INVENTORY MANAGEMENT: AVOIDING INVENTORY PITFALLS

By Dan Gilmore - Editor-in-Chief    March 8 , 2007

Anytime we write about Inventory issues in the Supply Chain, we
generate a lot of interest and feedback.

Our recent analysis and report on Days Inventory Outstanding (DIO)
trends by industry sector is just the most recent example – you’ll
find a number of reader comments in our Feedback section below, and
we’ll print more next week.

I also enjoy taking 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. But
I think the list of the 14 pitfalls 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. My take: lots of progress in
some areas, driven by the Internet (barely in existence at the time of
this article), but lots of room for improvement – for example, as
we’ve noted many times in the past, 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 fervor 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). I think most companies could do a lot more in
this area, though some (Raytheon, Harley-Davidson, for example) 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. Consultants tell me all the time that they have
clients who haven’t looked at inventory and safety stock policies in
years.

- Discrimination against internal customers: I wasn’t expecting this
one – 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. Well, if we’ve made any
supply chain progress at all, we should have largely addressed this,
but I suspect 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. My
take today: 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. My sense is that this is 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, I sure wish we had a
more definitive industry view on how to best cost our inventories.

- Organizational barriers: Basically, the challenges of operational
silos. The advent of the “integrated supply chain organization”
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 center are
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, I don’t believe this is at all common
today.

- 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 center of today’s
demand-driven supply chain paradigms.

The more things change, the more they stay the same. Seems to me,
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.

What’s your take on this list of supply chain/inventory management
pitfalls? Are they still relevant today? Which ones are especially so?
Let us know your thoughts at the feedback button below.

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