Geek On The Mountain

A couple of weeks ago, we had a large container of cashews. I noticed that they had printed on the lid both the expiration date and the manufactured on date. These dates were 2 years apart, but interestingly, we were already a year and a half into those 2 years. The nuts were fine. They weren’t stale or anything like that. It’s just that generally so speaking, from a manufacturing point of view, this is rather incredible. What this means is that there is a year and a half’s worth of inventory sitting between the nut maker and the store that sells them. This is something that I almost sadly know too much about…

There are generally two “types” of manufacturing. I use the term types loosely, because you could do either to varrying degrees and I couldn’t really tell you right off hand that there is even a solid cutoff point between the two. Perhaps it would be better to explain it as a state of being more lean or less lean….Anyways, the two types of which I speak are batch manufacturing and lean manufacturing (sometimes called just-in-time production, or the Toyota production system). The differences are pretty straightforward. Basically, in batch manufacturing, huge batches (lots) of goods are produced at once. The nuts are a good (though quite extreme I think) example. There is a year and half’s worth of inventory sitting around. I’m taking a guess that the store I bought them from (a large chain) buys them directly from the manufacturer. If they were buying through an intermediary, the inventory levels would still be quite large, though not quite so bad. I’m saying this because at every level, inventory is held. This might be 1 hours inventory or it might be a months worth (perhaps a year in this case). Also, for all I know, the nut manufacturer has a very small inventory, and the store I got them from is holding nearly 18 months worth of stock. That doesn’t seem likely though, since if the had a tendency to do it for nuts, they probably would do it for other things too, and I really don’t think they have the warehouse space for all of that. At any rate, some of the invtory is being held by each party. The second type is lean manufacturing, and basically means low levels of inventory. A truly lean system will hold no inventory at all over what is needed(i.e. they have half a days inventory, but that is because they are making goods for the truck that goes out the next day), though I’m quite sure that in practice this is rare. This is what I mean by more lean or less lean. Somewhere between no inventory and 18 months worth lies the point at which a company will call itself “lean”, though as I said I couldn’t really tell you where exactly….it’s in the ballpark of a day or three.

As I said before, there are other factors as well. Certain parts may have to cure for a certain period of time, so a certain level of inventory must be maintained just for that. There are other examples basically along those lines (wine is probably a good extreme example). I don’t know if nuts have any such consideration, but for all I know they could.

Batch manufacturing is the way manufacturing started out, and it has been traditional to do it this way in the US. It makes sense at a certain level. You have machines that take a long time to change-over to different model/product, so you make large batches to minimize the downtime due to the change-over. Maybe you tend to hold on to lots of inventory to make sure you can still make shipment to your customer when a machine breaks down. Maybe it’s just tradition. I could go on, but I won’t. This system has problems. The inventory covers up problems. The change-overs could be made shorter, but with enough inventory to cover the downtime, there is no need. The same is true for machine problems. Instead of really needed to fix the root cause, problems can just happen again and again because the inventory is there. Big lots of parts can lead to quality problems. If something was setup wrong and no-one notices it until you change-over again, would you rather have produced 500 bad parts or 5000? There’s also a matter of flexibility. Say the customer calls up and changes their order for the next day. The trouble is, you don’t have enough produced of that particular item to meet the order. Now it takes you 12 hours to change-over, and then…..you couldn’t ship what they needed in time. In the long run, a customer will find a supplier who can ship what they need when they need it. It’s good to keep in mind as well that inventory is expensive. A company could have millions of dollars tied up in their inventory. I say tied up, because the inventory levels can be cut, then that money can be used for something purposeful (paying down debt, buying new equipment, etc) instead of just sitting in the warehouse. And speaking of warehouses, those cost money too. That space could be better used for actually producing parts, or not at all (in the case of a dedicated warehouse that might otherwise not be needed).

Toyota started the whole lean manufacturing thing. The idea was to eliminate waste (waste being anything that isn’t adding value…even a few steps to get to tools is waste). If you look at it, you’ll realize that a lot of it seems rather anal, but in reality, when you make thousands of widgets a day, even small savings add up quickly over time. Lean manufacturing isn’t just about inventory levels, but many other things follow from this. Look at all the problems I mentioned above, and you’ll see how this helps. A lot of it has to do with management as well. They may have never particularly noticed before when machines would break down all the time, but when there isn’t enough inventory to cover the downtime and the customers start complaining, they’ll really get right to it and try to make sure that things get fixed and fixed for good.

If you want a good example, have a look at Dell. They don’t even start making your computer until you order it. They probably don’t have a whole lot of finished computers sitting around.

To finish with a pun, it’s just nuts to do it any other way.

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