Supply chain innovations

We will now summarize some basic principles to reduce inventory and increase efficiency, followed by a reveal of several successful innovations.

As the fundamental inventory models indicate, the key drivers of inventory are: set-up cost, lead time, and demand variability. In order to do better than their competitors, a company must look for ways to change the givens so as to reduce the magnitude of these factors. Some approaches to reduce the set-up costs are: using information technology to automate the ordering process, and collaboration with the supplier to consolidate transportation. These approaches can also lead to reduced lead time. In addition, shortening the supply chain by taking out non-value added stages, and increasing parallel processing can also shorten lead time. Postponement and assemble-to-order are examples of using component standardization and modularization to reduce variability, these belong to the general principle of 'risk pooling'. Other examples of risk pooling include physical or virtual centralization of inventory, such as trans-shipment. Another principle to reduce demand uncertainty is simply to find ways to acquire more information. Approaches include providing incentives such as free shipping to induce early demand information, and using that information to make a better prediction of the market. Of course, using information technology such as RFID, and implementing collaborative programs such as CPFR to share information across the supply chain can greatly enhance supply-chain transparency, and reduce demand and supply variability. Many companies have applied these principles innovatively to achieve operational excellence.