How An Inventory Cost Misinterpretation Led To Chaos For Purchasing And Operations In A LEAN System

Abstract

A firm engaging in lean production has employed a computer system to revise order quantities and lot sizes in real time. What appears to be a minor misinterpretation of costs leads to radical fluctuations in inventory and efficiency. Volumes of resources and products grow, contrary to the intent of the system and drastic action is taken to reduce costs, leading to a period of shortages and high administrative costs.