Excessive warehouse inventories today are a direct result of increased demand. These requests started during the COVID-19 pandemic, and shippers stockpiled merchandise to be able to keep up. As time has passed, inventory levels are now causing large companies to see a massive decrease in profit margins.
Inventory surplus also creates a backup at the ports and railways, causing shippers to stage freight, in some cases, shippers will stop ordering completely. As a result, the maritime sector experienced a new-found drop off in demand during the second half of 2022. Current economic conditions point to the need for warehousing to slim down by scaling back staffing and machine usage. If there was ever a time for shipping warehouses to run lean, it’s now.
The foundations of running Lean
The Lean method is a concept that originated in the 1940s from Toyota Motor Corporation. Yet, some of the most important steps of the process date back to Ford Motor Company.
In 1913, Henry Ford set up manufacturing based around the “flow” of production and ushered in Ford’s revolutionary assembly line, cutting the time to manufacture a vehicle down by 12 hours. The primary areas that Ford focused on to improve his operation were to end the waste of movement, end wasted materials, and manage inventory.
Trial and error
Kiichiro Toyoda expanded the processes created by Ford in the 1930s. During this time, he created The Toyota Motor Company.
There were various production problems that led Toyota to strive for improvement. These setbacks led the company to focus more on the reduction of waste and the “Kaizen”, English for “improvement”, process.The sole purpose of Kaizen is to improve standardized processes and programs by ending waste and increasing efficiency. Dependent on brainstorming ideas and implementing daily activities, this approach involves all employees from the executives to the plant-floor workers.
A step further into Lean and Six Sigma
Kiichiro took the idea of having less inventory on hand from Ford and molded it into his own business model in the 1940s and 1950s. The result was the concept of Just-in-Time manufacturing. He proclaimed that, like Ford, Toyota operations would not have excess inventory, but also included that the auto manufacturer would work with suppliers to level their production output.
JIT, a model still in practice today, allows for better material and information flows to control and reduce overproduction. Making only “what is needed, when it is needed, and in the amount needed.”
Through utilizing JIT practices, a “pull system” comes into play, designed to pull consumer demand instead of pushing it. In other words, discontinue manufacturing something that consumers may not purchase.
Taiichi Ohno, Toyota’s chief of production in the post-WWII era, developed the Toyota Production System (TPS). This new system would offer the best quality cars, for the lowest prices, and with the shortest lead times by eliminating waste, becoming the premise for lean operations.
The purpose of the TPS is to focus on the two pillars of Toyota’s production ideology: JIT and Jidoka, or “automation”. The system succeeds in the complete elimination of waste.
The Lean terminology
Organizations that use the lean methodology in their operations gain a competitive advantage from a customer-first mentality and fundamental market economics. Companies using this approach should understand that consumer demand sets the price of goods. Therefore, the best way to increase profitability is by lowering costs.
Price – Cost = Profit
The principles of Lean were first introduced in the book “The Machine That Changed the World” by James P. Womack, Daniel T. Jone, and Daniel Roos.
The Lean Enterprise Institute summarized the principles into the following:
- Determine the value expected and desired by the customer through meaningful interaction
- Identify the value stream for the products. This will provide the value that customers are looking for and determine how to reduce or end waste along each stage of the stream
- Develop a method of ensuring a continuous flow of manufacturing and fulfillment. These products are produced at or near the same rate that they are required
- Establish a pull system that eliminates waste by only triggering the production of items when there is demand for them
- Analyze metrics at a constant rate. Areas of improvement are identified in the pursuit of enhancing the customer experience
Put an end to waste
Overall, lean practices create value by eliminating waste and reducing costs. There are three categories that lean thinking and practices are grouped into:
- Value added – Only focuses on tasks that add value to a product or service
- Essential but non-value-added – Any essential activities that do not create value for the operation need to be completed. This will focus more on the value-creating work
- Waste – Any action that does not create value for the customer is considered wasteful and needs to be eliminated
There are seven different kinds of waste classified by the Lean Enterprise Institute:
Introducing… Six Sigma
Shippers started to use statistical data analysis to reduce errors. In the 1980s, an engineer at Motorola named Bill Smith was inspired by lean practices and the Kaizen model used at Toyota.
Smith focused on the elimination of waste of resources, time, and effort while promising quality in both production and organizational processes. This in turn created a focus on reducing process variation and enhancing process control. The method that he created would become known as Six Sigma.
Six Sigma focuses on statistical improvements in business processes with qualitative measurements of success. By using statistics, financial analysis, and project management, practitioners can improve business functions and quality control by examining mistakes or defects.
Applying Six Sigma
There are several techniques in applying Six Sigma to measure process improvement. The most common is DMAIC. The model, by using the scientific method, is meant to improve current processes, products, and services.
Define – The first step in solving a problem is recognizing that there is one. A project team identifies a struggling process and develops an initial project goal.
Measure – Once the team identifies the process that needs to be improved, measurement is critical to finding issues. The team should focus on lead times and the quality of the product that consumers are receiving.
Analyze – Without proper analysis, teams may jump to a solution that doesn’t solve the root causes of the problem. Take the time to develop the right solution.
Improve – Once the problem is defined, the Improve phase is implemented. This is where teams pilot and install the changes and solutions to improve the process.
Control – Now that the improvements are in place to fix the process, it is time to sustain it. Teams should develop a monitoring plan to track the success, or failure, of the designed process.
Motorola was among the first to be awarded the Malcolm Baldrige National Quality Award. This was after making these adjustments on the production floor and creating synergy. General Electric later adopted the Six Sigma method for its own business and went on to save billions of dollars.
Six Sigma has evolved into more of a general business management philosophy. The focus is on meeting customer requirements, improving customer retention, as well as improving and sustaining business products and services.
As a result of the explosion in consumer demand during the COVID-19 pandemic, inventory levels are at all-time highs. This has threatened the stability of the supply chain as a whole. Shippers abandoned these reliable practices because they thought they could predict demand. Their prediction has now gone sideways.
Large retailers were able to stretch their inventory throughout the holiday season. The surplus in inventory made retailers place more items on sale. Consumer spending was conservative through this past holiday as well. This created a perfect storm of low profits or none at all.
In this economy, it’s paramount that shippers and manufacturers closely monitor excess inventory and create an action plan for surplus.