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A Complete Guide To Lean Inventory Management

As an online business owner, you’re always interested in discovering new ways to reduce costs, improve efficiency and increase profits.

Lean inventory management is a technique that more and more businesses are adopting in order to do just that.

But what exactly is lean inventory management? How can it help improve your bottom line? And how can you implement it in your business?

This article aims to answer all of these questions while giving you a thorough understanding of lean management best practices, so that you can determine whether or not it’s a suitable inventory management style for your business.

What is lean inventory management?
Five key principles of lean inventory management
Understanding the 5S framework
Lean inventory management attributes
Benefits of lean inventory management
Limitations of lean inventory management
How to implement a lean inventory management system
Is lean management right for my business?

What is lean inventory management?

Lean is an inventory management technique that consists of a set of tools, a philosophy and a system. The crux of it is that it aims to reduce waste, optimise production and helps put the customer first.

The philosophy associated with this concept is known as Kaizen.

Kaizen is a Japanese term that literally translates as ‘continuous improvement’.

In terms of lean management, the philosophy embodies the reduction and elimination of unnecessary resources that are used across your operations.

As a tool, you can utilise lean management principles to select the right technique or methods to enhance areas that need improving.

And, when being used as a system, lean inventory management can help to lower your business costs and maximise your customer satisfaction rates.

Holistically, the inventory management technique refers to a systematic approach to enhance the value of your inventory by eliminating waste through continuous improvement, all in the pursuit of perfection.

After all, waste exists in all parts of a business - from the front office to the factory. There could easily be an excessive waste of materials, time or other resources present in your production line. 

Lean inventory management is a way to combat this.

Five key principles of lean inventory management

Lean inventory management is built upon five main principles that work together to help meet the primary goal of efficiency:

Value 

A business that utilises lean management will regularly review their product and services from the eyes of the customer. According to lean principles, value is everything that customers will pay for.

Consider how your business offering helps your customers. This will help you to determine the unique value that your products provide.

On top of this, it’s important to define the value that your company will get from implementing lean inventory management. 

You can then engage with value stream mapping to identify places where you can improve your daily processes and operations.

Flow

The next step is to create a flow by analysing each step in the process, helping you to maximise your efficiency and reduce unnecessary wastage. 

Ask yourself:

How can you think in a streamlined way to reduce the steps needed and provide the most value to your customers?

Removing friction from your supply chain helps to clear away any obstacles in your current processes. Friction can be caused by a number of different factors, such as waiting on external stakeholders in order to complete a sale. 

Pull

Once you’re completely aware of how your inventory flows, the third principle of lean management - pulling inventory when requested by the customer - will follow naturally. 

Utilising the lean principle of Kanban, a pull system helps to create a demand-centric business, whereby minimal inventory is kept in your warehouse and is only replenished once it’s been consumed. 

In other words, it’s a just-in-time (JIT) inventory management tactic. 

In contrast, a push-based system relies heavily on the retailer to determine production levels based on historical sales data.

Consequently, a push system can result in overstocking, delays, product obsolescence and increased inventory carrying costs

On the other hand, a pull system enables you to carry just enough inventory to meet the demands of your customers while keeping costs to a minimum.

What’s more, a pull system means new work starts only when there is demand for it and your team has spare capacity, in order to avoid overproduction. 

Responsiveness

With a continuous evaluation of your inventory flow, you’ll benefit from the ability to adapt to change quickly.

This level of responsiveness will ensure that your inventory is kept at appropriate levels - preventing increased carrying costs and obsolete inventory. 

Building a responsive, proactive culture that stops to fix problems and ensure maximum quality every time is integral to successful lean management.

Perfection

The last of the five principles, perfection, requires that you consistently work to refine your inventory management processes to improve upon quality, efficiency and reduce cost.

Focus on enhancing your activities that generate the most value while removing or reducing as many wasteful activities as possible.

Understanding the 5S framework 

The 5S framework is a systematic approach to workplace organisation to help you maximise operational efficiency and boost your bottom line.

It stands for: Sort, straighten, shine, standardise and sustain.

Traced back to post-war Japan, the methodology was created by Toyota Industries, at a time when the team were looking for ways to reduce waste and remove inefficiencies from their operations.

Their solution, Toyota Production System (TPS), encompassed a number of now famous methodologies, including Just-in-Time manufacturing (lean).

As part of the Toyota team’s research, representatives analysed the assembly lines and inventory processes of US companies, Ford Motor Company and Piggly Wiggly Supermarket. 

Here’s what they discovered:

  • Ford’s assembly line had a lot of waste with workers needing to wait for one step to be completed at a time
  • Piggly Wiggly’s inventory system ordered only what was needed based on demand

As a result, the TPS representatives identified seven types of waste that were impacting productivity levels and the quality of products:

  • Overproduction
  • Waiting
  • Transporting
  • Processing
  • Inventory
  • Motion
  • Defects

Since then, the 5S framework has expanded into other areas of quality assurance including the visual workplace and total productive maintenance.

In fact, the methodology is most commonly used as a visual control tool in lean systems to ensure a smooth flow in the production line. 

It includes a list of five actions that aim to facilitate continuous improvement and eliminate waste that could lead to defects, errors and injuries.

Here they are in detail:

1. Sort

Sort through all the items in your work area and separate what is needed from what is not, then dispose of any unwanted items.

2. Straighten

Straighten your work area so workers can easily locate necessary items from a specific and permanent place according to their usage.

3. Shine

Keep your work area clean so any pre-failure conditions or abnormalities that might impact quality can be easily spotted.

4. Standardise

Standardise your work processes and procedures to ensure a continuous flow that is uniformed and without any confusion or obstacles.

5. Sustain

Ensure safe manufacturing process policies so that the workplace can sustain continuous improvement.

This means the previous 4S’s also need to be continued over time, which is achieved by developing self-discipline in key employees on your team.

Lean inventory management attributes

In order to fully understand lean management, you also need to know about the key attributes involved in building and maintaining such a system.

These are:

Demand management

This means you only provide inventory when requested by the customer (JIT process). What’s more, it’s important you maintain accurate demand forecasting through effective collaboration between sales and operations.

Costs and waste reduction

While waste reduction remains the primary aim of lean inventory management, it should not impact negatively on the customer value. 

Therefore, you should never compromise on the quality of your end product.

Process and industry standardisation

When implementing lean management, standardisation of processes is needed to improve production and enable continuous inventory flow. 

Teamwork

Everyone in the company, from stakeholders to suppliers to customers, must work as a team to provide the highest value to the end user. 

Benefits of lean management

Lean management aims to reduce wastage, improve efficiency and increase profitability through a range of principles and attributes.

So, how exactly do these inventory management processes translate into real benefits for your business?

Let’s take a look:

Faster delivery times

With lean management setting the same consistent standard across all of your operations, your inventory and manufacturing processes will benefit from a much greater level of efficiency.

As a result, you’re likely to experience fewer delays and shorter lead times - maximising customer satisfaction.

Increase quality

A key focus of lean inventory management is to decrease the number of defects and reworks in products.

With optimised processes to prevent human error and save time for your employees, increased quality is achieved throughout.

Maximise your profits

Lean practices help to decrease costs by eliminating wastage across the business, so that all savings can be added to profit.

As a business owner, you’re forced to scrutinise your expenditure to ensure profits are maximised at every stage of production.

Reduce inventory waste

By implementing Just in Time (JIT) inventory management, you receive goods only as they are needed, meaning lower inventory holding costs, less dead stock and the ability to adapt quickly to combat fluctuating customer demands.

Improve company culture

Lean management ensures every worker has a defined role that brings value to the business, which ultimately boosts their productivity and morale.

As a result, there is often a shift in culture that values daily improvement.

Limitations of lean management

Lean management is not without its drawbacks, as with any new process implementation. Not all businesses will be suited to it either.

Here are some disadvantages to keep in mind:

Lack of customisation

Lean management requires a large amount of standardisation with the objective of minimising waste.

Consequently, this doesn’t allow for much product variation or customisation, as any changes made add a level of complexity to your production process that can lead to things slowing down or going wrong.

Therefore, if your customers value a high level of customisation within your products, lean practices are unlikely to be a good fit for your business.

High investment of time and other resources

In order to establish an effective lean management system, you’ll need to be able to make continuous small changes to ensure efficiency is maintained.

A company cannot simply become lean over night. It takes years to perfect.

What’s more, embedding lean processes into the culture of an organisation requires a number of costly resources, such as the latest equipment or training programs for your team. 

Of course, this requires a rich investment into a number of resources.

Need to convert the whole team

Lean practices need to be implemented across the business and every team must be on board to ensure that you’re all striving for the same goal. 

However, deploying an entirely new system isn’t easy and may be something long-standing employees will be uncomfortable with.

On top of this, a breakdown in trust within the business could result in wasted time, such as unnecessarily double-checking standards and low productivity. 

How to implement a lean inventory management system

To implement lean management in your business, you must make sure all elements of production follow the five lean principles, so that you minimise waste as much as possible.

Here are some lean best practices to help you with successful deployment:

Maintain good relations with your suppliers

You’re reliant on your suppliers to help you stock optimal stock levels, so maintaining a good and stable relationship with them will prove invaluable. 

Timely communication, deliveries and responsiveness to unexpected problems are all critical to the successful implementation of lean management.

Therefore, it’s important that you have a centralised point of contact to build upon long-term, mutually conducive supplier relationships.

Use inventory management software

It’s essential that you keep an updated inventory record at all times.

To do so, you’ll require access to real-time stock levels which can be achieved with the use of inventory management software.

An inventory management system is able to synchronise your stock automatically, monitor the movement of stock throughout your supply chain and provide regular updates from supplier to customer.

That’s not all though.

With Just in Time (JIT) capabilities, inventory management software supports lean techniques and practices by avoiding the risk of damaged stock and costly warehouse fees.

Hold emergency “safety stock”

The last lean best practice is to hold emergency “safety stock”, which is just buffer stock in case anything goes wrong in production that would cause a delay or there’s a sudden increase in customer demand.

Of course, you don’t want to find yourself holding too much safety stock, so the key is to maintain an optimal level through detailed analysis of past sales figures and purchase history.

So, is lean management right for my business?

Lean management is best suited to businesses that sell in high volumes, as the goal of mass production is low-cost manufacturing, which is a key principle of lean alongside enhanced product quality.

What’s more, minimal variations and customisation to your products allows for a simplified production process, making it easier for businesses to break down individual processes and identify ways for continuous improvement.

On the other hand, if your customers expect different levels of customisation with the products you sell, lean management is unlikely to be right for you as this requires constant changes in your production line. 

Plus, if you don’t have the funds available to keep buying the latest equipment and so on, then you will never achieve a true lean culture in your business.

Finally, lean is not suited to companies who do not have direct control over their production (e.g. outsourcing or offshoring), as constant communication is needed to implement a lean structure successfully.

That being said, whether you choose to deploy the technique or not, you can still take some key components from lean management practices.

All businesses should focus on reducing waste, strive for continuous improvement and ultimately become customer-centric in order to achieve growth and remain competitive.

Have you considered going ‘lean’ in your business? We’d love to hear your thoughts. Please leave us a comment below.

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Topics: Inventory Management