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New World Business Solutions on Inventory Management

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It is interesting to take a look back at some classic supply chain management and logistics articles by the industry’s great thought leaders to see how they have stood the test of time, and take a fresh look at insights they may have to help us manage our supply chains today.

One such article is Managing Supply Chain Inventory: Pitfalls and Opportunities, written all the way back in 1992 in MIT’s Sloan Management Review by the well-known Hau Lee of Stanford and Corey Billington, then a supply chain manager at Hewlett-Packard and who it appears is also now a professor at Stanford after a distinguished career at HP.

The article is fascinating, in part because it came in the very early stages of true supply chain thinking. That’s in part reflected in one of the opening comments, where Lee and Billington note, “Managing a supply chain is very different than managing one [manufacturing] site. The inventory stockpiles at the various sites, both incoming materials and finished products, have complex inter-relationships.”

Today, this would be considered a very basic supply chain concept. The 14 pitfalls identified in that 1992 article is still well worth reviewing today:

No supply chain metrics: Metrics that are focused at the site or functional level, not the broader supply chain. We’ve made a lot of improvement, but does this still ring a bit true:

“Different sites may have different operational goals that, if met, result in inefficiencies for

the supply chain.”?

Inadequate definition of customer service: Companies frequently rely on single measures, like order fill rates, that don’t well capture true customer service needs. Consider other measures like total cycle time per order, performance to customer due dates, etc. Many companies have made these measurement changes.

Inaccurate delivery status data: Difficulty in providing an accurate ship date, and updating order status. While there has been a lot of progress in some areas, driven by the Internet (barely in existence at the time of this article), there’s still a lot of room for improvement – for example, still relatively limited use of true advanced ship notices, and in a B2B context, limited on-line order status availability.

Inefficient Information Systems: Lack of visibility and integration among distributed databases across the enterprise, causing poor inventory decisions. Well, that’s in large part why today we now have ERP. Still, at a supply chain level, we still have far to go – why else the fervour around RFID data?

Ignoring the impact of uncertainty: Companies frequently do not document and track the sources of supply chain variability (e.g., supplier deliveries). Many companies could do a lot more in this area, though some have made great strides, and Six Sigma thinking will drive this further.

Simplistic inventory stocking policies: Basic, static inventory policies, such as by ABCD classification, just aren’t good enough. Stocking policies must be dynamic, and more considerate of variability of supply and demand. Plenty of evidence exists to confirm thatmany companies haven’t looked at inventory and safety stock policies in years.

Discrimination against internal customers: Operations supplying both internal and external customers tend to focus on the latter, even though the internal customer is using the input to then service external customers. If we’ve made any supply chain progress at all, we should have largely addressed this, but we know that it is still an issue in many companies.

Poor coordination: This is mostly focused on companies that must merge products from several sources for final shipment to the customer. The perception then: coordination is poor, resulting in expediting costs, poor customer service, and inventory buffers. Today it’s much less of an issue, and many companies excel at this.

Incomplete shipment methods analysis: Transportation decisions based on lowest logistics costs, not total supply chain costs, especially inventory. Again, evidence suggests that this continues to be somewhat of an issue in many companies.

Incorrect assessment of inventory cost: There is no standard approach for measuring the cost of inventory, and companies often under-represent the total costs. While many companies have done a better job at measuring costs of obsolescence, a more definitive industry view on how to best cost our inventories would be very useful.

Organisational barriers: Basically, the challenges of operational silos. The advent of the “integrated supply chain organisation” addresses this problem, but in the end, this really describes the heart of the supply chain challenge, doesn’t it?

Product-Process Design without Supply Chain Consideration: Discrete manufacturing costs are the focus of product design considerations, not total supply chain costs. We’re making progress here, and the notion of “designing for total supply chain costs” has caught on in the past few years.

Separation of Supply Chain design from operational decisions: Decisions to open or close a manufacturing or distribution centre are often looked at too narrowly, on those discrete costs alone, not on the total supply chain impact. With the use of network planning tools and general supply chain thinking, this isn’t as common today as it was in 1992.

Incomplete supply chain: Looking at the supply chain only to the first-level customer (such as a distributor or retailer), not the end consumer. This basic issue of course set the stage for Dr. Lee’s subsequent work on The Bullwhip Effect, and is at centre of today’s demand driven supply chain paradigms.

The more things change, the more they stay the same. It seems we’ve at one level made progress across the board on Lee and Billington’s list of pitfalls, but that with just a few exceptions, the majority are still issues for most companies 15 years later.

Source: Adapted from article in Supply Chain Review Magazine, by Dan Gilmore, Editor in Chief, March 2007.

More information is available from New World Business Solutions which specialises in the engineering of effective, high-performance logistics and supply chain solutions.

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