The Destructive Effect of WIP Inventory - Work In Process a Hidden Enemy Enrique Mora

Most of my customers have this same problem without even realizing all the negative impact it has on their bottom-line.

A critical change of mindset and culture will show us that Inventory is NOT Wealth.

Especially when the inventory includes Work in Process, it is impressive the amount of money invested into:

• Raw materials

• Labor

• Machine time

• Real estate

• Racks

• Boxes

• Insurance

• Taxes

• You Name it!

It is a poor investment, since the main purpose of any manufacturer is to put products out of the plant in a timely manner, storing semi-products, sub-assemblies, etc, comes back to hurt the performance of the business.

I have personally witnessed the frustration of not being able to produce something because the material we need has already been cut, bent, welded, etc, and is part of a semi-product that we do not need.

It is preferable to have people not producing for some time than producing something we do not immediately need.

Why does WIP happen?

The culprit of WIP is the “Just in Case” culture that makes us push product before it is needed. When I had the opportunity to help one of the largest shipyards in America, we discovered more than once, that a completed subassembly made too far in advance, would not be used because the design had changed for future units. In most cases the costly material and labor were a total waste, since specifications from the government (the customer) established not to patch pipe-work. In not few other cases, the bulk volume was quite big and the subassemblies had to be stored in the yard, therefore subject to rusting and other physical damages, adding to this the fact that the transportation requirements were substantially increased with the consequent cost and risk.

Solving the Problem…

What the Toyota Production System did about this so common trend and problem was called: “Pull System.” Pull System is a common-sense procedure that imitates the functionality of Modern Supermarkets. Contrary to the old “Grocery-Store” mentality, where large amounts of products would be stocked in big warehouses, where they in many cases would get spoiled, rotten, damaged, eaten by rodents, rained on, catch fire, etc, the Supermarket does not store large amounts of products. The Pull System creates a faster turn in inventories. Inventory turns are a healthy ingredient in the company’s financial health.

Beginning “in house” first, this efficient product-flow tool was implemented between work-stations. The key of the pull system is to not produce or provide (or push into) the next work-station more semi-products or sub-assemblies before it needs them.

The “Pull System” worked so well in the “Internal Customer” dealings at Toyota, that they decided to extend the culture to their vendors and Original Equipment Manufacturers (OEMs). In order to establish this functional Pull System, a “partnership with the vendors/suppliers” needs to be established. This new trend is fortunately getting more popular all the time bringing up the efficiency of the whole enterprise. Toyota negotiated with their suppliers and promised loyalty in exchange for service. They committed to buy all the materials from them as long as they agreed to bring the supplies to the assembly plant only in the quantity required, at the time they are needed, and delivered right in the spot where they will be used (POUS=Point of Use Storage). This service helps manufacturers avoid the need for a warehouse and the consequent need to transport materials afterwards. Actually there is No Warehouse. Some parts and materials are delivered only for the needs of the next hour or even for fewer than 60 minutes.

Some of my customers have said: “…well, but we are not that important to our suppliers.” Let me tell you that Toyota achieved this level of support from suppliers/vendors many decades before they turned into the powerful customer they are today. Any efforts to achieve this kind of negotiation are worth it.  Negotiation is a technique that always works if we develop the appropriate skill. It is always a Win-Win Situation!

We have in many cases been able to establish these negotiations even for Maintenance parts and the results have been very positive for both: customer and supplier.

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