Examples of inventory throughout a firm’s operations
Manufacturing organizations typically have multiple stages of inventory throughout the operations:
- Raw materials: Material yet to be transformed
- Work in progress: Components in various stages of production
- Components waiting to be assembled: Stores of components that will go on to be assembled into a final product.
- Finished goods: Completed items waiting to be dispatched
Advantage of reducing inventory 1: Less money tied up in inventory
One of the key advantages of reducing inventory levels is that it can free up working capital. Material throughout the operations can tie up a substantial amount of capital – potentially requiring investments, or interest to be paid on the money tied up within the firm.
Advantage of reducing inventory 2: Less possibility of stock going out of date or being outdated
Another advantage that comes from reducing inventory levels is that it reduces the likelihood that the final product will change, resulting in obsolescence of the material or components. If you have substantial inventory throughout the firm’s operations, then a change to the product design will result in a large cost associated with scrapping those parts.
Advantage of reducing inventory 3: Can help streamline manufacturing operations
Having a large amount of inventory throughout the manufacturing operations can also cause problems with operations. Inventory can cause confusion or delays in moving the materials.
Advantage of reducing inventory 4: Exposes problems in the production line, allowing you to correct them
A final advantage of reducing inventory levels is that it can help expose problems in your operations that inventory is hiding. Having large amounts of buffers in case of machine failure can mean there is no pressure to solve the underlying issues. Gradually reducing inventory levels can help expose problems, allowing the issues to be solved, rather than worked-around through inventory.
Final thoughts: Just in time production
While there are significant opportunities to reduce inventory levels in an organization, just in time production relies on reducing inventory levels throughout the supply chain. Getting regular, small deliveries of materials and components as they are required, can allow you to reduce your raw materials supplies. While such changes may require greater integration with your suppliers to let them know in advance when you will require materials, it can help you gain the securities in supply needed to make more substantial reductions to inventory levels in your operations.
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