Lean Distribution and Inventory Management
The value of inventory to distributors is obvious. Distributors profit by selling inventory to their customers; but for many, inventory can be a liability when it ties up capital as it sits unsold, costing more than the products per se—in warehouse space, finance charges, operational and handling expenses, and so on. As such, one would expect to see a broad-scale adoption of Lean principles in distribution, if only to better manage inventory. After all, Lean inventory management allows distributors to meet or exceed their customers’ expectations with inventory optimized for maximum profitability.
One of the common arguments against the adoption of Lean practices is that it is basically a tool for high volume manufacturing practices, and that processes such as distribution, where variability is high, can be a difficult fit for Lean. However, a recent post by Gregg Stocker on the Lessons in Lean blog disputes this strongly. The author notes that three basic questions related to the application of Lean demonstrate it is not dependent on the volume of products or services produced:
- How do your processes need to perform (i.e., what is the ideal condition)?
- How do your processes perform?
- How are you going to deal with the gaps between ideal and actual performance?
“Knowing how a process needs to perform has absolutely no relationship to the size of the organization, the volume produced, or the repetitiveness of the work,” says Stocker.
In a recent Supply Management article, procurement consultant John Hatton also considers why the well-established principles of Lean supply have yet to be more broadly embraced. Among the principal reasons he cites: supply matters such as inventory take a backseat to other areas in terms of technology and process improvement, and the awareness of Lean methods is surprisingly low.
Among the advantages that Lean management has over traditional management is lower inventory risk. “A Lean supply chain is one that produces or provides only what is needed, when it is needed, and where it is needed,” Hatton says.
To apply Lean to supply processes, he points to five guiding principles:
- Involve people: engage colleagues to improve continuously through waste elimination and problem solving.
- Build in quality: design processes to make them mistake-proof, thus preventing errors before they happen.
- Reduce lead times: establish a continuous flow of materials, equipment, and process, such that products are pulled through the supply chain at the right place, the right time, and in the right quantity.
- Standardize: document the best practices and make sure they are followed.
- Improve continuously: no matter how good a process seems, there’s always room to improve it.
After all, Lean has its deepest roots in inventory management—a fact that distributors might reflect on profitably. Lean was first developed by Kiichiro Toyoda and Taiichi Ohno in the 1960s for Toyota. They received their inspiration not from the American automotive industry, which at that time was the world's largest, but from visiting an American grocery store: Piggly Wiggly. They were impressed by how the supermarket only reordered and restocked goods once they’d been bought by customers—the precursor of the just-in-time inventory system.
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