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Vol 27 - No 03 - March 2001 Cost Analysis For World Class Change - Part 1: Inventory Reductions for Profitability This article discusses the financial model by Womack and Jones [5] and highlights further analysis that should be undertaken by companies considering or planning the implementation. The authors identify a further two layers of analysis that should be considered... The renowned tome “The Machine that Changed the World” [4 ]focused on the competitive advantage achieved by automotive assemblers. The lean paradigm emerged from this work that focused on the ability to reduce raw material, work in progress and finished goods stock. In the February 2001 issue of Control, Günther Kruse [2] graphically identifies the significant effect reducing material costs could have on gross profit. The models sum the cost of sales and includes both assets and overhead costs. To achieve the overhead reductions referred to by Kruse, Martin Christopher [1] proposes a square root rule-of-thumb.He suggests, for example, that if previously there were 25 stock locations and now there are only 4, the overall reduction in inventory would be in the ratio from v25 to v4 - from 5:2, ie. a 60% reduction. It is unclear from Christopher's work if overhead costs would reduce linearly or via the square root mode. Page number: Page: 17 Word count: Words: approx. 1400 Related Topics: Costing Inventory management
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