And they think inventory is an asset ...

        

    Two stories from the auto industry in recent days:

    IN the first, we learn more about GM’s rapidly unfolding quality debacle: “General Motors is recalling another 2.4 million cars and trucks, the embattled automaker announced Tuesday, bringing the number of vehicles called in to repair defects this year to a record 13.6 million in the United States.”

    In the second we learn that the auto companies – GM especially and Toyota not at all – are padding their sales numbers by adding inventory: “Some 3.27 million new cars are now sitting on lots across the U.S., more than there have been in almost five years, according to Automotive News.” “General Motors, for example, has enough Cadillacs finished to meet demand for more than four months. It also has 85 days’ worth of Buicks ready to roll. (At the other end of the spectrum, Toyota and Subaru are running lean—current U.S. inventories for both companies should be gone in less than 60 days.)"

    It is no great surprise that few business writers and commentators (few meaning none that I know of) connect the two; but the connection is very real and every manufacturer should be able to spot it.

    It is impossible to have excellent quality and high inventory. It isn’t just an automotive thing – it is an absolute rule of manufacturing. Why is it true? For one, because inventory means cycle time – the two are synonymous. If GM has 80+ days of inventory while Toyota has less than 60, it takes customers 25 days plus or minus longer to discover defects created in GM factories than it takes them to discover defects created in Toyota factories.

    That has a couple of huge implications: Running the defect down to its root cause is a whole lot harder at GM. Figuring out what went wrong two months ago is hard enough, which is what Toyota has to do when a defect is discovered. GM has to figure out what went wrong four months ago – a daunting task.

    Even more problematic, the cost of the defect is twice as high at GM. When the customers find something wrong, there are four months of defects in the pipeline. At Toyota, there are only two months worth of defects in the pipeline. Hence: “The cost of the recalls is also spiraling, as GM said it is setting aside an additional $200 million to deal with the latest set. Overall, the company said, the recalls ordered this year could cost $1.7 billion.

    GM’s view of inventory as an asset costs them dearly compared to Toyota’s view of inventory as waste.

    There was inherent and irrefutable logic in the mantra spouted by the folks at Motorola in the early days of Six Sigma (a mantra that has been all but forgotten by the modern day black belt approach to Six Sigma). That mantra was, ‘The best quality producer is the shortest cycle time producer; and the shortest cycle time producer is always the best cost producer’.

    Big inventories inevitably, sooner or later, mean quality disasters. And quality disasters cost a lot of money.

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