My own heightened appreciation for intellectual rigor dates from the early 1990s, when I served as CFO at General Electric’s major appliance business. We were trying to reduce the amount of capital we deployed in operating our businesses, and in line with that goal, my boss had decided that our business unit needed to reduce the $1 billion in inventory we maintained. Guess whose job it was to lead the inventory reduction effort? The assignment caught me by surprise—I wasn’t sure how to proceed. I had seen other businesses flounder when pursuing such initiatives. The boss would decree that henceforth the company would only keep a certain amount of inventory on hand to shrink the amount of cash it had locked up. Months later, inventory levels would creep back up, and the amount of cash locked up would increase as well—again.
I wanted to try a new approach, but I didn’t know what that would be. We convened a cross-functional team and asked them: Why did inventory reduction initiatives usually fail? What can we do differently? “If we’re going to fail,” I said, “let’s at least do it differently. The definition of insanity is doing the same thing over and over, always expecting a different result.” A manufacturing leader identified dissatisfied customers as the reason why these initiatives usually failed. Once a business reduced inventory, customer delivery usually suffered because we didn’t have the items we needed in stock. Customers complained, and the sales force applied pressure on the business to stock more product. Eventually inventory levels were right back where they had been. Inventory levels and customer satisfaction were directly related. You could have lower inventory levels or high customer satisfaction, but not both. You had to choose between two seemingly conflicting things.
That, at least, was the conventional wisdom. We wondered if we could find a way to reduce inventory levels while also keeping our products readily available and ready to ship so that customer satisfaction wouldn’t plummet. My team and I spent an entire day puzzling over it. At some point, a team member urged us to take a step back and assess our entire process, from forecasting, to supply chain, to manufacturing, to transportation, to distribution. Running an analysis, we found that it took eighteen weeks end-to-end, from when a product was shipped out of the warehouse to the point when manufacturing was told to replace it, and then it was produced, shipped, and replaced in the warehouse. That seemed like an extraordinarily long time. What if we could render the whole process more efficient, shrinking our “cycle time,” as we called it, down to a couple of days? We’d be able to reduce warehouse inventory while still providing great customer delivery because we’d be able to replenish our stock much more quickly. The dramatically improved efficiency would also help us reduce a lot of operational cost. The overall impact could be huge!
Our team began working on improving our processes to reduce cycle time in forecasting, supply chain, production, and distribution. We began providing immediate feedback to plants on what had shipped that day, shortening supplier lead times, dramatically reducing lot sizes (the quantity of a product model we made during a given production run), and reducing transportation time to warehouses. Over a four-year period, these ongoing efforts reduced cycle time to about two weeks. We were able to cut inventory levels in half, while also improving our on-time delivery rate from the low 80s to above 90 percent. By striving to achieve two seemingly conflicting goals at the same time, instead of just focusing on one goal, we had prompted ourselves to think far more carefully about our business as a whole, and to pose questions nobody had asked before. This fairly intense intellectual process led us to reengineer a significant part of our business so that it functioned better across a range of metrics, not just one. Because our subpar process had been the underlying problem, and because we’d improved that process, we could sustain these gains over time.
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