Managing Supply Chain Inventory: Pitfalls and Opportunities
Magazine: Spring 1992: April 15, 1992 Reading Time: 23 min
Most manufacturing enterprises are organized as networks of manufacturing and distribution sites that procure raw materials, transform them into intermediate and finished products, and distribute the finished products to customers. The simplest network consists of one site that performs both manufacturing and distribution. More complex networks, such as those required to manufacture mainframe computers, span multiple sites that may be scattered around the world.
We call these networks supply chains or value-added chains, as shown in Figure 1. Often, multiple managers — manufacturing, operations, logistics, material, distribution, and transportation managers — have responsibility for different parts of a chain. Overall operational performance, as part of the finished product’s cost, may be the responsibility of the product division’s general manager.
Managing a supply chain is very different from managing one site. The inventory stockpiles at the various sites, including both incoming materials and finished products, have complex interrelationships. Efficient and effective management of inventory throughout the supply chain significantly improves the ultimate service provided to the customer. In this paper, we describe the many pitfalls of managing supply chain inventories and suggest opportunities for improving management and control. Throughout the discussion, we draw upon our knowledge and experience of supply chain management at electronics, computer, and automobile companies.
Common Pitfalls
Pitfalls 1 through 4 address problems related to information definition and supply chain management. Pitfalls 5 through 9 relate to operational problems. Pitfalls 10 through 14 are problems that are strategic and design related.
Pitfall 1: No Supply Chain Metrics
Although the supply chain’s overall performance depends on the sites’ joint performance, usually each site is managed by fairly autonomous management teams, each with its own objectives and mission. These objectives may have little to do with the supply chain’s overall performance. Worse, these objectives may conflict. The consequence is that the different sites may have operational goals that, if met, result in inefficiencies for the overall chain.
For example, a northern California computer manufacturer’s circuit assembly operation used cost per placement as its overriding performance measure. The site focused on reducing placement cost. This was not inherently wrong, but it didn’t take into account how the site’s performance affected the overall supply chain of computer manufacturing and distribution. Consequently, the site held excessive inventory in order to operate in large lot sizes.
In another case, an Indiana component manufacturing plant of an automobile manufacturer started aggressively cutting inventory, as its performance was explicitly determined by its inventory. As a result, the plant’s response times to the final assembly plants and the spare parts distribution centers became longer and highly erratic. The final assembly plants and the parts distribution centers had to keep inventory high to give their customers reasonable service.
We observed that there were no performance measures for the complete supply chain. Many companies have this problem. Those that do have such metrics often do not monitor them regularly. Or their metrics are not directly related to customer satisfaction. For example, some companies use inventory turns for all supply chain inventories as the main performance measure. Yet they do not measure their response time or service fill rates to customers. We contend that supply chain metrics must be oriented to customer satisfaction. This leads us to the second pitfall.
Pitfall 2: Inadequate Definition of Customer Service
A supply chain must ultimately be measured by its responsiveness to customers. However, there are different definitions of responsive customer service. Most companies measure the average line item fill rate (percentage of line item requests shipped prior to customer due dates). There are variations, such as weighting fill rates by dollar volume. Yet these may not satisfy customers.
A customer order usually involves multiple line items. For example, a personal computer (PC) dealer may order printers, computers, accessories, and software in one order. As the dealer is merely replenishing its own stock, which will be sold to end users, the supplier can ship individual items separately, depending on the availability of these products, without adversely affecting the dealer’s business. Line item fill rate would be a good indicator of customer service. Other customers demand a single shipment of all items, such as customers who need service parts to complete a repair job. In these cases, it is important to measure the fill rate in terms of completed orders.
However, measuring order fill rate