Value metric is most relevant since it measures funds tied up in inventory

Value metric is most relevant since it measures funds

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Value metric is most relevant, since it measures funds tied up in inventory (working capital). One can have a very large "time supply" of inventory (e.g., a couple of years' supply of staples in your desk drawer at home) but if the value is relatively low, it is not a major concern. A natural disaggregation of inventory in a manufacturing setting relates to the type of inventory: Raw Material (RM), Work-in-Process (WIP), and Finished Goods (FG). The danger in using these as separate metrics (as opposed to their sum) is that respon- sibility for them will differ, and one can easily envisage "gaming" taking place near the end of an accounting period as, for example, the person responsible for WIP inven- tory pulls very little material from RM inventory and also rushes to get out the most costly jobs. Then, at the beginning of the next accounting period, large volumes of RM are pulled onto the shop floor. Such behavior is not conducive to a smooth-running production facility. 7. Summing Inventory All Along the Supply Chain An interesting theoretical question several years ago was: What if your company tracked and summed up the monetary value of all inventory across your entire supply chain? How would this actually be carried out? Let's look at a supply chain for a PC manu- facturer. Ideally one would track data on the levels of inventories for all major com- ponents (integrated circuits, hard disk drives, memory chips, monitors, motherboards) in upstream locations and then add their monetary value to inventories in transit and to WIP inventories at the assembly factory. Next, we would track and add all invento- ries downstream in the distribution channel, all the way to the end consumer's pur- chase point. This question is rapidly changing from a theoretical to a practical one as managers of supply chains cope with increasing pressures on customer service and asset performance. Compaq Computer and other PC companies now measure both their own inventory and the downstream inventory at their distributors. Procter & Gamble, with its Vendor-Managed Inventory (VMI) process, routinely measures both its own inventory and downstream inventory of its products. What is the corresponding trade-off curve for inventory versus service for a com- pany's entire supply chainl The inventory dimension adds up all the investment in
Supply Chain Performance Metrics 69 (a) (b) Our Inventory Our Factory ^ ^ Our Service Inventory All along The Chain Our Supply Chain Competitor's Supply Chain \ End-customer Figure 4.3 A tradeoff curve for the entire supply chain, (a) Myopic view and (b) Chain- wide view. inventory along the chain; but what service metric should be used? Presumably service to the ultimate customer, since that is the end purpose of the entire supply chain. See Figure 4.3.

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