What if the market for automobiles slows, but a manufacturer continues to produce vehicles at a normal rate (a level to which bonuses might be tied)? At some point, the company either runs out of space to park the finished vehicles, the cash required to support continued operations, or both. Consider the automobile manufacturing industry, where overproducing can have drastic long-term effects. In some industries, the cost to hold excessive inventory can be much higher. If the inventory is potentially hazardous to people and/or the environment, risk-based costs can be quite high.įor example, if an organization keeps $1,000,000 in inventory on hand, the estimated profit impact equals about $220,000 per year. These include insurance in the event the inventory is damaged or causes damage. ♦ Obsolescence.In some instances, inventory is kept until a point in time when it’s no longer relevant to the product or the process. It is susceptible to spoilage, chemical degradation, mechanical degradation, etc. Inventory is, to varying degrees, perishable. ♦ People.People are required to manage inventory, count it, etc. This cost can be very high for extremely perishable inventory such as food products. ♦ Space and Systems.Inventory requires space, bins, shelves, computer systems, and other items to support its storage and management. The rate of working capital varies as a function of economic condition and the creditworthiness of the company. Excess Inventory Is Among The Eight “Deadly” Wastes Remember, though, that holding inventory is not free. Inventory is a very effective way to mitigate production risks that could adversely affect production Availability and/or production Rate. Minimizing inventory on hand is a major focal point in Lean Manufacturing because it’s identified as one of the six, seven, or eight so-called “deadly” wastes (Table I).

This inventory is products for which all production sub-processes are complete, and the inventory is ready to ship to or be collected by the customer. WIP is the inventory staged between various sub-processes. We usually refer to raw materials as the metal, chemical, organic, or other materials for which value-adding processes are applied to create finished. Production Inventory can be further sub-classified as Raw Materials, Work in Process (WIP) and Finished Goods. MRO inventory is employed to ensure that equipment is maintained to ensure production Availability at the desired Production rate–which are two important elements of Overall Equipment Effectiveness (OEE). Production inventory is employed to ensure that production processes continue to flow uninterrupted and to ensure the organization is prepared to deliver on customer orders in a time fashion.

But, as with redundancy, it’s an expensive option for reducing risk. 19, 2022, article, inventory is a risk mitigation tool. Much like redundant systems, which in the cited Feb.

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