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Inventory is Not the Only Lean Measure
November 21, 2007

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?

Posted by on November 21, 2007 | Comments (0)