Excess Inventory Quotes

I sat at the foot of a huge tree, a statue of the night, and tried to make an inventory of all I had seen, heard, smelled, and felt: dizziness, horror, stupor, astonishment, joy, enthusiasm, nausea, inescapable attraction. What had attracted me? It was difficult to say: Human kind cannot bear much reality. Yes, the excess of reality had become an unreality, but that unreality had turned suddenly into a balcony from which I peered into—what? Into that which is beyond and still has no name…

JIT is a technique used to eliminate the waste of excess inventory. Parts and materials are “pulled” through the production process only as needed, rather than “pushed” out onto the production floor in large quantities. Accountants justifiably see inventory as an asset because it represents an investment by the company. From a JIT perspective, however, it is an avoidable cost that must be minimized. Any costs that do not contribute to the value of the output are to be eliminated.

At Supreme they do things their way, with little if any con- cern for how the rest of the fashion industry operates. Instead of releasing their new collections all at once, Supreme releases a small number of items at a time, usually somewhere between five and fifteen. The “drop,” as they call it, occurs online at 11 A.M. local time in America, the UK, and Japan, typically selling out in minutes. While many people believe this strategy is about building hype, the truth is that short runs of product were actually born out of not wanting to saddle their business with excess inventory. The strategy was discov- ered, not manufactured.

Everything is in excess except money, thereof, money must be manage with high efficiency.

First, as shown in Table 2.1, the amount of time when value is actually being created (3 hours) is infinitesimal in relation to the total time (319 days) from bauxite to recycling bin. More than 99 percent of the time the value stream is not flowing at all: the muda of waiting. Second, the can and the aluminum going into it are picked up and put down thirty times. From the customer’s standpoint none of this adds any value: the muda of transport. Similarly, the aluminum and cans are moved through fourteen storage lots and warehouses, many of them vast, and the cans are palletized and unpalletized four times: the muda of inventories and excess processing. Finally, fully 24 percent of the energy-intensive, expensive aluminum coming out of the smelter never makes it to the customer: the muda of defects (causing scrap).

Economics and P&L What are the per-unit economics of the device? That is, what is the expected gross profit and contribution profit per unit? What is the rationale for the price point you have chosen for the product? How much will we have to invest up front to build this product in terms of people, technology, inventory, warehouse space, and so on? For this section of the PR/FAQ, ideally one or more members of your finance team will work with you to understand and capture these costs so you can include a simplified table of the per-unit economics and a mini P&L in the document. A resourceful entrepreneur or product manager can do this work themselves if they do not have a finance manager or team. For new products, the up-front investment is a major consideration. In the case of Melinda, there is a requirement for 77 people to work on the hardware and software, for an annualized cost of roughly $15 million. This means that the product idea needs to have the potential to earn well in excess of $15 million per year in gross profit to be worth building. The consumer questions and economic analysis both have an effect on the product price point, and that price point, in turn, has an effect on the size of the total addressable market. Price is a key variable in the authoring of your PR/FAQ. There may be special assumptions or considerations that have informed your calculation of the price point—perhaps making it relatively low or unexpectedly high—that need to be called out and explained. Some of the best new product proposals set a not-to-exceed price point because it forces the team to innovate within that constraint and face the tough trade-offs early on. The problem(s) associated with achieving that price point should be fully explained and explored in the FAQ.

Startups struggle to see their work-in-progress inventory. When factories have excess WIP, it literally piles up on the factory floor. Because most startup work is intangible, it’s not nearly as visible. For example, all the work that goes into designing the minimum viable product is—until the moment that product is shipped—just WIP inventory. Incomplete designs, not-yet-validated assumptions, and most business plans are WIP. Almost every Lean Startup technique we’ve discussed so far works its magic in two ways: by converting push methods to pull and reducing batch size. Both have the net effect of reducing WIP.

We’ve drained about fifty percent of the work in process from the plant, and about twenty-five percent from finished goods. We’ve saved a lot by not purchasing new materials to replace this excess inventory, and the cash figures show it clearly. But on our books, the assets represented by inventory went down, since they were only partially compensated for by the cash we didn’t have to pay out. In this period, when we were reducing inventory, all the difference between the product cost and the material cost of the reduced inventory showed up as a net loss.” I swallow hard. “Lou, you’re telling me that we were penalized for doing the right thing? That reducing the excess inventory was interpreted by our books as a loss?” “Yes,” he replies, still looking at his papers. “Well tell me, what was the impact—in numbers?” “Our actual net profit was well over twenty percent in each of the last three months,” he says flatly. I stare at him. I can’t believe my ears. “But look at the good side,” he says sheepishly, “now that the inventory has stabilized at a new, low level, this effect won’t disturb us any longer.

And what happened to efficiencies? Well, they did fall initially as we began to withhold raw material from the floor, but not as much as we had been afraid they would—it turns out we were consuming excess inventory. But with the rate of shipments up dramatically, that excess has melted quickly. And now that we’re beginning to resume releases of materials to non-bottlenecks again, efficiencies are on their way back up. Donovan has even told me confidentially he thinks the real numbers in the future will be almost the same as before.

Once the somebody is already on the payroll, it doesn’t cost us any more to have him be idle. Whether somebody produces parts or waits a few minutes doesn’t increase our operating expense. But excess inventory . . . now that ties up a lot of money.

What happened was that even as throughput increased, we continued loading the plant with inventory as if we expected to keep all our workers fully activated. This increased the load dumped upon the milling machines and pushed them beyond their capacity. The first-priority, red-tagged parts were processed, but the green-tagged parts piled up. So not only did we get excess inventory at the NCX-10 and at heat-treat, but due to the volume of bottleneck parts, we clogged the flow at another work center and prevented non-bottleneck parts from reaching assembly.

A major constraint here in your system is this machine,” says Jonah. “When you make a non-bottleneck do more work than this machine, you are not increasing productivity. On the contrary, you are doing exactly the opposite. You are creating excess inventory, which is against the goal.

Stacey points out immediately that in no case does Y ever determine throughput for the system. Whenever it’s possible to activate Y above the level of X, doing so results only in excess inventory, not in greater throughput. “Yes, and if we follow that thought to a logical conclusion,” says Jonah, “we can form a simple rule which will be true in every case: the level of utilization of a non-bottleneck is not determined by its own potential, but by some other constraint in the system.

By running non-bottlenecks for “efficiency,” we’ve built inventories far in excess of demand.

Sure, at first glance it looks as if we can use one hundred percent of Y, but think again.” “We can only use as much as the market demand can absorb,” I say. “Correct. By definition, Y has excess capacity,” says Jonah. “So if you work Y to the maximum, you once again get excess inventory. And this time you end up, not with excess work-in-process, but with excess finished goods. The constraint here is not in production. The constraint is marketing’s ability to sell.

Eighty percent of your products require at least one part from a bottleneck. What are you going to substitute for the bottleneck part that hasn’t shown up yet?” Bob scratches his head and says, “Oh, yeah . . . I forgot.” “So if we can’t assemble,” says Stacey, “we get piles of inventory again. Only this time the excess inventory doesn’t accumulate in front of a bottleneck; it stacks up in front of final assembly.

Do you realize that the only way you can create excess inventories is by having excess manpower?” he says. I think about it. After a minute, I have to conclude he’s right; machines don’t set up and run themselves. People had to create the excess inventory.

Another crucial element of TPS is its focus on eliminating waste (muda) wherever possible. Excess inventory is a form of waste (just recall the Beer Game!), so just-in-time (JIT) production (build only what is needed, when it is needed, by your customer) is a crucial element of the system. JIT also complements the Andon Cord. The two elements work together to ensure that defects are discovered and resolved rather than piling up in work-in-process inventory. Both elements build learning into the system, to enable continuous improvement (or kaizen).