Retailers’ inventory levels depend on the demand patterns of their customers and supply relationships with their distributors and manufacturers, the suppliers to their manufacturers, and so on. The supply chain describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same company or in other companies. Retailers can purchase inventories on a JIT basis only if activities throughout the supply chain are properly planned, coordinated, and controlled.
Procter and Gamble’s (P&G’s) experience with its Pampers product illustrates the gains from supply-chain coordination. Retailers selling Pampers found that the weekly demand for the product varied because families purchased disposable diapers randomly. Anticipating even more demand variability and lacking information about available inventory with P&G, retailers’ orders to P&G became more variable. This, in turn, increased variability of orders at P&G’s suppliers, resulting in high levels of inventory at all stages in the supply chain.
How did P&G respond to these problems? By sharing information and planning and coordinating activities throughout the supply chain among retailers, P&G, and P&G’s suppliers. Sharing sales information reduced the level of uncertainty that P&G and its suppliers had about retail demand for the product and led to (1) fewer stockouts at the retail level, (2) reduced manufacturing of Pampers not immediately needed by retailers, (3) fewer manufacturing orders that had to be “rushed” or “expedited,” and (4) lower inventories held by each company in the supply chain. The benefits of supply-chain coordination at P&G have been so great that retailers such as Walmart have contracted with P&G to manage their inventories on a just-in-time basis. This practice is called supplier- or vendor-managed inventory. Coordinating supply chains, however, can be difficult because supply-chain partners don’t always share accurate and timely information about their sales, inventory levels, and sales forecasts with one another. Some of the reasons for these challenges are communication problems, trust issues between the companies, incompatible information systems, and limited people and financial resources.