A common dilemma among firms is whether to increase inventories to ensure customer service or reduce inventories to improve cash flow, but at the risk of running out of stock. Many organizations operate on the premise that perfect customer service requires higher inventories which entail higher costs of storage and working capital. In other words, inventory is a trade-off for service, and vice-versa.
But many firms prod their supply chain managers to pursue the ideal world class customer service without increasing inventories. How indeed does one improve the capability of the business to provide a higher customer service level while maintaining if not reducing inventory? The answer lies in how the organization synchronizes supply versus demand.
To achieve optimal synchronicity of supply versus demand, company managers must endeavor for the following:
Establish true demand. Managers tend to “react” to demand fluctuations without understanding the requirements of the business. If the firm is into fast moving consumer goods (FMCG), for example, it is likely that it deals with wholesalers, distributors, and supermarkets. These ‘customers’ tend to speculate on order quantities. If they perceive a shortage or an upcoming price increase, they would order more to build inventories. This can cause a significant ripple or ‘bull-whip’ effect in demand upstream to manufacturers and vendors. To counter this, planners should focus on demand at the first stage, which in the case of FMCG, is the consumer.
Reduce or manage demand volatility. Demand that is artificially generated and not reflective of consumption or usage does no good to a firm. One controversial concern is the monthly sales target, in which orders tend to be skewed toward the final days of the month as sales agents rush to meet volume quotas. But bear in mind that marketing promotions, price changes, and advertising strategy should be designed to build business through higher consumption and usage, not for temporary surges in sales.
Improve supply flexibility. Flexibility is the ability of the supply system to increase or decrease supply. Implicit in this is the ability to switch from one product size to another or from one item to the next. Large minimum order quantities, long lead times, and high-volume production batch sizes are indicators of an inflexible supply system. Companies which require customers to order by the truckloads or manufacturers whose required minimum order exceeds the quantity needed by the customer are less likely to be competitive in the marketplace.
Improve supply responsiveness. Flexibility is a prerequisite to responsiveness, which in turn entails capturing the demand signal and tweaking the supply system to respond to it. In today’s energy industry, modern power plants have built in systems that sense customer demand and automatically adjust electrical output to closely match consumption. This enables firms to minimize waste from over-supplied power output, while allowing them to gain a more precise historical record of demand for future capacity planning.
Integrate functions via Information Technology (IT). Synchronization requires constant, real-time relay of reliable data. Most large firms have IT strategies that continuously improve information exchange between functions. Typical goals include real-time data sharing, speedy relay of sales orders to logistics, updates on the purchase order status, and daily records of inventory counts of the items at all locations. From my observations with a number of firms, many functions still use stand-alone internally-designed programs (i.e. via Microsoft Excel) on personal workstations. They privately complain that their firm’s IT systems do not suit all of their needs. For their part, IT managers, while admitting that there may be shortcomings, blame the users’ lack of communication during the design phase or the upper management’s lack of active involvement in the implementation of a new IT system.
It is usually the area of information technology that many executives pin much hope for greater synchronization of supply versus demand, but it is also the field where managers experience much frustration and misunderstanding. Most of the time, the solution lies in the clear definition of needs and in tailoring the system to accommodate these needs.
Attaining almost perfect customer service at competitively lower costs and working capital is achievable. Understanding the demand, marketing for growth and not on artificial surges, making supply more flexible and responsive, and ensuring that IT will support the integration, and not the alienation, of users, are the means to achieve better supply-demand synchronization.
Jovy Jader is a management consultant and regional speaker on Supply Chain Management. He has directed and implemented Supply Chain Management projects both local and international which have resulted to company-wide improvements in inventory, total cost, customer service, response time, quality, and on-time delivery. Mr. Jader was formerly with Procter & Gamble Philippines and Coopers & Lybrand/PricewaterhouseCoopers. Should you have questions or comments email to email@example.com
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