shipping crates into floorboards
In the convenience store business, sandwiches have traditionally been delivered or made in the morning in anticipation for the day’s demand. As a result, there is sometimes waste from sandwiches left over in the evening and lost revenue from stock outs of sandwiches that are particularly popular. Wawa, an East Coast chain, pioneered a completely automated POS (Point of Sale) system. It allows customers to design their own sandwiches. A small crew behind the counter makes each custom sandwich in about the same time it takes the customer to pay.
The Exception that Caused a Breakthrough
The exception to ownership of the inventory is the proliferation of rack jobbing models invented by the milk, bread, soft drink, and snack companies, where the inventory is owned by the manufacturer until it is sold by the distributor.
Now retailers like Walmart own virtually none of the inventory in their stores. Although this model changes the magnitude of some key performance indicators (KPI), it does not change the measures needed for efficiency and profit. You still have to turn over stock and attain certain sales per square foot to succeed and thrive.
The metric of interest to the parts user is service level. In this usage, service level is the probability the SKU ordered is in stock and available for shipment to the customer. Service level is both an input to the stocking system and a measure of the stocking system’s effectiveness. In these retail inventories, the service level is a parameter that is used to determine the quantity on hand.
ORPHAN INVENTORY: COMPANIES WITH PHYSICAL ASSETS THAT WEAR OUT
Maintenance inventory is different from the other types and requires different tools for analysis. For example, you might stock a $25 part for years to avoid a $1,000,000 downtime incident. The part is orphan because there’s no immediate or pending demand for it. However, the maintenance inventory of spare parts makes it possible for the maintenance function to do its job, which includes enabling the company’s capacity (Table 2-2). But there is no outside reason or driver to have the parts.
Table 2-2: Orphan Inventory
| Orphan’s Name | What Is It? | How to Manage or Analyze |
| Maintenance | Used to provide the capacity of an asset (not sold or converted). Generally not a consumable like ink or labels. | Downtime due to spare parts, cost and amount of downtime, dollars per asset value, dollars on shelf, insurance policy stock, how to insure having the part in 24 hours. |
It is a supposition of this book that maintenance inventory is not an inventory at all and shouldn’t be treated like one. In fact, treating the storeroom as an inventory is a fundamental business mistake that costs your organization money and results in unnecessary and, possibly, excessive downtime.
Is the Orphan Maintenance Inventory a Completely Different Kind of Entity?
Inventories are assets that are on the financial books. Certainly the inventory costs money, but is it primarily a financial asset? Second, should the inventory be managed as a financial asset (like cash, raw material inventory, etc.)?
When we look at the operational use of spare parts, we see something entirely different. We stock parts as a method of risk management. There is a risk (downtime) that has certain financial and other consequences that we, as a business, are unwilling to take. Risk management has many ways of managing the risks of downtime.
Many businesses have several factories in different parts of the country. If one of
