In this post, we discuss the one key difference between inventory in service industry and manufacturing, Previously, we discussed how production and consumption is different in service versus manufacturing; we also covered the intangible differences between service and manufacturing. In this post, we’ll discuss the topic of “Inventory” and how that might be understood in a service context and a manufacturing context.
What is Inventory in Manufacturing?
In Manufacturing, Inventory is typically understood as (1) the components used to build the finished product and (2) the finished product themselves. Inventory has the unique property of “cash sitting in product” – in other words, inventory does nothing for the business until it is sold in exchange for a more liquid asset, such as cash. Until then, inventory is a cost.
Series on Difference Between Service Versus ManufacturingGo here for details on applying Lean for Service Operations. For other posts in this series, please refer to the table below:
What is Inventory in Service?
The concept of inventory in a service context is a little difficult to explain and can take on different forms, depending on context. But in general, inventory in a service context, is not to be equated with inventory in a manufacturing context – inventory in service is quite intangible and sometimes it is not a “real good”. Here are some examples,
- Inventory in an emergency room might be the people waiting; in this context, increasing patient flow means that we reduce inventory (people) and, in other words, we serve more patients in a more timely manner. But, who wants to call people “inventory” – it’s not appropriate, but one could misapply the term and reduce people to inventory.
- Inventory in a service context often has the property of intangibility – that is, it’s not often a “real good” that one could point to in a moment of time. For example, seats at a movie theater could be considered “inventory”, but there are other more creative labels for “unused capacity”, such as “occupancy rate”, and others. But, it is basically inventory. Back to the movie theater example, unused seats in a movie theater could be considered inventory for which there is no demand – this means it is “cash left on the table”.
Notice that how we understand the concept of “inventory” determines how we approach it. In the above examples, on the one hand “inventory” should be reduced but, on the other hand, inventory ought to be satisfied or “filled up”.
No Inventory or Buffers
Here are a few examples to illustrate the concept of “intangible” in service versus manufacturing.
If we manufacture widgets, those parts may go to a retail outlet to be placed in inventory. If the demand suddenly decreases, that inventory is the buffer between production and the demand. The goods will stay in inventory and can be sold later.
Or, if you have too many seats on an airline, or if the airplane is too large for the demand for traveling from point A to Point B, you cannot save those seats for later. When that flight takes off without passengers, those seats are gone.