Academic journal article Management Accounting Quarterly

Cycles of Lean: Findings from the Leanness Studies-Part 1

Academic journal article Management Accounting Quarterly

Cycles of Lean: Findings from the Leanness Studies-Part 1

Article excerpt

EXECUTIVE SUMMARY

Improving leanness should show up as quicker response times, better quality, lower costs--and, prominently, rising inventory turnover. Yet research involving more than 1,500 global companies finds long-term value-chain inventory turns falling, rising, falling, etc., in multiyear cycles with nearly all regions showing worsening inventory turns in the new millennium. Looking beyond the numbers, the research tends to suggest durable leanness as a catchall indicator of management effectiveness.

A dominant objective of value-chain management is improving leanness, carrying with it better quality, quicker response, and lower costs. Such benefits should show up as sustained improvements in Lean indicators with inventory turnover as the most objective and accessible among them. (1) Yet global research referred to in this article as the "leanness studies" shows long-term value-chain inventory trends rising and falling in multiyear cycles. Counter to expectations, the latest cycle is one of growing inventories in most sectors and regions of the world. This finding, which arises from research centering on inventory data that reaches back as far as 50 years, is directed particularly to the trend reversals that have occurred since Lean was launched in the West in its 1980s guise as Just-in-Time (JIT) production and since the 1990s under the Lean label.

Inventory studies have been attracting increased interest among scholars in recent years, a primary reason being emergent awareness of the high costs of globalization and concomitant lengthy, multistage value chains loaded with raw-to-finished inventories. Among the earliest major companies to mount a serious attack on these costs is Hewlett-Packard. In 1997, the company formed a Strategic Planning and Modeling (SPaM) group, which led to chopping nodes from its complex supply chain and, for some product lines, reducing production locations from many to just one. The SPaM team found that "mismatches between demand and supply leading to excess inventory were the main drivers of PC costs [and] HP's management-accounting metrics had failed to keep pace with the evolution of its supply chains." (2)

In response to that kind of supply chain awareness, reshoring, nearshoring, and insourcing have become common themes in both academic research and the business press. (3) Numerous companies are said to have implemented reshoring initiatives, thus shrinking their channel inventories and attendant costs. Harry Moser lists 16 companies that have done so along with tables summarizing survey research on the issue. (4)

The more traditional focus of inventory studies, which were plentiful in the past, was in relation to interest rates and business cycles. As to the latter, Alan S. Blinder said, "Recessions are inventory swings." (5) Less broadly aimed, another report concluded that "just-in-time techniques will dampen recessions." (6) Further, Jonathan McCarthy and Egon Zakrajsek found that "since the mid-1980s [amid high activity in JIT manufacturing] inventory dynamics have played a role in stabilizing manufacturing production." (7)

On the other hand, studies of interest rates' effects on inventories have mostly failed to prove the reasonable assumption that when rates are low, companies will bulk up on inventories, and, when high, they will unload inventories. The logic of that may be defied, for example, because in times of strong sales, interest rates tend to rise, and, despite the higher financing costs, companies will often spend more on inventories, the better to cash in on booming sales. (8)

Because macroeconomic data does not do well in explaining the long-term inventory-turnover cycles found in the leanness studies, what does? Later in this article, the explanation posited is simply that Lean, by any other name, is susceptible to management-initiatives fatigue, which a colleague of mine likened to "The Seven Year Itch" from the 1955 movie of the same name starring Marilyn Monroe and Tom Ewell. …

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