The Hindu Business Line : Optimising the supply chain

Developments in supply chain concepts and advances in the field of computer software have gone hand-in-hand. Supply chain management, as is taught in B-schools, is quite outdated. Indeed, so much has happened in the area that almost all firms may need to re-look their inventory control mechanism.

Earlier methods of inventory performance measurement have been replaced with the order-to-delivery time metric. Research at Massachusetts Institute of Technology, US, suggests linking inventory placement in the supply chain to the manufacturing/sales stage. The key is the relationship between manufacturing/operations lead time and the service time at each stage. The programme then optimises the inventory placement in the supply chain through a complex mathematical modelling.

What is not realised that the service time considered is akin to order- to-delivery period, which is an important measure of performance of companies and can give significant competitive advantage. Current inventory control mechanisms measure the lead time and then decide what inventory levels to stock depending on replenishment happening within the lead time. Therefore, the service time considered is the lead time involved in the operation.

The MIT study goes a step further and suggests the inventory level if the service time is less than the lead time. This approach is more useful to the industry to improve the order-to-delivery period.

Using this solution has led to a 30 per cent pruning of inventory levels by industries as diverse as chemicals, healthcare, and electronics. More importantly, theservice levels have improved and the execution problems reduced to a few.

According to this three-stage system, for some industries, it is preferable to keep more inventory at the raw materials stage rather than at the finished goods level, and for others the reverse.

In India, the textiles sector, for instance, can take advantage of this optimisation tool for better inventory performance.

(The author is Senior Manager (supply chain), Dr Reddy's Laboratories Limited, Hyderabad, and can be reached at gbrkprasad@rediffmail.com)

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