Learn to spot delays to increase value and impact

A client once asked for help with the following problem:

We’re an online retail business, and as we grow we need to understand more about when we should be re-ordering products, and how much inventory to hold. We want to protect our cashflow by not having a lot of capital tied up in stock. How can we work this out?

I think this is a really interesting question, and reading it you may have some ideas about how you would tackle it.

There’s a good chance your first thought was “data”. One of the first things that I wanted to look at with the client here was: do you have access to good quality customer demand data?

There’s another piece of the puzzle here that’s not as obvious as data.To reveal that, we need to ask: why does a business need to hold inventory at all?

The lowest possible risk scenario for a business would be to hold zero stock, and to only order (or make) a product on demand when a customer orders it. Then absolutely no cash is tied up in stock, there’s no risk of ending up with products that you have to sell at a loss if demand dries up, and you have to put only minimal resources into forecasting demand. This ‘zero stock’ approach is not just a thought experiment. People do it and make money from it. It’s what drop-shipping is.

Given that drop-shipping exists, and is so low risk, why doesn’t every retail business operate in this way? The answer to that lies in the heads of customers. When we buy things, we may be sensitive to the lead-time, and want the items not as and when they’re ready, but by a specific point for a specific purpose (or even just ‘soon’, because it makes us feel better).

This exploration of customer psychology shows there’s a tweak needed to our ‘lowest risk’ scenario. If our supplier can deliver a product directly to the customer on the customer’s desired schedule, we don’t need to keep our own stock. But if our supplier takes longer than the customer will tolerate, we have to maintain our own inventory to create a buffer.

This point is super-important: the reason any business holds stock is as a result of delays. And this illustrates why lean theory is so focused on delays: if we can reduce delays, we can reduce the amount of stock we need to hold. This in turn reduces the level of risk the businesses is carrying, and frees up working capital.

Some delays are beyond our control. There may be relatively little we can do about our suppliers lead times (although Toyota has actively worked with suppliers to reduce their delays from the early days of the Toyota Production System). But there are plenty of delays that are within our control, and every one that we can reduce translates into a smaller inventory. The causes of delays in a business can be anywhere. As well as our working methods, things like HR processes, warehouse or office layout, and team meetings can all be targets for improvement.

It’s not just retailers that can benefit: any organisation can find ways to do more of what it cares about, without needing to increase the resources it has available, if it’s willing to dedicate some of those resources to finding and reducing delays.