Thursday, January 26, 2012

Jonathan Byrnes on inventory optimization

MIT's Jonathan Byrnes presented a terrific webinar last week.  His topic -- inventory management -- has a lot to do with all kinds of businesses, including hospitals.  I want to summarize some key points for you.  (For those who want learn more, Jonathan has his own blog, which I highly recommend.)

The major point of the webinar was that there is a huge difference between inventory optimization and inventory management.  Jonathan puts this in terms of a paradigm shift:

In the past, the job of the supply chain manager was to optimize the flow of goods into and out of the storeroom.  For example, reducing the inventory of a SKU that lost money was viewed as success.  But as Jonathan puts it, "If you optimize something that is stupid, the result is still stupid."

He urged us instead to consider the earning power of inventory, to change from minimizing inventory cost to maximizing its earning capacity.  Inventory represents a significant portion of a company's invested capital, and you want to put that investment to its most productive use.

If you look at your task as maximizing the return on invested capital that is represented by inventory, many other aspects come into play.  Look at this comparison of the factors which would be considered in the standard model and the one for which he advocates.

In the old model, all those factors in the right-hand column were "somebody else's job."  If, instead, you take a broader view, you realize that those factors must be considered, especially relationships with suppliers and customers.  Each stage of that value chain should be analyzed.

There is a historical context for this transition.  Markets have evolved over the years.

Before mass production, the "market" was how much you could deliver on your horse or in a cart.  With mass markets, full-scale and wide-ranging production and distribution became the norm.  Now, though, precision markets exist, with finely grained purchase and consumption decisions intimately tied to the needs of suppliers, intermediaries, and consumers.  This requires a new view of value creation, one that leads outside the boundaries of the corporation to include the real-time needs of customers.

Jonathan followed with a number of case studies that dramatically illustrated these points.


Deeper said...

Dear Levy, do you have description of hospital's value chain, e.g. like Michael Porter's one? Did you have internal audit in your hospital? Thank you.

Paul Levy said...

I don't.