Don’t Blame Lean Production Methods for Shortages

Another wave of lockdowns will renew concerns about supply chains and shortages. As a grower of fresh mushrooms, for decades I experienced the difficulties of filling orders during wild fluctuations in raw material supplies and demand for our products. Today, I teach supply chain management and Lean Manufacturing – a methodology to reduce waste: whether time wasted waiting for materials or waste from excess inventory, i.e., ensuring each production stage has what it needs, when needed - and never more.

Unfortunately, some blame Lean supply chains for shortages, while others suggest managing inventory less efficiently somehow would improve availability. They imagine high inventories would eliminate shortages, but greedy, short sighted business people keep inventories low to reduce costs. In fact, Lean companies are superior at ensuring customers get what they want for a reasonable price, and when they want it.

Inventory is not necessarily good or bad. It depends. Mushrooms’ short shelf life, like all fresh produce, force store managers to maintain low inventories. This happens to reduce holding costs. However, regardless of product perishability, low inventory strategies not only reduce costs, they can provide other benefits, including increased product availability.

Greater levels of two inventory types: Raw materials and finished goods can decrease the chance of stockouts. Safety stock is insurance against disruptions and short term demand peaks, but this simplistic view leads some to believe inventory strategy is only a tradeoff between cost and availability.

In reality, it is easy to have too much. A Lean inventory management system considers variation in demand and production to determine optimal safety stocks based on the service level required. As with any insurance, only purchase what you need.

Lean never suggests eliminating “needed” inventory, only “excess” inventory. Next, Lean companies reduce process variations that create the need for safety stock, such as breakdowns, or they may require suppliers to locate nearby. Only after reducing the need for inventory is inventory reduced.

Yet some suggest that since there were shortages, inventories weren’t sufficient. However, the problem with unpredictable events like pandemics is they’re unpredictable - and rare. While emergency items, like PPE must be stockpiled in case of disaster, the cost of maintaining a six month supply, for example, of ordinary items like toilet paper would be so prohibitively expensive, many companies would be bankrupt long before a crisis hit. Furthermore, after a time, there may not be as much stock as thought. Large inventories draw down slowly and even non-perishables eventually spoil (Steel rusts, N95 masks have expiration dates), are damaged, stolen, misplaced or become obsolete.

Organizations need better options for black swan events, such as alternative suppliers or materials. Starbucks sources coffee from multiple areas in case one has a poor harvest. Aluminum replaced copper during price spikes. What’s more, companies need flexible supply chains.

When lockdowns began last spring, there were instances of milk shortages while milk was being dumped. Produce rotted in fields while shelves were sparse. These shortages were not caused by a lack of inventory, but by inflexible processes. As demand shifted to supermarkets from restaurants and schools, these producers lacked flexibility to switch to different labels and packaging types required for retail markets. They had plenty, but of the “wrong stuff.”

Lean creates needed flexibility by reducing a third type of inventory: work in process. Traditional manufacturing relies on dedicated machines and large production runs to create economies of scale. Large lots create long wait times at each production stage and dramatically increase overall production time. When demand changes, longer processing times delay production of the items now in demand.

Smaller lot sizes reduce inventory between processes and thus wait times, increasing flexibility. Paint production illustrates an easily relatable strategy. Rather than producing large lots and inventories of each color, only white paint is stocked and pigment added only as orders are placed. Inventory is low; nevertheless desired colors have increased availability. Food producers using similar strategies satisfy different markets as needed.

So, while stocking up, please be mindful that the people doing the difficult job of keeping the shelves full, while not perfect, know what they are doing. Moreover, while inventory can be useful, Lean is better - and waste is never a good thing.

About the author: Phillip S Coles is a Professor of Practice in the Department of Decision and Technology Analytics at the College of Business at Lehigh University. He can be reached at [email protected].

The views and opinions expressed here are those of the author and do not necessarily reflect the opinions of Lehigh University’s College of Business.