How Lean is Too Lean?

Cutting waste by reducing inventory is not always the most cost-effective strategy.

If you want to see lean perfected, study the NASCAR pit. In a matter of seconds, the pit crew has changed tires, wiped down the windshield, filled up fuel, and given the driver a drink of water. Everything is in the right place at the right time. If only every distribution center would run that smoothly.

Although the lean revolution has hit manufacturing, many organizations, especially retailers and wholesalers, have yet to apply lean principals. And even among those who do dabble in lean, the focus tends to be on suppliers upstream rather than adding value to the end customer.

Paul A. Myerson, professor in supply chain management, identifies store- and distribution operations as prime candidates since that's where the most waste can be cut.

He writes:

Distribution is all about optimizing the trade-offs between handling costs and warehousing costs, and maximizing the warehouse's total cube—utilizing its full volume, while maintaining low materials handling costs and minimizing travel time.

Mastering inventory levels is central to the equation of eliminating waste. But inventory management is becoming a vexing problem for some organizations, compounded by multi-channel distribution, inadequate demand forecasting, and lack of communication among the appropriate parties. Let's look at the issues in some more detail:

  • In an effort to reduce merchandise sitting around on warehouse racks, some organizations take lean too far. The problem, in this case, is one of business process rather than software. While management sees the financial impact of cutting inventory, they tend to pay less attention to how it will affect operations. The heads of distribution quite frequently are not even invited to take part in the decision and find out only when fewer cases and pallets show up at receiving. A collaborative approach that brings together the managers of procurement, finance, operations, and sales and marketing, is more effective. In other words, open up the silo.
  • Even with sophisticated demand forecasting models on hand, input from all parties is needed for an accurate assessment of inventory levels. And although demand forecasting can help an organization plan around high-level “what if” scenarios, it may not always be able to break it down on a granular level or take into account the increasing number of variables associated with multi-channel distribution. Again, collaboration is crucial.
  • Sometimes the answer to the issue of inventory levels is counterintuitive. Even with lean as the driving force, the notion of optimization cannot be left out. In some instances, it makes sense to increase rather than minimize inventory if it will contribute to lowering your overall supply chain costs. Your business and inventory strategies need to align.

What do you think are the main challenges to optimizing inventory levels? Is lean always the answer?

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