Companies commonly use generic stocking policies: all A stock-keeping units (SKUs) have three weeks of safety stock, B SKUs have four weeks, and so on. The classification of items by transaction volume does not necessarily reflect the magnitude of uncertainties in supply and demand. More rigorous techniques should be used. One California automobile parts supply warehouse classifies an item based on the transaction volumes between the warehouse and the supplier. Hence, it has SKUs that are classified as A items whose annual demand is only one-tenth of others that are classified as C items. The irony is that this warehouse uses generic stocking policies for the SKUs. Simple analysis reveals that the company could reduce 40 percent of its inventory investment while maintaining the same level of customer service just by linking stocking policies to the sources of the uncertainties that require inventory in the first place.2
Pitfall 7: Discrimination against Internal Customers
For vertically integrated companies, one entity’s outputs are simultaneously inputs to other company entities and products for external customers. Yet, to an independent division, external customers bring in real revenues and thus are more visible and apparently more valuable.
The distribution centers of a PC manufacturer have explicit customer service measures for external customers, but none for internal customers. Although customer service for internal customers is not tracked, it is common knowledge that it is much poorer than for external customers. The resulting delays at the other internal entities could create significant inventory and backorder problems. Similarly, the manager of a Michigan automobile spare parts distribution network finds that the worst of his suppliers are the company’s own manufacturing plants. Such a priority system can hurt the company’s overall profitability.