By November 19, 2007 7 Comments Read More →

Lean Cannot be Measured by Inventory Alone

I know many of you won’t have access to this article from the latest Industrial Engineer magazine (from the Institute of Industrial Engineers) but I had to comment on it anyway. The piece, by Richard Shonberger, has the headline “Faltering lean” and has a callout that says “U.S. companies are doing poorly with lean.”

At that point, I was drawn in. It’s always an interesting topic, the struggles that companies face with lean. There’s a whole book on How to Prevent Lean Implementation Failures and I have a separate blog on the topic. Lean gurus and experts are always bemoaning the high failure rates for Lean implementation and surveys are taken and discussed (as we did here). There’s no shortage of things to write about and talk about with “Lean failures.” The discussion isn’t too much different than talking about “Six Sigma failures” or “ERP failures.” It often boils down to a lack of leadership and a lack of commitment from the organization, as we’ve often discussed here.

In his IIE article, Shonberger highlights and focuses exclusively on a single reported financial number, inventory, as his measure of “leanness.” I think this is a huge error. I am hesitant to criticize Shonberger, as he deserves much credit for the spread of Lean and Just in Time principles in the U.S. But, this narrow laser focus on inventory numbers does little to help others be successful in their Lean efforts, I believe. It would be like looking at data that shows that teams that win the Super Bowl tend to commit fewer penalties than other teams (I’m making that up, but it could be true) and then assuming that the key to winning the Super Bowl is to avoid committing penalties (and focusing on that almost exclusively as a goal or a metric). A low number of penalties won’t necessarily lead to winning (you need to score some points and play some defense, as well).

Lean companies, such as Toyota, Danaher, or others might tend to have to have low inventory, compared to their peers, but low inventory isn’t the primary goal of a business. That goal should be long-term profitability. That’s how we should gauge the success of a company. Not the short-term profit this quarter, but long-term profitability. Look at Toyota — the true measure of their success is the sustained profitability that allows them to fund growth and new technologies, creating stability that helps them avoid layoffs and the downward spiral of the layoff cycle.

Shonberger pulled inventory data, what he calls “the measure of merit” (again, I disagree with that assertion) from public companies, something that anyone can do online, and showed that inventory trends are not good.

“Of the 566 U.S. companies tracked, 50 percent show no clear trend in inventory turns and another 15 percent show at least 10 years of worsening turns. That leaves just 35 percent that have maintained a lean trend for at least 10 years or had that trend but faltered in the the most recent 5 to 7 years.”

Shonberger continues to make his case by saying:

“Where we see lots of inventory, we conclude, rightly, that the facility is not lean. No other measure is so universal, objective, and available for research.”

It might be true that having tons of inventory means you are “not lean” but does having very little inventory on the books prove that you are lean? Remember, Toyota defines TPS/Lean in two parts: eliminating waste (including inventory, as one type of waste) and having respect for people. To me, low inventory, in and of itself, is not enough to prove “leanness.”

Shonberger points to Japan and how their inventory numbers have done better recently after 15 years of “malaise” — and he credits outsourcing. That’s a “Lean” approach? It’s easy to have huge inventory turns when you don’t make anything, if you’re some sort of modern virtual manufacturer, the type who only has 10 employees for marketing and design. Is that the path Shonberger wants us going down?

He then points to Toyota and how their inventory turns have fallen from 22.9 (in 1993) to 10.1 (in 2006). But, Toyota is not the same company today as in 1993. It’s not an apples-to-apples comparison. Toyota is building and selling more in the U.S. Is Toyota “less Lean” today than in 1993? That seems like a statement that is hard to back up, other than looking at the inventory data. Sure, Toyota has its struggles (defects and recalls), but Lean is only about inventory, right?

So why are companies struggling with Lean? Shonberger points to “weak support in the executive suite,” and the temptation to “cherry-pick easy practices” like 5S and kanban instead of focusing on core issues of balancing demand and supply. Is this why Toyota is supposedly struggling with Lean, per the inventory measures? I doubt it.

Shonberger really loses me in his final paragraph when he points to Dell and Wal-Mart as two great Lean examples, he calls them “lean standouts.” It’s painfully clear we are working off of different definitions of Lean. Dell and Wal-Mart aren’t followers of the Toyota model. Dell is just now starting to explore Toyota as a model (as I’ve complained about before) and Tesco is the clear Lean leader in retailing, not Wal-Mart.

I prefer my definition (shared by many others), which has balanced goals of improving quality, customer satisfaction, employee satisfaction, and company profits. Reducing inventory can contribute to some of those goals, sure. Those are goals that translate across industries. Hospitals aren’t trying to get Lean for the sake of cutting inventory levels. That’s not a goal that translates and I think it’s further proof that Shonberger’s definition of Lean is wrong or, at best, outdated.

What do you think?


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Mark Graban's passion is creating a better, safer, more cost effective healthcare system for patients and better workplaces for all. Mark is a consultant, author, and speaker in the "Lean healthcare" methodology. He is author of the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, as well as The Executive Guide to Healthcare Kaizen. His most recent project is an eBook titled Practicing Lean that benefits the Louise H. Batz Patient Safety Foundation, where Mark is a board member. Mark is also the VP of Improvement & Innovation Services for the technology company KaiNexus.

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7 Comments on "Lean Cannot be Measured by Inventory Alone"

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  1. Anonymous says:

    Jim Womack and Dan Jones wrote about this similar theme about 5 years ago Link

    —————–
    Cribbed from LEI:
    —————–

    …Richard Schonberger – a stalwart leader of the lean movement from the very beginning – has recently claimed that Toyota has not been “walking the talk” for a key indicator of lean practice – inventory turns. He points out that Toyota’s company-wide turns have fallen from more than 80 in the 1960s to about 12 today, and follows this observation to some rather gloomy conclusions about the future of the lean movement.

    In my and Dan Jones’s view, Richard has identified an important symptom – Toyota’s turns really have fallen – but has come to the wrong diagnosis and prognosis. Toyota’s turns have not fallen because its individual plants are less lean. We visit them frequently and know that this is not true. Rather Toyota’s turns have fallen because of the steady global expansion of Toyota without the ability to globalize and regionalize its production system at the same rate.

    In the 1960s Toyota created practically all of the value in its products within a short distance in Toyota City and sold most of its output in the Japanese domestic market. In addition, it sold its finished units at the factory gate to the independent Toyota Motor Sales Company, meaning that the Toyota Motor Company carried no finished-unit inventories. Its lean methods inside Toyota City made 80 or more turns quite practical. (Remember that turns are calculated by dividing the cost of goods sold during a year by the average value of the raw materials plus work-in-process plus finished goods on hand during the year. This means that shorter value streams always produce higher turns, other things being equal.)

    As Toyota began to sell abroad, it suddenly needed to ship finished vehicles vast distances by sea. What was more, because it could no longer build most vehicles to customer order as it did in Japan (due to the long lead times for shipping), Toyota had to create stocks of finished units in each export market. At first these vehicles were owned by independent foreign distributors and were not carried as inventory on Toyota’s books once they left the boat. However, over time Toyota bought out its foreign distributors and in 1982 merged with its Japanese distributor to form the current-day Toyota Motor Corporation. This had the effect of transferring all finished units not at dealers onto Toyota’s books and dragged down inventory turns.

    Then, after 1984, Toyota began to establish assembly operations abroad, supplied initially by parts makers in Japan. Even with frequent shipments from suppliers, mountains of parts were always on the ocean, pulling turns down further. Over time Toyota has worked hard to establish a parts base within each region, but the steady growth of Toyota assembly operations has always run ahead of its ability to create local parts manufacturers and in any case the local suppliers are not nearly as close to Toyota assembly plants or as tightly coordinated as they are in Toyota City.

    Therefore, even Toyota has a lot of work to do to fully “walk the talk” for its extended value streams, now stretching across the world, and doing this will be a continuing challenge as it moves to the head of the global automotive industry. I look forward to an upturn in inventory turns at Toyota in the years ahead and anticipate that members of the Lean Community will be involved in this campaign as Toyota suppliers.

  2. Mike Gardner says:

    I agree, Mark. A few years ago I had the pleasure of attending a seminar by Dr. Shonberger and he said much the same thing. He spent considerable time shooting down Jim Collins’ book Good To Great because the “great” companies had poor inventory turns. Any metric can be over-utilized–stock price, inventory, productivity, etc. We have to look at the whole, not one piece.

  3. Karthik Chandramouli says:

    I participated in a seminar by Dr. Schonberger in 1997, and was shocked to learn that his initial books on JIT and World Class Manufacturing were written by surveying the existing literature on the subject. In other words, Dr. Schonberger never visited any of the Japanese companies he wrote about.

    Hardly the Gemba mindset that I would expect from someone who professes such deep knowledge of manufacturing. Combined with the unwarranted praise of Dell and Wal-Mart, I think someone has a new book to sell…

    I’m sure Prof. Schonberger has visited many other companies but I wonder how many true Lean companies he has personally visited to understand their true capability?

    Clearly, Prof. Schonberger is smart, but it’s hard to take these comments seriously when he hasn’t spent meaningful time observing Toyota’s process. I am certain that the public tours Toyota offers are insufficient in this regard.

    I’m also certain that Toyota does not care too much what Prof. Schonberger thinks or looks forward to, as inventory turns are a metric nowhere to be found within Toyota.

    In fact, you would be hard pressed to find someone in Toyota (even in Accounting) who understands and uses the calculation.

    The truth is, Toyota uses simple visual control to manage inventory and optimize their system to perform with a dual supply base — Japan and local.

    That’s who Toyota is, and it’s not going to change, no matter what “experts” write. Toyota could care less about inventory turns because their process capability allows them to manage the underlying drivers of inventory.

    By the way, systematically planned inventory is not a bad thing. Excess inventory, on the other hand, is a risk which Toyota has proven capable of managing through fundamental execution and PDCA.

    The Lean community also needs to wake up to the fact that ultra-low inventory is inherently at odds with service levels, particularly in a global marketplace with long lead-times.

    Optimizing the trade-offs between inventory and service levels is not something that Toyota does, or knows how to do. They just manage this implicitly through TPS and solve real problems (customer, supplier, or otherwise) one-by-one.

    The “shareholder” problem of insufficient inventory turns is not one that gets much attention at Toyota.

    Like all financial metrics, turns can be gamed. That’s why Toyota focuses relentlessly on process.

    Could they do better with Global Network Optimization? Probably. But their ability to develop local suppliers cannot be accelerated with software or wishful thinking.

    Until then, the Japan-based supply base will continue to be an integral part of Toyota’s global growth. When inventory turns improve, it will be largely because of supply base localization and not because of any new “improvements” in inventory management.

  4. Kevin says:

    Great post, Mark, and I agree with the others that you’re right on the money. The bottom line with lean is not inventory turns or any other metric or tool. It’s creating value for the customer (as well as respect for people). The importance, or even direction, of a metric can change based on how customer value is identified.

    I was recently in a couple factories of a medium-sized specialized medical device manufacturer. They make complex devices that have long (even after lean improvements) raw and processing lead times, with a wide range of potential configurations. But customers consider it critical… valuable… that products be delivered within 48 hours of order. Thus when you go through their factory you see world class lean everywhere you look… then you look through those double doors into the warehouse and see mountains of inventory. But that inventory is value to the customer.

    Kevin

  5. Mike T says:

    Mark:

    I’m hoping to manipulate your blog for personal gain (not the first time and I’m probably not the only one!) This thread ties into a recent thread on the NWLean forum and I’m curious to see response from this information source.

    What are Lean financial measurements that are acceptable financial measurements? Everyone can understand On-Time Delivery and Lead Time, but financial managers cannot relate that to hard $$. Inventory levels and Inventory Turns can be defined financially, but what are other metrics that can be used?

    I’ve asked others with Lean backgrounds. One suggestion (which has merit) is called a Productivity Index. It is (Sales – Raw Materials) / Expenses (generally EBITDA – I’ve also heard it described as variable expenses). I’m being challenged (in a positive way) to find ways to measure the success of our company through Lean measurements, as opposed to our traditional Variances, Effectivity, Reported vs. Earned Hours, etc.

    I’d love to hear other people’s responses. Remember, they need to be something that financial managers could relate to, so employee morale or simply saying “providing a service level to our customers” – things not definable by $ – won’t help. I firmly believe there has to exist a transitional method of going from Financial measurement to Lean measurement, without making an incredible leap of faith.

    Any suggestions?

  6. Ron Sturgeon says:

    I get a lot of questions about inventory turns because they can be hard to understand. Even harder to understand or model is how turns affect cash flow. However, the entrepreneur who measures turn and appreciates the connection is much more likely to prosper in the long run….. Read more at http://www.mrmissionpossible.com/blog/

  7. Mark Graban
    Twitter:
    says:

    I saw Prof. Shonberger speak recently at the 2012 ASQ Lean and Six Sigma Conference.

    It seemed pretty clear from what he said that he only looked at public financial statements. To Karthik’s point, I don’t think he goes to the gemba much.

    I think a lot of his analysis is flawed. The decline in inventory turns has got to be more a commentary on globalization and the China factor than anything about getting “bored” or “fatigued” with Lean (two terms he threw around).

    He also said, quite definitively in his mind, “Toyota is no longer the paragon of lean” because their inventory turns are worse than before.

    The biggest head scratcher was that he complained that the media only sees Lean as “JIT inventory” — yet I think he is a huge contributor to that perception by talking about inventory so danged much.

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