The New Mantra in Supply Chain Management

Efficient inventory management: the new mantra in Supply Chain Management

Inventory management has become a critical part of the supply chain given the improvements in technology to monitor and minimize its levels as well as due to greater volatility of demand for goods and services.  According to PricewaterhouseCoopers (PwC), more companies are taking additional steps to deliver fast customer response while diminishing the inventory levels across all parts of the supply chain.  This arises from the fact that different components of the supply chain have proven to be too exposed to uncertainty (see my blog entry on Semiconductors overstock due to low demand of finished goods).  The traditional methods based on historical patterns of demand, for determining production levels, procurement, transport and logistics amongst others are no longer the most reliable and useful for managing the supply chain (Glatzel, Helmcke & Wine 2009).

The PwC report points to the fact that the growing use of the internet as a mechanism to purchase goods and services is forcing companies to reduce the response time, which requires supply chains that maximize flexibility.  The report found that there is a stark difference between companies that invest in efficient use of inventory and the rest, with 15.3 inventory turns for the latter while companies who do not invest in this type of technology achieve only 3.8 turns.  In this regard the use of integrated real-time demand and- supply planning with suppliers and customers has provided some companies with a decisive advantage over its competitors.

This trend, far from being a product of economic instability, may constitute the future given the potential to expand the control over inventory.  A recent study by Bain and Company and The World Bank points to the fact that trade barriers have a significant impact on the inventory management of the supply chains.  Given uncertainty in the time frame and cost associated with trade tariffs and other barriers, companies respond by holding additional inventory.  Using the example in the report, a rubber company holds 120 days of inventory instead of 30 as a result of trade barriers.  However with increases in international economic integration many of these barriers are disappearing, thus increasing the opportunity for small and medium companies to manage inventory levels according to their needs.  A clear example of this economic integration is provided by 3D Robotics a San Diego-based drone startup company that took advantage of the economic integration with Mexico to shorten its supply chain by reducing inventory levels. The company was able to reduce its procurement plan, which depended on Chinese manufacturers, from 6 months to a week thanks to increased economic integration between Mexico and US.

The efficient use of inventory is no longer the privilege of giants like Toyota or Dell, thus allowing small and medium companies to take advantage of the cost reduction advantages of efficient use of inventories. Far from a mode this may become indeed mantra.

 Sources:

Anderson, Chris (2013), “Mexico: The New China”, The New York Times, January 26^th, available at: http://www.nytimes.com/2013/01/27/opinion/sunday/the-tijuana-connection-a-template-for-growth.html?_r=0

Glatzel, Christoph;  Helmcke, Stefan; Wine, Joshua (2009) “Building a Flexible Supply Chain for Uncertain Times”, McKinsey Quarterly, No. 3 March.

PricewaterhouseCoopers (2013), 2013 US CEO Survey Creating Value in Uncertain times, PricewaterhouseCoopers, available at: http://www.pwc.com/gx/en/consulting-services/supply-chain/global-supply-chain-survey/assets/pwc-global-supply-chain-survey-2013.pdf

The World Bank; Bain and Company (2013), Enabling Trade: Valuing Growth Opportunities, The World Bank, available at: http://www3.weforum.org/docs/WEF_SCT_EnablingTrade_Report_2013.pdf