Managing Supply Chain Inventory: Pitfalls and Opportunities

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.

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References

1. For a thorough discussion of customer service measures, see M.A. Cohen and H.L. Lee, “Out of Touch with Customer Needs? Spare Parts and After Sales Service,” Sloan Management Review, Winter 1990, pp. 55–66.

2. For a more thorough discussion of the problems of ABC classification, see: M.A. Cohen and R. Ernst, “Multi-Item Classification and Generic Inventory Control Policies,” Production and Inventory Management Journal 29 (1988): 6–8; and

R. Ernst and M.A. Cohen, “Operations Related Groups: A Clustering Procedure for Production and Inventory Systems,” Journal of Operations Management 9 (1989): 81–104.

3. M.A. Cohen and H.L. Lee, “Resource Deployment Analysis of Global Manufacturing and Distribution Network,” Journal of Manufacturing and Operations Management 2 (1989): 81–104.

4. S. Nahmias, Production and Operations Analysis (Homewood, Illinois: Irwin, 1989).

5. See D.E. Whitney, “Manufacturing by Design,” Harvard Business Review, July–August 1988, pp. 83–91;

J.W. Dean, Jr., and G.I. Susman, “Organizing for Manufacturable Design,” Harvard Business Review, January–February 1989, pp. 28–36; and

C. Taguchi and D. Clausing, “Robust Quality,” Harvard Business Review, January–February 1990, pp. 65–75.

6. See L.B. Schwarz, ed., Multilevel Production/Inventory Control Systems: Theory and Practice (Amsterdam: North Holland Publishing, 1981);

M.A. Cohen and H.L. Lee, “Strategic Analysis of Integrated Production-Distribution Systems: Models and Methods,” Operations Research 36 (1988): 216–228; and

A. Federgruen, “Methodologies for the Evaluation and Control of Large Scale Production/Distribution Systems under Uncertainty,” in Logistics: Where Ends Have to Meet, ed. C.F.H. van Rijn (Elmsford, New York: Pergamon Press, 1989), pp. 143–157.

7. B.S. Moskal, “Logistics Gets Some Respect,” Industry Week, 18 June 1990, pp. 14–22.

Acknowledgments

The authors gratefully acknowledge helpful comments from Tom Davis and Warren Hausman on an earlier draft of this paper.