MIT Sloan Management Review

Operations Management and Research

Managing Supply Chain Inventory: Pitfalls and Opportunities

By Hau L. Lee and Corey Billington

April 15, 1992

DO YOU CONSIDER DISTRIBUTION AND INVENTORY COSTS WHEN YOU DESIGN PRODUCTS? CAN YOU KEEP YOUR CUSTOMERS INFORMED OF WHEN THEIR orders will arrive? Do you know what kind of inventory control systems your dealers use? If not, you’ve succumbed to the pitfalls of inventory management. You’re not alone. Manufacturers have been concentrating on quality of incoming materials and outgoing products, but they haven’t been paying as much attention to the costs associated with transporting and storing them. Lee and Billington describe fourteen pitfalls of supply chain management and some corresponding opportunities. The more complex your network of suppliers, manufacturers, and distributors, the more likely you can gain operational efficiencies by attending to inventory.

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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

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