The Role of IT in Inventory Management

Besides the basics of formalizing inventory replenishment procedures for thousands of SKUs, the two most significant contributions of IT systems can be improved inventory visibility and better coordination in the supply chain.

An excellent example of the benefits of improved inventory visibility is Nordstrom, a department store chain in the United States. The company was always very good at managing its inventories (IT systems played an important role here) but had historically separated its online inventories and its store inventories. In September 2009, the company started integrating store inventories onto its website. Customers are now able to access inventory no matter where it is available. If they prefer home delivery, Nordstrom can now use store inventory to serve them. If, however, they prefer to pick up the item themselves, Nordstrom allows them to reserve it for pickup. The increased inventory visibility allows Nordstrom to serve its online customers better while also drawing more traffic to stores. In 2010, Walmart also added a similar feature, called “Pick Up Today,” which allows customers to place orders online and pick them up a few hours later at a retail store. Customers are alerted (typically through a text message) when the order is ready. Redbox uses inventory visibility at each of its vending machines to guide customers to the closest kiosk that has the desired DVD in stock. In each example, the increased visibility pro­vided by IT systems allows the firm to improve product availability to the customer without increasing inventories.

Another area in which improved visibility could play a significant role is locating in-store or in-warehouse inventory. Often, a store or warehouse has inventory available but in the wrong place. The net result is a loss in product availability despite carrying inventory. Good RFID sys­tems have the potential to address this issue. Although there has been limited success using RFID systems at the item level in stores (there has been some success with high-value apparel), there has been success in areas such as warehousing of aircraft spare parts.

IT systems have also played a significant role in better integrating different stages of the supply chain. A classic example is the continuous replenishment program (CRP) set up between Procter and Gamble (P&G) and Walmart that allowed P&G to replenish diaper inventory at Walmart based on the visibility of available inventories and sales at Walmart. This coordination allowed the two firms to improve service levels while reducing inventories. Over time, the pro­gram evolved into collaborative planning, forecasting, and replenishment (discussed in greater detail in Chapter 10), which allows better coordination of planning and replenishment across multiple supply chain partners through improved visibility of inventories and sales. Even though each of these programs uses IT as a foundation, it is important to acknowledge that success requires important organizational changes and leadership commitment as discussed in Chapter 10. Good IT systems are a necessary but not a sufficient condition for success.

It is important to recognize that the value of the IT system in each of the cases discussed here is tightly linked to the accuracy of the inventory information. Inaccurate inventory informa­tion leads to flawed decisions and could in the worst case create mistrust among supply chain partners attempting to coordinate the decisions and actions. A study by DeHoratius and Raman (2008) found that about 65 percent of the inventory records checked for a retailer were inaccu­rate. That is, for 65 percent of the records checked, the inventory on hand did not match the inventory showing in the IT system. Without reasonably accurate inventory records, the value provided by an IT system will be limited.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.