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Oil and inventory don't mix



Published June 28, 2007
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Rising oil costs are socking everyone in the wallet, and converters are not immune to the effects. Oil costs impact many line items on a converter's P&L, including raw material, utilities and freight.

Petroleum and its derivatives are used:

-    as raw materials for inks, substrates, adhesives, and packaging;
-    as fuels for transportation of raw materials and finished goods by ground, air, rail, and sea;
-    as fuels that power the turbines for the generators that provide electricity to the paper mills, film extruders and to your own plant;
-    as fuel to heat warehouses full of excessive, even obsolete, materials and equipment "bone yards".

Converters who carry high amounts of inventories (RM, WIP and FG) are feeling the pinch most of all: The cost of carrying and restocking these inventories continues to grow while the paper mills, film extruders, ink companies, freight carriers, and utilities pass their own oil driven cost increases on to you.

Add to this mix the idling or outright closure of paper mills and an increasing demand for raw materials for converters in emerging markets (China, India, Vietnam) and you have a recipe for a steady diet of cost increases.

What's a converter to do?

A typical response when faced with price increases and extended lead times is to stock up: Buy now at the best price you can get and deal with finding a place to store it later. Unfortunately this common reaction is flawed. Any unit price savings will be eroded by the added transportation, storage, handling, and spoilage costs associated with these additional inventories. These inventories won't do you any good if you're just storing them and not converting them into billable product, so your cash flow also takes a hit. Since you probably now have more pallets than you have available pallet positions you'll need to store this extra inventory anywhere and everywhere you can find room, which ends up being in every far flung corner of the building — unless you want to waste the time (money) to temporarily rearrange your entire inventory. Then someone will be walking around looking for that extra roll or pallet as your press sits, waiting on material, wasting valuable time. As the saying goes, the more inventory you have, the less likely you are to have what you actually need.

Converters need to break away from the "more is better" inventory trap, and the way to accomplish this is by using the proven techniques of what's known as Lean Manufacturing.

I know what you're thinking — you don't make cars, planes or electronic widgets. There's nothing that can be learned from those high tech industries that would apply to your plant. Printing is a craft, an "art", and such technical and "scientific" nonsense like Lean and Six Sigma doesn't apply here.

Well if that's your story, and you're sticking to it, your inventories will continue to rise like the tides, they will swamp your balance sheet — if they haven't already — and they will wash your profits away. For the rest of you, there's hope — there's Lean.

What is Lean? To answer that I'll start by telling you what Lean is not.

Lean is not a "car" thing. The roster of companies who have embraced Lean and are using it to transform their businesses (and the industries they compete in) is as varied as I'm sure your own client list is. Few auto companies can even claim to be "Lean" — certainly not the Detroit Three. Medical services, building products, appliances, furniture, full-service restaurants, and more all have successful Lean leaders in their ranks.

Lean isn't high tech or difficult. Lean is the ultimate application of Occam's Razor: "Entia non sunt multiplicanda praeter necessitatem," which is paraphrased as "All things being equal, the best solution is the simplest one." In other words, Lean forces you to Keep It Simple, Stupid. The best solutions are often those that are easiest to implement and, therefore, to sustain.

Lean is not expensive. There's a saying in the Lean community: "Creativity before Capital". Those same simple, easy to implement, non-high tech solutions are usually very inexpensive and the return on investment can be 20, 30 or even 100 fold per year. Companies that look to gain capacity by adding more equipment or space often have more than adequate capacity, both on their existing equipment and in the space that's being used to store inventory. Lean can free up this capacity and help you avoid capital spending.

Lean is not a fad. Lean is not a tool. Lean is not something you dabble in from time to time, whenever it's convenient.

Lean is a business model, a new way of attacking and eliminating common, everyday obstacles to productivity and growth.

Lean promotes smaller lot sizes — only making what the consumer has requested — and not producing to a forecast (or a "hope" cast, as in we "hope" these will sell). Smaller lot sizes means more frequent changeovers and a constant effort to reduce changeover time. That's one reason why the forerunner of Lean, known as Training Within Industry, faded from the American industrial scene shortly after World War II. Shorter set up times didn't matter when plants were producing thousands upon thousands of the same item, day after day. And inventory — who cared? The demand for goods in the post-war years was so great that nearly everything that was made was sold. What didn't sell was melted down or buried in a landfill, out of sight and out of mind. Our resources were limitless, our wallets were full, and we demanded and consumed more and more.

Lean is about people. Lean is about respecting the individual's worth and contribution. Lean is about providing employees with a method and a voice to make real, lasting improvements.

Lean is not about cutting costs. Lean will help you control costs, but Lean is about growing your people and your business — not cutting them out.

Lean is about changing processes — not changing people — and making the workplace safer, easier and better.

Lean converters have made the switch from believing in the inventory trap of "more is better" to believing in Lean. Lean converters have seen their businesses grow by 25 percent or more without capital, without chaos, and without the cash drain from high inventories. These converters are sprinting to the front of the pack and are providing the label buyer with faster turns and better quality at lower cost. Can you compete with that? Are you going to continue to run your business with excessive, costly inventories, or are you ready to start your Lean journey?

For those of you who are ready we'll begin the journey in the next issue with a discussion about some common but "unseen" wastes that converters overlook, and proven methods — easy and inexpensive — to eliminate them.


Tom Southworth is the founder of Southworth Consulting LLC, a Niantic, CT based consulting firm specializing in Lean and continual improvement for printing and the graphic arts. He is a senior member of ASQ and is Lean Bronze Certified by SME. He can be reached by e-mail at Tom@SouthworthConsulting.com.


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