Dec 21, 2006 2
Building a lean supply chain
In the article Building a lean supply chain, Adam J Fein takes up the notion of building a lean supply chain and how far down along that path supply chain investments and executives really are. The article is dated Feb 2006 and so is not that far from the current state of affairs.
Adam Fein notes,
There is a widely held, but inaccurate, perception that new technologies have led directly to declines in the inventory-to-sales ratio, an important indicator of “buffer inventory” in the supply chain. In theory, information technology-based supply chain practices such as just-in-time (JIT) inventory management, warehouse automation, and the introduction of bar codes should have allowed companies to improve their management of orders and stockpiles of materials.
And further,
However, the empirical evidence for leaner supply chains is surprisingly weak. Economic research studies continue to find that aggregate manufacturing, wholesale, and retail inventory-to-sales ratios remain within historical ranges. For example, the inventory-to-sales ratio for wholesale distribution was essentially unchanged in the 1990s and has only begun trending down slightly in the past four years.
Adam Fein also refers us to the research paper on which this article is based on. From the article, Adam Fein notes the testimony of an official from the Federal Reserve Bank concerning inventory growth:
In testimony to the United States Senate, Federal Reserve Bank of New York Senior Vice President Charles Steindel stated that “…the inventory-sales ratio in manufacturing has declined almost continuously since the early 1990s, which we think is consistent with improved inventory management techniques.” (Steindel 1999). Vice Chairman of the Federal Reserve Board Ferguson offered additional support by noting that “… investments in information technologies have helped firms to cut back on the volume of inventories that they hold as a precaution against glitches in their supply chain or as a hedge against unexpected increases in aggregate demand” (Ferguson 2001).
Further more, he notes in his research paper,
Finally, at least some private companies invest in supply chain technology based on this belief. A 2003 survey found that 56 percent of supply chain management software buyers name “reducing inventory” as the most important factor fueling their investment in supply chain technology.
However, Adam Fein notes that inventory-sales ratios have not been declining,
Filardo (1995) argues the aggregate manufacturing, wholesale trade, and retail trade inventory-sales ratio have all remained within their historical ranges. Stock and Watson (2002) show that the relative volatility of inventories and sales has not changed as much as previously estimated by using more sensitive statistical tests. Khan (2003) questions the impact of technological innovation on the aggregate inventory-sales ratio by noting that the nominal inventory-sales ratio rose before it fell. Ginter and La Londe (2001), in one of the few studies to use financial statements from public companies instead of government data, conclude that some industries have seen substantial declines, while others have shown no improvement or shown an increase in inventory levels.