Carrying inventory upstream

As an example, imagine that you are inside a grocery store and want to understand the supply chain of finished goods upstream of this store. The supply chain map (Figure 1.9) starts at the store and works its way upstream. The store carries inventory, which is picked up and purchased by retail customers. The goal of the store is to make things convenient for customers by enabling them to get their demand satisfied immediately... 

If the manufacturer carries finished goods inventory, the retailer can place orders with the manufacturer in accordance with customer demands, thus satisfying customer demand with a lower retail inventory than if he were to buffer the entire upstream lead time. If the manufacturer were to carry inventory to hedge against manufacturing lead time then the only lead time that the retailer has to cover is the transport lead time from the manufacturer to the retailer. 

Consider a set of independent entities (nodes) in a serial supply chain, shown in Figure 2.4. Node 1 is closest to the customer, and Node 1 is supplied by Node 2, Node 2 is supplied by Node 3, and so on. Now suppose that Node 1 faces a demand of fi every period. Suppose each node faces a lead time L to get product from its supplier immediately upstream. Finally, suppose that each node carries a pipeline inventory (sum of all physical inventory, plus orders or material in transit) of (T 4- S) X DemandForecast, where S is the safety stock factor at that location. Thus, if every node passed along the demand forecast it faced, each node would have a pipeline inventory of (Z 4- 5) X DemandForecast. 

It is apparent that assemblers have been using their power in the supply chain to optimise inventories around their own processes. Meanwhile, component manufacturers upstream and dealers downstream are carrying huge inventories. Dealer networks are holding some 18bn of stock in disused airfields around Europe While long-term mutually beneficial relationships are often talked about, the reality can be very different. 

Because actual demand for products is difficult to know upstream in supply chains, suppliers often carry high levels of inventory unnecessarily. Higher inventory levels are a direct result of closed lines of communication and lack of coordination causing upstream suppliers to use inaccurate and unsuitable data for planning. Even with open lines of communication and coordination, the information transmitted has to be accurate and portray what is occurring correctly. 

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