Tuesday, February 12, 2013

Breaking Up the Inventory: A smart supply management technique

According to Professors James R. Freeland and Robert D. Lande, “inventory is the single largest asset on the balance sheet”. This single point highlights the importance of inventory for a company. So managing this asset in a very smart way is crucial for the success of a company. It is, therefore, a good idea to break up the inventory into small pieces and to estimate the money involved in it.WSJ.com in its Inventory Pulse Check has pointed out the same thing. For example, in the manufacturing of a car, a company usually has many vendors for supplying the different parts of the car. It is important for the company,in this scenario, to break up the inventory into different portions such as raw materials, maintenance and finished goods.

The breakup of the inventory will help the company to come up with a system to manage the rise or decline in the quantity of a specific item. Here, reorder point systems come into play. If you use the reorder point system, you can make up the reduction in different inventories according to the demand. These systems are becoming more and more common these days among retail industry. In this way, we can also cater the bullwhip effect. For example, a retailer sells ten laptops and then updates the selling in the system and orders ten more computers from the same manufacturer. The manufacturer will respond this demand and supply him with the computers and order the components for another ten computers. If there is a decline in the demand of the computers, the manufacturer will receive order with a delay. He will be able to read the decline in the demand of the computer and will decrease the order of the computer components. Furthermore, if the sales predict that people are interested in the computers with two tetra bytes of hard disk instead of one tetra bytes of hard disk, he can reduce the order of one tetra byte hard disk and can use it in other things or simply take the money out of the cycle.  

Some people may argue here that rule of thumb is an easy way to manage the change in the inventory. But it usually gives rise to more problems for the companies. It has no scientific basis and business is an art and a science. A painter is an artist. But he can’t be a good painter without knowing the science of painting.

Companies must have flexible supply chains to survive the uncertain times. Most companies fail to deliver at uncertain times. At the time of high demand, they miss the opportunity to expand their consumer base and are left behind because of non-flexible supply chain. If we break up the inventory into small parts then we have a better chance to survive the uncertain times. This gives the manufacturer opportunity to effectively coordinate with the supplier. According to the Mckinsey Quarterly, the use of IT systems to achieve this coordination has not produced the effective results. But I think it’s too early to rule out the effectiveness of IT in this scenario. I think we need to learn the problems created in the IT systems and then try to fix it. IT is the thing of future and it will become an absolute requirement in the future owing the globalization of the markets. Don’t you think so?

1) In The News: In Faulty-Computer Suit, Window to Dell Decline (NY Times, June 28,
2) Articles (2): 1). Managing Inventories—Reorder Point Systems (UVA-OM-0936), 2).
    Managing Inventories—What is the Appropriate Order Quantity? (UVA-OM-1006)
    (Freeland, Landel, and Weiss, Darden Business Publishing, 2000 and 2003)
3) Article: Building a Flexible Supply Chain for Uncertain Times (Glatzel, Helmcke, and
    Wine, McKinsey Quarterly, March 2009)
4) Read: Ten Ways to Improve Inventory Management (Bain and Company, July 6,
    2011)— www.bain.com/publications/articles/ten-ways-to-improve-your-inventorymanagement-

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