One of our students in the recently concluded Finex-Citi Junior Bankers Congress held in Cebu asked me if keeping a large inventory was good. I gave it a thought and realized that there was no straightforward answer to this question. It depends a lot on several factors, including where one is in the supply chain. There are conflicting interests throughout the process and understanding the various motives and objectives of each of the participants is a good way to understand the intricacies of the chain and the way it works.
When I was assigned to our telecommunications group, we noticed that technicians would tend to hoard whatever parts they could get their hands on. This would allow them to execute the repairs within the turnaround time in accordance with the service requests they received on a daily basis. Having inventory at their fingertips allowed them to exceed the standard service levels. The inventory planners, as well as the finance managers, frowned on this practice, though. They wanted to ensure that there was no excess inventory left lying around in remote warehouses for too long. These non-moving inventories cost money, not only to purchase but also to store and maintain.
It is precisely this balancing act that a supply chain manager has to reconcile and focus on.
We addressed this particular technician situation by first determining the actual inventory available. This sounds easy, but it was challenging in an operation dispersed throughout the country. We had to reconcile items on record and actual items on hand. The next thing we did was to establish the appropriate maximum/minimum levels of the unique inventory line items based on the lead times and safety stocks required. This helped ensure that our technicians have what they need when they need it. It allowed them to meet service levels and it also avoided costly overstocks, which were anathema to our finance managers and inventory planners.
The supply chain mantra of delivering the right products or services at the right time, to the right place, and at the right costs, represents the basic philosophy for all of our business groups.
Various peculiarities crop up and these characterize the industries in which our companies operate.
In the electronic manufacturing service industry for instance, we have to deal with fast turnaround items that have limited shelf life because of obsolescence, or simply because they go out of fashion (think of cellphones). Yet, we have to deal with special order quantities, minimum orders and special packing requirements after determining economic order quantities. We have to deal with vendor limitations on volumes to be delivered. Vendors usually want to sell large quantities and inventory managers want to order in lean quantities. Vendors come up with ingenious ways to increase orders beyond target quantities and sometimes impose conditions on packing, or on minimum orders. We addressed this natural conflict with collaborative relationships while balancing cooperation and competition between vendors. We synchronized production and delivery with timely communications. We also made sure that we involved our supplier—partners in early-stage planning for new products. This way, they got first-hand knowledge of the critical points in the delivery or fulfillment of our end-customer requirements.
A classic conflict that frequently arises in our engineering heavy subsidiaries involves the red screw/blue-screw paradox. Simply stated, some engineers would specify a more expensive red screw when a cheaper blue screw would suffice.
In our telecommunications business, a major consideration is the interoperability of the various systems with one another. The networks that we install need to have the ability to talk to one another. We are, after all, a communications company. Some engineers would come up with detailed specifications, which would seem innocuous at first glance, but these specifications would lead to and could only be met in the end by a particular brand. These brand-specific recommendations are justified because of their familiarity with the products and the proven interoperability with the rest of the network. We’ve observed that if the engineers went out of their comfort zones to test other products and we accredited other vendors, there was a big chance that these “alternate” products would serve the same purpose. We also found out that the dominant brands would require that we buy related passive products when other cheaper brands would connect just as well.
I recently observed the same red screw/blue screw paradox in the automotive industry because of the adaptive requirements of our electronic laden vehicles. There are so many electronic devices in our vehicles that we have to ensure that everything that we put in, including ordinary items that we take for granted, like batteries and accessories are compatible with one another. I was surprised by this adaptation requirement as I had always assumed that certain parts of the car would remain passive. The built-in telematics integrated into our vehicles connect practically all the electrical and mechanical components. It now appears that the steel body is the only item that remains passive. This means that our engineers will have to continue specifying the red screw until we identify the elusive blue screw that would adapt to the rest of the vehicle. The exciting search continues.
The supply chain is by definition multipartner and multicompany. It would always be characterized as a natural breeding ground for conflict. All of the participants from the manufacturers, logistics providers, distributors, buyers and sellers would have their own perspectives and opinions about how products and services should flow through the chain. It is human nature to be entrenched in the correctness of our individual advocacies. It is important that we realize that the chain is managed by people who get emotional and are driven by their own personal objectives. We need to resolve the underlying conflicts that occur regularly, down to the relationship level, to make it work.
The entire process is in place precisely to raise conflict and the challenge is to move through the conflicting parts smoothly to achieve our mantra of delivering the right products or services, at the right time, to the right place at the right costs. This, in the end, is the essence of supply chain management.
Ronald Goseco is currently executive vice president for Finex. He is also chief operating officer for IDI-Volkswagen, an Ayala company.