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The Unexpected Costs of Inventory

Small problems in your supply chain can cause huge inventory problems, which can significantly cost you in terms of time and resources.

On the one hand, you face inventory surplus, obsolete materials, and large, complex, expensive warehouses. On the other hand, you face inventory stockouts, empty warehouses, long wait times, rushed orders, and constantly chasing after suppliers to get parts.

No matter where on the spectrum it falls, poor supply chain planning is costly at all levels of the organization. When manufacturers face inventory surplus, they are left with warehouses filled with unused materials and unsold products. Storing these units is expensive, and if stored for too long, both raw materials and unsold products become obsolete, leaving manufacturers with large amounts of waste in terms of unsaleable units. This is unsustainable and has a large effect on the bottom line.

When manufacturers are faced with inventory stockouts, they risk losing their customers and reputation, as well as facing high costs from of rushed orders, missing parts, and unhappy customers. The costs of these problems cannot be ignored: having a solid customer base is fundamental to the survival of your business, and if customers take their business elsewhere due to long lead times, unable-to-delivers, and constant delays, then you will have to work double-time to get your revenue back up-to-par.

Having an efficient, well-functioning supply chain is therefore clearly fundamental to maintaining your company’s bottom line.

Where do problems in the supply chain start?

Forecasting is an important part of supply chain planning, though should not be viewed as the only way to ensure success. Proper demand, supply, and price forecasting all have their place in ensuring that the supply chain is as efficient as possible. Being able to predict variation is vital to ensuring a smooth-running business. However, this only represents one piece of the puzzle. If you spend all your time on accurately trying to forecast fluctuations in demand, you’ll miss other important components of supply chain management.

The bullwhip effect refers to the effect that a buffer on one end of the supply chain can have further down the chain. As you move down the supply chain, buffers created to account for order fluctuations increase, the same way a whip does having been cracked.  Having a buffer of 5% on one end of the supply chain can amount to as much as 40% further down. This can lead to both inventory surplus and inventory stockouts, and makes effectivizing the supply chain extremely difficult, even with very accurate forecasting.

The bullwhip effect occurs when communication across the supply chain is ineffective. When managers at different stages in the chain think in silos, act reactively, and fail to give clear information to other managers, the ability to plan and forecast accurately becomes increasingly unstable, leading to inventory problems.

How can you minimize the bullwhip effect?

If the bullwhip effect occurs when managers fail to give accurate information, then it is clear that communication is key to minimizing this effect. However, before simply vowing to better communicate, it is important to learn to analyze the root cause of problems: Where in the supply chain is forecasting going wrong? Where are buffers too large?

Once you have answered these questions, you need to be able to find smart solutions.

If you can find out where in the supply chain the bullwhip effect is beginning, then you can most likely also locate some communication and information breakdowns. Eliminating silo thinking, constantly reviewing buffer levels, reducing wait times, and being transparent with communication throughout the supply chain can make a huge difference in solving inventory problems.

At Celemi, we have developed a business simulation that accurately reflects the needs of manufacturers suffering from problems in their supply chain. PartnerStock is designed to give participants a big picture view and understanding of challenges in the supply chain, (need more text here)

2018-12-14T09:02:35+00:00December 14th, 2018|Uncategorized|