The Whose, Where, and How of Inventory Control Design by Lee & Whang

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Summary of Supply Chain Management Review

In the past decades, the task of inventory system, location, and control has been carried out by the corporate entity itself. In the new era, however, the system of inventory control has changed and contractual forms have been aroused. The major factor behind this change can be attributed to the advancement in information technology (IT), and the improved supply chain management (SCM) systems. Improvement in inventory control can be seen in vendor management inventory (VMI) as well as the supplier hubs. For designing and implementing the inventory control system, supply chain management adopts different ways. Remote controlling of inventory is now possible through tracking and visibility of inventory levels in different departments. Advanced supply chain management systems such as VMI, CRP (Continuous Replenishment Program), supplier hubs, and outsourcing to third-party logistics (3PL) can provide effective inventory control systems. These systems are enabling the collaboration between supply partners and thus the information and decisions can be easily transacted. Accountability and performances in inventory control can be shared and mutually owned by the suppliers and the buyers.

Dispersal of inventory ownership can be carried out in different ways. Inventory consignment is a generally used method of inventory control in the retail industry. In this system, the replenishment of inventory can be controlled either by the buyer or the supplier. In this case, ownership and location of inventory are shared between buyers and suppliers. The Scan based trading (SBT) that emerged recently is an effective way of retail consignment in high tech industries. In this system, the ownership of inventory has changed when the supplier handed over goods to the retailer. Pre-positioning or reverse consignment is another way of ownership dispersion. It is suitable in the fashion industry for which high volatile demands in the market can be easily set off through this inventory system besides reducing the risk of extra holdings and lead times. Third-Party inventory ownership is effective for inventory control in large original manufacturing firms characterized by large bargaining power.

In cases where the ownership of inventory lies with the supplier, they have direct control over inventory. Thus they can be aware of the buyer’s usage pattern through which a proper level of inventory can be maintained. The location of inventory is also an important factor for effective inventory management. It may be in the buyer’s own site or on-site supplier hubs. The onsite supplier hub is a warehouse near the buyer’s premises. Through this system, multiple suppliers of the specific buyer can be concentrated in a single place. The hub materials are owned by the supplier. Operation of the supplier hub is through a 3PL provider and it supports the sharing of information and data between partners. Offsite supplier hubs are not under the direct control of the buyer and the supplier is liable to take the risks related to inventory. Through the inventory consignment for incentive alignment, suppliers take part in the cost of inventory imposed to the buyer through providing inventory cost subsidies.

In the VMI inventory system, suppliers take the replenishment decisions independently. This system is effective for avoiding the bullwhip effect in inventory. Suppliers are free from reacting to buyers’ orders and thus they get more flexibility in scheduling the supply chain. But it is not suitable in the case of inventory where ownership is held with the buyer. In this case, a mixed control system of inventory will be more effective. In a mixed control system, inventory control is jointly managed by the supplier and buyer and it is termed as JMI (Jointly Managed Inventory). In this case, dealers have no chance to take part in inventory decisions.

Application of controlling of inventory is influenced by the market capability. There are different alternatives used in inventory control. For efficient inventory control, a particular design alternative must be selected. The selected design must be matched with the specific market environment. The supply chain managers have to identify the better ways of effective inventory control for employing in the organization.

“Author Information: Dr. Hau Lee is Thoma Professor of Operations, Information, and Technology at the Graduate School of Business, Stanford University. Seungjin Whang is Jagdeep and Roshni Singh Professor of Operations, Information, and Technology, also at Stanford’s Graduate School of Business.” (Lee, and Whang, 2008).

Reference

Lee, Hau L., and Whang, Seungjin. (2008). The Whose, Where, and How of Inventory Control Design. Supply Chain Management Review. Web.

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The Whose, Where, and How of Inventory Control Design by Lee & Whang

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