The Role of Inventory in Supply Chain

I was recently involved in a conversation about the role of inventory in a supply chain and, more generally, in business success. It was generally thought that a higher customer service level required more inventory. The higher level of inventory would make up for long lead times, poor supplier performance and customer demand volatility.
These comments are very common and are considered “laws” where operations management personnel are concerned. In fact, not only are the laws false – but the entire concept of service and inventory levels relationship is outdated. The advent of supply chain management (SCM) has created new dynamics in creating a customer value with ever lower levels of inventory in the supply chain (SC).
One of the most critical aspects of supply chain management is dealing with customer demand. Members of a supply chain must have visibility into the final customer or end user demand data. To meet ever increasing customer desires for product variety at low cost, the supply chain participants can use the data to plan production, transportation, storage and final delivery where and when the product is needed with the lowest possible inventory. Many of these decisions involve participants working together intensively with the aim of providing value to the final customer/end user. This cooperative nature of SCM is one of tradeoffs and core competencies among the SC participants and is thus very difficult to achieve.
Poor supplier performance has been magnified by the globalization of business and the use of outsourced business processes. The inputs provided by material and service suppliers are critical to supply chain performance. If one link in the chain fails all downstream participants and the final customer are affected. However, the role of the supplier in the SCM context is changing in the face of business demands and the role of the buying organization. It is no longer appropriate to treat all the suppliers in the same manner. Under the banner of strategic sourcing, a business uses different procurement tactics for different commodity groups. For example, procurement of office supplies does not use the same methodology as a key manufacturing input. Suppliers are grouped and measured on mutually agreed performance standards. The results are reported in a Supplier Scorecard available to authorized participants online. Better overall supplier performance can contribute to high service levels with lower inventory.
As previously mentioned, doing business around the world increases the complexity – including longer lead times – of SCM. Longer lead times also increase the variability in supply chain performance. A supply chain with long lead times (often called a “push” supply chain) is not flexible or responsive to changes in demand. Thus such supply chains will have a higher level of inventory along with substantial obsolescence. The redesign of a push supply chain to make it more responsive can assist in achieving the holy grail of lower inventory across the supply chain.
A number of industries can be said to lead in this area. High tech firms experience very short product life cycles which drives a generally pull-based supply chain that is agile and responsive. The automobile industry gives consumers billions of product configurations. Such complexity requires push-pull boundaries at different stages of order fulfillment combined with a postponement strategy.
If you wish to find out more about SCM and how higher service levels can be achieved with lower inventory, please contact
Brian Graystone, MBA, CMC, P.Log
Vancouver, Canada
Skype: bgraybgray1

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