Tuesday, February 12, 2013

What has Changed in 20 Years for Supply Chain Inventory Management

This week’s reading focuses on planning and managing inventories in a supply chain. It covers the details of several quantitative methods for deciding the appropriate order quantity to minimize the inventory cost. They are more theoretical than practical for new learners. As which is also mentioned in the articles, modeling results can be used for reference, the exact inventory management strategies depend on many other factors.

After my reading, I came across an article published in 1992, “Managing Supply Chain Inventory: Pitfalls and Opportunities”[1] by Hau L. Lee and Corey Billington. It drags me out from simply calculation to an overview of supply chain inventory management. I’m so surprised that the pitfalls mentioned in 1992 still exist now. Although the negative effects of some of the pitfalls have been largely reduced by the development of modern technology, some of them still remain as big concerns when managing supply chain inventory. The pitfalls of supply chain inventory management and their symptoms is listed in the following table.

1.No supply chain metrics
l Independent and disconnected individual sites
l Incomplete metrics
l Performance measures not tracked
l No attention to measure tracked
2.Inadequate definition of customer service
l Inadequacy of line-item fill rate measure
l No measures for response times
l No measures for lateness
l No measures for backorder profile
3.Inaccurate delivery status data
l Delays in providing delivery information
l Inaccurate delivery information
4.Inefficient information systems
l Inadequate linkage among databases at different sites
l Proliferation of operating systems for the same function at different sites
l Delays and inaccuracies of data transfer
5.Ignoring the impact of uncertainties
l No documentation or tracking of key sources of uncertainties
l Partial information on sources of uncertainties
6.Simlistic inventory stocking policies
l Stocking policies independent of magnitudes of uncertainties
l Static stocking policies
l Generic and subjective stocking policies
7.Discrimination against internal customers
l No service measures of internal customers
l Low priority for internal orders
l Inappropriate incentive systems
l Jockeying for priority among different internal division
8.Poor coordination
l No coordination among supplying divisions to complete an order
l No system information among multiple supplying divisions
l Independent shipment plans
9.Incomplete shipment methods analysis
l No consideration of inventory and response time effects
10.Incorrect assessment of inventory costs
l Omission of obsolescence and cost of rework
l No quantitative basis for inventory holding cost assessments
11.Organizational barriers
l Independent performance measures and incentive systems at different sites
l Barriers between manufacturing and distribution
12.Porduct-process design without supply chain consideration
l No consideration of manufacturing and distribution in product-process design
l No consideration in design for customization and localization
l Organizational barriers between design and the supply chain
13.Separation of supply chain design from operational decisions
l Chain decisions without consideration of inventory and response time efficiencies
14.Incomplete supply chain
l Focus on internal operations only
l Inadequate understanding of operational environment and needs of immediate and ultimate customers
Table 1 Pitfalls of Supply Chain Management and their Symptoms[1]

We can see from the table that some of pitfalls existing 20 years ago are caused by limited information technology. Pitfall 3, 4 are typical examples. As modern technology enables information tracking and sharing, these pitfalls rarely appear. Some companies like FedEx and Amazon are taking advantage of these modern technologies to make their supply chains more efficient.

From what we learn from last two weeks, we can see some pitfall concerns are under research these days. Examples are pitfall 5, 6, 9, 10, 12, 13, 14. Companies taking these concerns into consideration are becoming more competitive. Now companies are encouraged to embrace uncertainties but not ignore it (Pitfall 5). Mature quantitative methods have been developed to analyze inventory and estimate new order quantity (Pitfall 6, 9, 10). Companies like Ikea and Tata are innovating in product design to transform its supply chain (Pitfall 12, 13, 14).

The pitfalls mentioned above are easier to be noticed and can be solved by deeper analyzing and impactful execution. However, pitfalls 1, 2, 7, 8, 11 are involved with the nature of business and the culture of companies. As it is described in the article “Ten ways to improve inventory management”, the author recommends cross-functional teams to optimize inventory management, which can be considered as a solution to pitfall 2, 8 and 11. Yet there are no accurate ways to examine the outcome these solutions.

In other words, the supply chain inventory management has become much more mature than 20 years ago. Most of the pitfalls discovered then have theoretical solutions and are still under research towards different branches. Successful supply chain inventory management depends on how companies are going to use them practically and efficiently. However, some of the pitfalls as benefits conflicts of business will remain unchanged. I’m sure during the 20 years, new pitfalls must have appeared, this is a question what we need to think about when we are studying modern supply chain management.

[1] Managing Supply Chain Inventory: Pitfalls and Opportunities by Hau L. Lee and Corey Billington

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