Companies often agonize over whether to cut their costs or to focus on customer service when managing their supply chains. By holding fewer finished goods, for instance, manufacturers can reduce their warehousing bills and the percentage of unsold items that become obsolete. Lower inventories, however, are troublesome because companies may anger customers by failing to fulfill all incoming orders in a timely manner. Many managers accept this trade-off as unavoidable, but our survey of 40 multinational and domestic consumer goods manufacturers in Germany found that it is possible to achieve both low inventories and high service levels.
Germany’s large, sophisticated, and highly competitive consumer goods market is an excellent place to study trends in supply chain management.1 To see how consumer goods companies deal with service-inventory trade-offs, we compared levels of service quality (measured by accurate and defect-free order fulfillment and punctual delivery times) with costs (using delivery and warehousing expenses2 and finished-goods inventories as indicators).
Conventional wisdom suggests that service quality has its price: if companies were plotted along a diagonal line, with their positions based on whether they emphasized service or costs, those focusing on the former would be clustered in the top right corner...