Just because inventory is invisible...
Inventory is unfinished work – that which hasn’t yet reached the customer. The presence of inventory indicates that costs have been incurred however value or revenue hasn’t been extracted. And until value is extracted, inventory is a liability for the business. In manufacturing, inventory is easy to spot since it is physical. In software development it is harder to see, but just because inventory is invisible doesn’t mean it doesn’t exist.
A few examples:
- A design document is waiting to be implemented.
- A code change is waiting to be reviewed or deployed.
- A feature is partially developed, e.g. back-end is complete but front-end remains.
The following is an excerpt from Principles of Product Development Flow by Donald Reinertsen.
In manufacturing, we are keenly aware of our inventory. We see it every time we walk the factory floor. Our chief financial officer (CFO) can report the exact amount of work-in-process inventory (WIP) by simply reading it off the balance sheet. If we cut WIP by $10 million, the CFO is overjoyed because we just freed up $10 million in cash.
Unfortunately, our situation is quite different in product development. If we ask our CFO, “How much design-in-process (DIP) inventory do we have?” we will get a puzzled look and the reply, “There is nothing on our balance sheet called design-in-process inventory. We have no inventory in product development.”
If we don’t believe the CFO, we can walk through the engineering department and look for inventory. But since the inventory in a product development process is not physical objects but information, it is virtually invisible. Inventory could double overnight in an engineering department, and we would see no change in the physical appearance of that department.
But just because this inventory is invisible doesn’t mean it doesn’t exist. Product development inventory is observable through its effects: increased cycle time, delayed feedback, constantly shifting priorities, and status reporting. Unfortunately, all of these effects hurt economic performance.
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