Supply Chain and Inventory Management Case Study: Quick-Fix Payoff 

Over the past 20 years, the distribution-related business functions have grown from being responsible primarily for physical distribution; i.e., warehousing and transportation; to logistics, which encompasses customer service and finished goods inventory planning and management as well as physical distribution. Now, as a result of the emergence of a global customer-driven marketplace and the need to improve material and product flow, it has progressed to supply chain management. As each of these growth steps has occurred, more functions have been brought under the logistics function umbrella: customer service, forecasting, finished goods inventory planning and management, sourcing, supply chain partnerships, and even production planning.

So what’s the difference with supply chain management? Supply chain management seeks first to integrate all of the internal activities necessary to supply product to the customer into a continuous, fast-flowing stream that will decrease costs and improve service by optimizing inventory and increasing its velocity and then, to further optimize supply by integrating directly with the supply chains of others, both suppliers and customers, through supply chain partnerships and information exchange. Sourcing now comes under the supply chain umbrella, also inventory planning and management, and production planning to the extent that it determines the best utilization of available capacity and material. Traditional internal organizational barriers are broken down to assure a smooth flow of information and material.

Note that the objectives of cost reduction and improved service are coequal. To flourish in today’s customer-driven marketplace, a company must offer competitive pricing to its customers, provide excellent service, and show a good return to its shareholders.

Under the supply chain management concept, the product supply areas of the company are reengineered to a business process, rather than functional model. The activities necessary to “Serve the Customer” are brought together in one process. Once the internal integrated supply chain is operating smoothly, the supply chains of others can be brought into the picture through coordinated planning and electronic exchange of information on production, inventory status, and movement of materials and product.

Quick-Fix Payoff

Relatively simple ad-hoc procedures and intensive, manual, detailed management of inventory and purchases can achieve substantial inventory reductions in the short term. Keeping a dedicated intensive manual process going on a broad basis for the long run may not be practical, but in this case, the result was a quick 30 percent reduction of actual inventory and a 70 percent reduction from what inventories were projected to have been without a remedial program. This was done without additional staff and with limited systems effort. Intensive attention to the basics of good inventory management can be effective, even without elaborate information systems.

A fast-growing utility company engaged in constructing communications networks and leasing communications services was experiencing inventory control problems. Typically, every city in which there was a network installed or to be installed maintained a stockroom of high-value parts used in the construction and maintenance of the systems. The value of the inventory of parts was growing out of proportion to the growth in business. If inventory continued to grow at its current rate as the business grew, it would soon become a serious financial issue.

An analysis of the make up of the inventory and of inventory management policies and procedures revealed several issues:

• Because of a lack of visibility to inventory status, particularly to items on order, additional quantities were often being ordered even though a part was in stock.

• Parts for a job were often ordered on a rush basis even though parts were in stock, but were committed to a job that had been planned, but was not yet due for actual construction.

• City inventories were sacrosanct and additional parts were often ordered in one city even when they were in stock in another city and not likely to be used.

• Because of the high-tech nature of the parts and the potential for obsolescence as a result of technical change, in-stock parts were becoming both unusable and un-returnable.

• Systems were often not constructed exactly as designed. This resulted in not using parts that were acquired for a job and using parts that were acquired for other purposes. Also, the true makeup of systems was not being properly recorded for fixed assets record keeping purposes.

• Inventory accuracy was poor. 

• Because of a lack of visibility to inventory status, particularly to items on order, additional quantities were often being ordered even though a part was in stock.

• All parts were bought as a result of a specific need. There was no process for forecasting parts requirements either for use as maintenance spares or in construction.

• Even though there was a great degree of commonality of parts across projects, rather than using a pool of available parts, parts ordered for a project were held for that project even if its start was in the future, and additional parts were ordered for projects that had an earlier start date.

• There were no supply chain partnership programs in place.

The long-range solution to these issues was to install an integrated computerized provisioning system to manage and track work orders and to plan, purchase, receive, and issue the parts. Business processes were designed, software functionality requirements were developed, software was acquired, and the implementation process began.

However, the new processes and system were a permanent long-term solution that would take many months to implement. There was a need for some quick fixes to start bringing the inventory under control immediately.

The following short-term measures to control inventory were recommended and implemented:

• Take a complete physical inventory immediately and institute a program of relatively frequent physicals until a new system that supports cycle counting is installed.

• Institute manual stockroom procedures for improved inventory control and accuracy.

• The physical inventory combined with improved inventory accuracy resulting from the new stockroom procedures surfaced more excess items, so known inventory first went up, then down as additional disciplines were introduced.

• An analysis report of item usage incorporating a forecast with a simple model based on the last nine months’ usage and showing excess parts by city based on the forecast was developed.

• Ordering parts shown to be in excess was stopped.

• Parts were transferred from cities with excess inventory rather than buying more in the city needing them.

• A simple min/max system was instituted for all parts.

• A second-round analysis of existing inventory was performed using the min/maxes. This indicated more excess inventory which now entered the “work it down” cycle.

• Gradual write-offs of excess inventory, oldest first, were begun.

• The “maxes” in the min/max system were tightened down.

• Vendors were pressed to reduce lead-time.

• Large vendors agreed to use a forecast from the client and stock to deliver with a seven-day lead-time.

• Low-value consumables, such as nuts, bolts and connectors, were taken out of inventory and expensed immediately, but their buying was still controlled through purchase orders. This gave sufficient control, removed their value from the balance sheet, and reduced the number of low-value detailed inventory transactions to be processed in the stockrooms.

Substantial inventory reductions were achieved nearly right now with almost no investment and successfully maintained until completion of the long-term solution, the “big system.” Taking care of business always pays off.