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March 8, 2007 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

Avoiding Inventory Pitfalls

Anytime we write about Inventory issues in the Supply Chain, we generate a lot of interest and feedback.


Our recent analysis and report on Days Inventory Outstanding (DIO) trends by industry sector is just the most recent example – you’ll find a number of reader comments in our Feedback section below, and we’ll print more next week.


I also enjoy taking a look back at some classic supply chain management and logistics articles by the industry’s great thought leaders to see how they have stood the test of time, and take a fresh look at insights they may have to help us manage our supply chains today.


One such article is “Managing Supply Chain Inventory: Pitfalls and Opportunities,” written all the way back in 1992 in MIT’s Sloan Management Review by the well-known Hau Lee of Stanford and Corey Billington, then a supply chain manager at Hewlett-Packard and who it appears is also now a professor at Stanford after a distinguished career at HP.

The article is fascinating, in part because it came in the very early stages of true supply chain thinking. That’s in part reflected in one of the opening comments, where Lee and Billington note, “Managing a supply chain is very different than managing one [manufacturing] site. The inventory stockpiles at the various sites, both incoming materials and finished products, have complex inter-relationships.”

Today, this would be considered a very basic supply chain concept. But I think the list of the 14 pitfalls is still well worth reviewing today:

  • No supply chain metrics: Metrics that are focused at the site or functional level, not the broader supply chain. We’ve made a lot of improvement, but does this still ring a bit true: “Different sites may have different operational goals that, if met, result in inefficiencies for the supply chain.”?
  • Inadequate definition of customer service: Companies frequently rely on single measures, like order fill rates, that don’t well capture true customer service needs. Consider other measures like total cycle time per order, performance to customer due dates, etc. Many companies have made these measurement changes.
  • Inaccurate delivery status data: Difficulty in providing an accurate ship date, and updating order status. My take: lots of progress in some areas, driven the Internet (barely in existence at the time of this article), but lots of room for improvement – for example, as we’ve noted many times in the past, still relatively limited use of true advanced ship notices, and in a B2B context, limited on-line order status availability.
  • Inefficient Information Systems: Lack of visibility and integration among distributed databases across the enterprise, causing poor inventory decisions. Well, that’s in large part why today we now have ERP. Still, at a supply chain level, we still have far to go – why else the fervor around RFID data?
  • Ignoring the impact of uncertainty: Companies frequently do not document and track the sources of supply chain variability (e.g., supplier deliveries). I think most companies could do a lot more in this area, though some (Raytheon, Harley-Davidson, for example) have made great strides, and Six Sigma thinking will drive this further.
  • Simplistic inventory stocking policies: Basic, static inventory policies, such as by ABCD classification, just aren’t good enough. Stocking policies must be dynamic, and more considerate of variability of supply and demand. Consultants tell me all the time that they have clients who haven’t looked at inventory and safety stock policies in years.
  • Discrimination against internal customers: I wasn’t expecting this one – operations supplying both internal and external customers tend to focus on the latter, even though the internal customer is using the input to then service external customers. Well, if we’ve made any supply chain progress at all, we should have largely addressed this, but I suspect it is still an issue in many companies.
  • Poor coordination: This is mostly focused on companies that must merge products from several sources for final shipment to the customer. The perception then: coordination is poor, resulting in expediting costs, poor customer service, and inventory buffers. My take today: much less of an issue, and many companies excel at this.
  • Incomplete shipment methods analysis: Transportation decisions based on lowest logistics costs, not total supply chain costs, especially inventory. My sense is that this is continues to be somewhat of an issue in many companies.
  • Incorrect assessment of inventory cost: There is no standard approach for measuring the cost of inventory, and companies often under-represent the total costs. While many companies have done a better job at measuring costs of obsolescence, I sure wish we had a more definitive industry view on how to best cost our inventories.
  • Organizational barriers: Basically, the challenges of operational silos. The advent of the “integrated supply chain organization” addresses this problem, but in the end, this really describes the heart of the supply chain challenge, doesn’t it?
  • Product-Process Design without Supply Chain Consideration: Discrete manufacturing costs are the focus of product design considerations, not total supply chain costs. We’re making progress here, and the notion of “designing for total supply chain costs” has caught on in the past few years.
  • Separation of Supply Chain design from operational decisions: Decisions to open or close a manufacturing or distribution center are looked at too narrowly, on those discrete costs alone, not on the total supply chain impact. With the use of network planning tools and general supply chain thinking, I don’t believe this is at all common today.
  • Incomplete supply chain: Looking at the supply chain only to the first-level customer (such as a distributor or retailer), not the end consumer. This basic issue of course set the stage for Dr. Lee’s subsequent work on “The Bullwhip Effect,” and is at center of today’s demand-driven supply chain paradigms.

The more things change, the more they stay the same. Seems to me we’ve at one level made progress across the board on Lee and Billington’s list of pitfalls, but that with just a few exceptions, the majority are still issues for most companies 15 years later.

What’s your take on this list of supply chain/inventory management pitfalls? Are they still relevant today? Which ones are especially so? Let us know your thoughts at the feedback button below.


Let us know your thoughts.


Dan Gilmore


Supply Chain 

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It was a wild ride on Wall Street last week, as stocks took a sharp drop across the board.  It was no different in our Supply Chain and Logistics Stock Index, with every single company we track down for the week with the exception of SAP, which managed a tiny gain - but that looked great by comparison.

See stock report.


This Week’s Supply Chain News Bites – Only from SCDigest

March 8 , 2007

Now Wal-Mart CIO Rollin Ford Rebuts Wall Street Journal Article


March 8 , 2007

RFID Debate Continues, as Sara Lee CIO says Technology Limitations Mean RFID Not Ready to Deliver Benefits to Consumer Goods Companies Yet

March 8 , 2007

New Integrated Solution from LogicTools Ties Supply Chain Network Design and Inventory Optimization Software Together

March 7 , 2007

State of Washington state Considering Restrictions on RFID Technology

March 2, 2007

Service Parts Management: Raytheon has to Deliver in Spare Parts Delivery Contract for the Navy



March 8, 2007

Role of Service Parts Logistics in High Tech Continues to Grow, Report Says, with Big Impact on Companies and Logistics Service Providers

New report from Transport Intelligence looks at European Market, but the insight is also beneficial for North American companies; highlights here

March 8, 2007

What’s the Likely Impact of First Steps Towards Allowing Mexican Trucking Companies to Operate in the U.S.?

Great news for the claimed driver shortage, or a bad idea?

March 6, 2007

Just what is the “Sweet Spot” for RFID?

MIT Professors try to find the Answer, though the conclusions aren’t that clear

March 1, 2007

From RetailWire: Does RFID Have Issues?

Wall Street Journal story on RFID continues to generate comments on all sides of the issue


Q. What are the "4 M's" in Lean thinking that can be manipulated to produce value?

A. Click to find the answer below


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Feedback is coming in at a rate greater than we can publish it - thanks for your response.

We're still behind - be patient if your letter has not yet been published

We received quite a lot of feedback from our two part series on inventory levels (see Are we Making Inventory Progress? Part II. We publish a number of them below, including our feedback of the week from Tom Craig of LTD Management, who "gets on his soapbox" about not making enough progress on inventories, and the barriers of our accounting systems. It's a good letter.

You'll find his letter as well as a few more below on this topic we think you will enjoy.

Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the Week – On SCDigest's Inventory Report

We have not done a good job at reducing inventory.  I would suggest that much of the reduction has been a combination of finally writing off dogs that have set for years in warehouses and some blind luck on consumer demand. 


In the 15 years you cite, we have expanded our global sourcing with extended, lengthy supply chains.  We put much emphasis on managing transport and less on managing supplier performance.  So how do we go from suppliers in Chicago to suppliers in Shanghai and reduce inventory.  I would also question whether accounting games are being played.  When title pass is the common game of deferring responsibility for inventory and treating it as off-the-books.  Given Sarbanes-Oxley, I wonder how much of that game is valid still.


As for the Lean impact, lean has struggled to succeed, especially with inventory.  Again lean, like SCM, runs contrary to what accounting does.  Lean and SCM view inventory as "bad", reduce it, pull it through your system, compress time to reduce the need for inventory.  Accounting sees inventory as an asset.  Lean and SCM see it as a waste. 


"Insanity it doing the same thing over and over and expecting different results."  That quote from Franklin (or Einstein" reflect the state of supply chain management.  SCM has not fulfilled its promise and potential.  SCM--and Lean--need Purposeful Abandonment and getting rid of the legacy SCM's that companies have had for too many years. 


I am not cynical.  I just believe we have been approaching SCM incorrectly, restricted by organization functional silos, legacy supply chain management approaches and accounting systems that date back to the Model A.  All this to manage processes that flow horizontally across and within organizations while managing product and information flows that span continents.


Okay, I will get off my soapbox.


Tom Craig

LTD Management

Logistics / Supply Chain Management Consulting

More on Inventory Report:

While I would dearly like to know the stats for raw material / component inventory and finished goods separately, I believe that the leaning and outsourcing movements have each had a big impact here.  While leaning has reduced certain inventories, the uncertainty of the marketplace, availability and extended lead times force larger buffers, particularly in the retail channel.  Also, your analysis of progress since 1992 is worthy, but the 2006 entry is of little use in that inventories of leftover stock from Christmas will be shown in each January number but are bled down by July.


Steve Murray

Senior Research Analyst

Supply Chain Visions



Long supply chains keep Inventory rising and when we put the brakes on --- Customer Service falters again due to the long supply chain. It is a never ending cycle.


Sam Baum

Your article confirms an issue that I've suspected for some time. While work-in-process inventory levels have decreased, it is being dampened by the increase in finished goods inventory. How is this happening? More and more distributors are decreasing their inventory levels by squeezing the lead times they are promised from their suppliers (manufacturers).

In order for manufacturers to rapidly respond to orders and keep the lead times shorter, they are forced to store more finished goods than ever before. In essence, the manufacturer is taking on more of the distributors role; the only difference is the breadth of customers the manufacturer is shipping to.

The other issue that you addressed and one that I am confronted with more often is overseas sourcing. Distributors and manufacturers are struggling with the extensive and variable lead times while carrying an extra 2-3 months worth of inventory of sourced goods on their balance sheet. They have to balance that added investment in inventory with the per unit cost savings. However, most companies aren't feeling much pain with higher inventory levels because the cost of capital borrowed to pay for the inventory remains low. Now if/when the cost of capital rises again, many companies will be cutting back on their procurement activity, and that's when things on a macro level will begin to snowball…

Rich Murphy

From the RetailWire:


The question posed here is timely and debatable. Certainly, the first set of numbers (monthly inventory-to-sales ratio trended from 1992 to 2006) suggests significant progress has been made, but the obvious question is at what cost has this "progress" been achieved. It seems to be a fairly one-dimensional view of business performance, which we know is far more complex.

We know from other studies that the rate of out-of-stocks at store level has remained constant or increased despite focused efforts to reduce OOS occurrence. Trade-offs are inherent in business, but real progress can be achieved by using technology to improve visibility of physical stock and decreasing the "latency" of information...i.e. continuing the push toward real-time systems.

Ken Kubat

Director, Industry Solutions,

TIBCO Software, Inc.

From the RetailWire:


While there have been substantial efforts to improve the management of the retail supply chain, the system continues to be tested.

The total number of items carried by most retailers has grown in recent years. Grocery stores once carried only about 10,000 items; now many carry 30,000 items. Supercenters stock over 100,000 items. While the average inventory may stay the same or even decline, the problem may get worse within some segments.

Item proliferation is also a factor. Over 10,000 new items are introduced each year just in food and beverages. The fact is that most of these items either fail outright or fail to generate a sales rate that keeps up with the norm.

While it is certainly useful to track metrics, it is more important to identify root causes and develop solutions.

Raymond D. Jones

Managing Director

Dechert-Hampe & Co.


Q.  What are the "4 M's" in Lean thinking that can be manipulated to produce value?

A. Material, machine, man and method

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