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7.4 Supply chain and inventory management

The two philosophies (push and pull production) explained in the previous section have implications for an organization’s interactions with its suppliers, interactions with its customers, and the amount of inventory the organization maintains. Supply chain management and logistics refer to all the aspects of maintaining flow of product from suppliers through the production process to customers. In either push or pull the goal is to maintain the flow and reduce inventories. Many strategies can be used to accomplish that goal.

In contrast to Just In Time, some people refer humorously to a Just In Case philosophy, where an organization stockpiles supplies and product in case of any disruption in the supply chain and breakdown in the production process. Holding inventory has benefits, but it also has costs: the cost to provide space and storage facilities for inventory, the cost to move the product into storage and then out of storage to the place it is now needed, and the cost due to the fact that money has been spent on the inventory and the money is not available for more productive uses.

A crucial concept that underlies many of the strategies I will describe below is the idea of reducing variability by standardization. Here is an example. A manufacturer uses 10 different kinds of bolts in its products. It uses from 100 to 1500 on average of each kind of bolt each day. Because the product mix varies from day to day and because products use different types of bolts, the demand for each type of bolt varies greatly from day to day. The organization maintains an inventory of 5 days supply of each type to ensure that production is not disrupted when the plant switches to another type of product. It also has storage places for each kind of bolt, information systems to track the inventory of each, and labels to ensure that the correct type of bolt is delivered to each place in the production process that requires the use of that type of bolt.

Now assume the manufacturer redesigns its products with a focus on reducing the number of different bolts used in the products and it is able to reduce the number of different types of bolts from 10 to 3. Its overall average use of bolts per day will be the same, but it will probably have reduced the variation of how many bolts per day it is using. If the mix of products being made changes from day to day, the variability in demand for different types of bolts will have been reduced because all products are using only 3 types of bolts now. The demand for bolts is more predictable and it may need to maintain only 3 days supply of each type, it needs less storage space and fewer distinct storage spaces, it has fewer types of bolts to track, and fewer worries about the wrong type of bolt ending up at a production point.

The pooling of the demand for bolts into larger numbers for a fewer types of bolts reduces variability in the demand for any one kind of bolt. At the extreme, if all products the same number of one type of bolt, the demand for bolts would be smooth no matter what mix of products is being made. The more that inventory can be standardized, the more that variability can be reduced.

Standardization brings benefits and these ideas can be applied not just to the standardization of bolts, but of other components of products, of storage bins and pallets, and of shippers and suppliers.

Strategies

An organization that picks and works closely with a few suppliers may choose to share forecasts and even information systems with those suppliers. A kanban system (usually computerized) might extend from the organization to its suppliers. With only a few suppliers, the organization can communicate more closely, get to know those suppliers well, and work together so both the suppliers and the organization can be successful. An organization that has a large customer can ask to work closely with it, again including the sharing of information to the benefit of both.

Supply chains and customer chains that rely on transportation over long distances introduce delays due to time in transit and the chance of disruption. Items in transit should be viewed as inventory, to be reduced. Supply chains can be shortened by having suppliers that are located nearby. Reliable shippers should be used. More frequent smaller shipments allow more responsiveness to demand. If the organization uses a few suppliers for all its items, each shipment may have only a few of each item, but may still be a large shipment that is efficient to transport.

Information technology, including bar cards and RFID tags can be used to maintain accurate knowledge of all inventory. Surprise stock outs can be eliminated.

Information technology can be used to track customer demand closely and to change production plans quickly. Information technology can be used to have customers enter customized orders, for example, as Dell does for its computers.

An ABC analysis classifies inventory into the A items that account for the highest amount of total purchasing costs in a year, the B items which are the next level, and the C items which may be numerous but are not costly. The A items should be managed most closely, but close management of C items may not be cost effective. One must be careful, however, to consider other factors. D items as those that have not been needed for over a year. One must be careful, however, not to assume that D items can be dropped from inventory. Parkview Hospital, for example, stocks rattlesnake antivenin, no matter how infrequently it is needed.

Parts, inventory storage, and shipping containers should be standardized. Having one type of pallet rather than three will be more efficient. The law of large numbers tells us that the overall variability in the number of pallets used will go down.

Subassemblies should be standardized. While the final products may differ, they may all be composed of similar parts or similar subassemblies. Subassemblies can be made and only customized into final products later in the production process.

Supplies are often ordered in bulk because of quantity discounts and because of the cost of placing an order. A supplier might be willing to give the quantity discount in exchange for a long term commitment. The cost of placing an order can be reduced by the use of information technology within the organization and with suppliers.

Tools are often neglected in the design of an inventory system. The article “Company Reduces Inventory And Costs With New Software,” from MMS Online, describes how the Aerospace Group of Parker Hannifin Corporation used software for tool management to decrease its stock of tools and reduce its cost in buying tools.

A storage facility can be laid out so that frequently requested items can be retrieved with little travel. However, the layout should also take into account items that are often requested in the same order (e.g. bolts and nuts) and locate them near each other.

Partners

A well run supply chain requires working with partners, usually the organization's suppliers. Other companies will provide supply chain logistics support to your organization. For example, UPS (which used to be named United Parcel Service) does a lot more than deliver parcels. UPS Supply Chain Solutions will design a supply chain system, including transportation, compliance with regulations on shipping, and management of returns. For example, in this case study, UPS worked with a manufacturer of medical devices and supplies that was considering eliminating its distributors and supplying its products directly to hospitals and physician offices. The study concluded that the company should not eliminate its distributors who were supplying valuable services to customers that would be costly for the manufacturer to implement.

Similarly, Penske Logistics "offers a full spectrum of transportation, warehousing, inbound/outbound, supply chain management and freight forwarding solutions." DHL provides supply chain management, warehousing, value added services (such as "order management, quality control, outbound fulfillment, reverse and return logistics"), distribution, and outsourcing. Transoceanic (now Agility) "provides a total logistics management package, including international forwarding, ship and aircraft chartering, export packing and consolidation, inventory management, inland haulage, project transportation management, procurement management, customhouse brokerage, marine agency services, project development and heavy equipment leasing ..."