Too often, top management lacks the "control mechanisms" that would allow them to manage inventories. The result? Too many of some items, and not enough of others. The Smart Pull System provides significant benefits by simultaneously reducing inventory investment (to make the CFO happy) and improving service levels (to make the marketing and sales people happy, as well as the customers).
For maximum efficiency, an inventory management system must be simple; able to handle phase-in, phase-out, and end-of-quarter spikes in demand; and be able to create exception notices to help companies proactively manage inventory.
The Smart Pull System was developed by Carlson School Professor Arthur V. Hill, holder of the John and Nancy Lindahl Professorship for Excellence in Business Education. The Smart Pull System sets targets to achieve a user-specified unit fill rate to meet identified service levels, versus keeping a day or week of supply on hand, as many companies do. It also uses a dynamic approach that updates inventory targets based on the variability of the demand during the replenishment lead-time and on forecast information. The system recommends using demand filters and tracking signals when forecast errors have exceptional conditions.
An important part of improving the supply chain is ensuring that managers receive the right incentives. Running out of inventory is much more significant than having a little too much. However, both cost money. The Smart Pull System allows supply chain and inventory managers to better align performance incentives by using dynamic inventory targets.
First, the new models make it easy to include the no-buy option. That means consultants can estimate the incremental sales that result from adding (or subtracting) a feature. Second, researchers are able to fit these newer models to supermarket scanner purchase data, such as prices, features and volumes, aggregated to the store level. “For example, we have estimated from such data that about 60 cents out of a $1.50 retail price for a 32 ounce Gatorade bottle is due to its brand name,” says John of data gathered from the Chicago supermarket chain, Dominick’s Finer Foods.
“Our MBAs learn to use both commercial software such as Sawtooth and hand-rolled Excel spreadsheet routines to implement these models in their consulting projects,” says George John. “Their consulting experiences complement marketing courses that stress the underlying concepts and the proper interpretation of the numbers as decision aids. We try to get them to think beyond the current implementation, to focus on the enduring ideas.”
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