Intuitively, it's easy to understand that improved product quality reduces the need for inventory, particularly buffer inventory of extra components “just in case” something goes wrong. If you have fewer defective components, after all, you don't need to keep as much safety stock. And studies of Japanese manufacturing practices over the past 20 years have suggested that the relationship between quality and inventory can work the other way as well, although researchers have been somewhat vague on exactly how lower inventory can improve quality and by how much.
A study published in the December 2000 issue of Management Science addresses some of these issues. For example, the authors explain that low levels of buffer inventory give workers key information on reliability and quality as well as where improvements may be needed. The study also found that the most dramatic benefits come when companies train and empower workers to find creative ways to improve process reliability on the basis of the information they gain from just-intime (JIT) inventory initiatives.
The article, “Information and Incentive Effects of Inventory in JIT Production,” by Michael Alles of the Rutgers Graduate School of Management, Amin Amershi of the University of Minnesota's Carlson School of Management, and Srikant Datar and Ratna Sarkar of Harvard Business School, is based on surveys and interviews with plant managers and senior executives at 116 AT&T, Boeing, Hewlett-Packard, Chrysler, Ford and Kodak plants. The managers rated their inventory changes and their effects on a 1–5 scale, with the scores validated by senior managers and follow-up discussions. The ratings were subjective because plants measure inventory in different ways, and many plants have special circumstances that affect their ideal inventory levels. Thus the study can't predict that lowering inventories by a given percentage will result in a proportionate quality increase.
Still, the study showed clear effects. “If you lower inventories,” explains Sarkar, “right away you have some cost savings, but really the Big Bang occurs when you train the workers” to work smarter and respond to problems in a low-inventory environment. In fact, the study showed that the effect of inventory reduction and training on process reliability is 29% greater than the effect of inventory reduction alone.
But how does JIT inventory actually affect quality? As Toyota demonstrated decades ago in its manufacturing operations, lowering work-in-progress (WIP) inventory often exposes process problems. It means, for example, that companies can no longer hide defective components in inventory.