running inventory, known as cycle stock, at half a month. And monthly shipments made the distribution centers’ inventory review period, that is, the period of reviewing stock and making replenishment decisions, at least a month long. This led to excessively high safety stock levels. The company found that the increased inventory costs more than offset the savings of “economical” shipments.
Pitfall 10: Incorrect Assessment of Inventory Costs
The previous pitfall suggests that economic analysis of the costs and benefits of inventory investment is important in operational decision making. How should the opportunity cost of inventory be valued? This subject has been discussed at length in the academic literature, yet there is no industry standard in practice.4 Variations exist even within the same company. Most people know that they should include the opportunity cost of capital, warehousing, and storage. The commonly omitted components of inventory costs include (1) obsolescence, owing to short product life cycles or fixed shelf lives, and (2) costs of reworking existing inventory to meet engineering changes. A manufacturer of computer printer components finds that the above factors increase the holding cost rate of inventory from 24 percent per year to 40 percent!
Pitfall 11: Organizational Barriers
Sometimes entities of a supply chain belong to different organizations within a company, each organization having its own performance measures and evaluation responsibilities. Organizational barriers that may inhibit coordinated inventory control include differences in objectives and performance metrics, disagreements on inventory ownership, and unwillingness to commit resources to help someone else. Some of the earlier pitfalls (4 and 8) are manifestations of such barriers.