Inventory:the great debate

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No one ever got fired for having too much inventory, but they certainly have for running out of stock. With that warning from Professor David Simchi-Levi, of the Massachusetts Institute of Technology, ringing in their ears attendees at Supply Chain Standard’s Great Debate on inventory management filed out into a gloomy Soho evening.

Over the past two-and-a-half hours they had enthusiastically probed the purpose, planning and control of inventory in industries as diverse as high fashion, furniture, personal computers and pharmaceuticals. Inventory was dismissed as a sign of failure, embraced as a bulwark against catastrophe and, for some industries, simply a question of the law.

The session, held in partnership with Oracle, had started appropriately enough (considering the venue in London’s entertainment district) with an exploration of the inventory requirements of a restaurant.

The assembled supply chain experts agreed with Dave Food of Oracle that a restaurant is a factory with inventory stored in the fridge, the freezer, in the bar and on the plate. A restaurant has facilities it wants to optimise, so does it make to stock or make to order? A bit of both delegates decided.

There are clear distribution paths from the storeroom to the kitchen, from the kitchen to the table explained Food. There is even a bit of sales and operations planning to shape demand. If they ran out of pâté the restaurant offers diners alternatives, maybe even more expensive ones.

In consumer goods the art of substitution was critical, Leapman of GBN pointed out. Simchi-Levi agreed: ”when computer maker Dell doesn’t have enough stock of a particular item it changes the price to influence demand,” he observed.

However, after thirty years Dell, famous for its low inventories, was changing its approach to the marketplace. ”The company has had to change its model and build to stock. PCs have become consumer products and Dell has had to position itself in stores,” said Food.

Others agreed that Dell was under pressure from Hewlett-Packard and missing out on the channel – now the company wanted a share of retail. ”It is true that Dell has changed its strategy but it is still different from Hewlett Packard,” Simchi-Levi noted. ”Dell has one channel while H-P has four or five. They have the same production line (as for direct sales) but they reduce the variety with the result that they have a business model where they can build to stock.”

Nick Allen, editor of Supply Chain Standard argued that if a company moves away from a lean build-to-order philosophy it had to make to stock and erode its margins. Dell was already moving away from a made to order model because of the lead times involved in assembling products. For example, the company has to hold stocks of the printers that form part of the systems it sells.

”The variety of stock required in retail is much reduced,” maintained Carnero of DPSS. ”The guy who goes to Wal Mart is not an expert, so it doesn’t matter if the store doesn’t have five models. The guy who goes direct is better informed and wants more choice. It is a different market.”

Zero inventory
According to Leapman zero inventory was what everyone was aiming for. He had an equation: zero inventory could be achieved when the supply lead time is less or equal to the demand lead time. Simchi-Levi was not sure. ”Even if you had zero lead time you still want to have inventory. Different reasons force you to hold stock – economies of scale for example.”

For Jim Tennyson of Oakley, handling expectations was very important, especially in furniture stores. ”You buy now in the expectation that the store takes your money and have six to eight weeks to build that furniture. If you change expectations you have to change your inventory requirement.”

Leapman saw similarities between furniture makers and Dell and Hewlett-Packard. ”Think about IKEA and the high-end furniture manufacturers. If you are a high-end furniture manufacturer you must offer a huge variety of different colours and designs. But IKEA is different. The number of skus in IKEA is significantly smaller.”

For any company, risk is a factor in its inventory planning. Toyota recently lost the output from one component supplier as a result of an earthquake, said Allen. It had the effect of closing 12 plants for a period of time. ”Why did they put so much into one basket?” asked Allen.

”As someone who has lived most of his life in the Caribbean I know you can’t quantify for catastrophe,” Leapman pointed out. ”Even if Toyota had two weeks stock it wouldn’t have helped.”

Legal requirement
For those in the pharmaceutical industry holding stock was not an option. Pharmacies have to carry inventory – if they don’t people will die. Jose Paguillo from Pfizer, pointed out that pharmaceutical companies are required by law to maintain a minimum amount of inventory.

”Who here has mechanisms for reducing inventory?” Allen wanted to know. Paguillo recounted how Pfizer had reduced stock holdings from 12 to 8 weeks. ”It was a question of changing our strategy and taking hold of the whole supply chain. It was a communication problem which is common in large organisations.”

Pfizer changed its distribution model from dealing with wholesalers to distributing direct. ”By selling to wholesalers we lost control. Now we distribute direct we know how many tablets all our outlets in the UK are selling,” explained Paguillo.

”One way to think of it is to realise that in many cases inventory is the symptom of a problem,” Simchi-Levi insisted. ”Don’t just say “reduce inventory by 20 per cent”. It is better to understand the drivers and to tackle them instead.”

However, Oakley, the fashion and sun glass company, is trying to reduce inventory by 20 per cent. ”We are not trying to control the supply chain but the stock we already have in the system,” said Tennyson. ”Some of our companies have done well in creating a lean supply chain. Then it goes out to the sales team and you lose that control.”

For others around the table inventory reduction revolved around communication. ”I am a firm believer in the philosophy that inventory is a sign of inefficiency. Why hold inventory? It is because of variability in supply or demand,” insisted Carnero.

Forecasting issues
”The issue is why you have that variability. It is because your forecasting is no good. If you forecast you need 120,000 items and it turns out to be 150,000 someone in the supply chain knew that and didn’t tell you.”

Consultant Anna Cusmano described an exercise she had been involved in where managers who were part of her supply chain spent a day in a hotel thrashing out their differences. Another time she won a corporate prize for charging inventory costs back to managers who made mistakes in their ordering.

Mandatory training is very important, claimed Richard Struthers of 4CX. ”I had a logistics director who made sure everyone had inventory training which involved putting people in the warehouse for three months. It gets over the terrible silo mentality.”

But getting a clear picture of demand is not always easy. Leapman looked at the difference between clean and dirty demand signals. ”Let’s say you have launched some Mission Impossible specs. Retailers inflate their orders which results in over production. There is a game theory which says by ordering more than we need we can prevent other retailers from having enough stock.

”Too much visibility allows people to play game theory games. If you are going to introduce visibility you also have to manage it perhaps by just saying yes we are in stock or no we are not in stock without quantifying it.”

The problem with that philosophy, according to Carnero, is that there will also be runs on stock because companies don’t trust each other. ”We talk about trust but often it is about phoning,” he said. ”True collaboration is about sharing the benefits of collaboration – if you are not prepared to share then collaboration does not work.”

Three key trends
Simchi-Levi identified three trends that have changed the way companies view inventory. ”First companies have moved operations to the Far East but that has increased the amount of inventory, so in North America, for example, they are moving back to Mexico.

”Second we are seeing companies using inventory and product life cycles as a way to drive product design architecture. The third trend is directly related to inventory management and green logistics. The need for a reduced carbon footprint is being taken into account when they design inventory networks.”

Allen recalled how Wal Mart asked suppliers for details of the carbon footprint created by suppliers. The company then worked with them to reduce carbon emissions and in so doing reduced the cost of products as well.

Financial issues were important, participants agreed. Leapman pointed out that if you don’t pay your bills on time your supply chain is stop/start. We have some adult conversations, agreed Tennyson. ”I find a lot of companies are not aware of the value of segmenting inventory among what we need to order, what to make to stock, what to make and deliver to stock and what to assemble to order,” Carnero pointed out. ”They all require different levels of investment.”

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