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From Just-in-Case to Just-in-Time Inventories

Zara, a Spanish fashion retailer with almost 1,000 stores in 31 countries, takes control of inventory seriously and integrates inventory control into its overall manufacturing and merchandising strategy. The company can take a new fashion idea and have it represented in new product selections in two weeks.15 The company replenishes its stock twice a week, a turnover rate well ahead of the rest of the retail business. Zara outfits its store clerks with handheld computers to record sales and customer comments, then integrates the collected data with design, manufacturing, and distribution functions. As a result, the company can spot trends early on—a rather critical quality in fashion retailing—and adjust stock accordingly, within days.16

One of the revolutions in business thinking over the last quarter of the 20th century is the notion of inventories. Retail businesses formerly considered inventories on the books as assets; now they're viewed as liabilities. Zara exemplifies the aggressive attitude that companies now take toward inventories. Having a huge store of production inventory once signified strength and stability. It showed that a company could buy in great quantities, to feed its machines of mass production. It also provided a buffer to protect against price increases. By stockpiling inventories when prices were low, a company could protect itself when prices went up. Stockpiling also protected companies against shortages. In the printing industry, a common expression said that one could get reprimanded for having too much paper for a job, but fired for not having enough.

Today, large material inventories mean that you can't keep count of your stock. The high cost of inventories comes from the credit needed to pay for the materials, as well as storage space and service. These costs are eminently avoidable. They only require better information. In some cases, companies themselves have that information, such as sales forecasts and burn rates. In other cases, the information comes from customers and suppliers.

If the inventories are goods, a small investment in bar codes and scanners, and a little training, can provide a current count of items on hand. Bar codes are an early and successful form of e-business.

Companies, especially in the retail supply chain, have exchanged data by printing item numbers and sometimes manufacturing data on bar-coded labels that trading partners can scan. If a company has any _products that end up in retail stores, they need to acquire a Universal Product Code (UPC) company code number—or European Article Number (EAN), as they're known outside North America—and assign unique identifiers to each product. Most retailers, especially in the grocery business, require scannable bar codes on product labels.17

Bar codes also help keep industrial inventories under control. For industrial materials, however, the information needed may exceed simple product numbers. When the quality of a manufactured product depends on the characteristics of the input materials, the data needed on the shop floor includes those about the raw materials. The Uniform Code Council that assigns UPC company codes in North America has also established a collaborative network for sharing these kinds of data, called UCCnet.18

An everyday example from modern office life demonstrates this idea. Office copiers sometimes jam when someone adds paper from a new box, especially if the new paper is made by a different manufacturer—or even the same brand but from a different shipment. Paper may have standard weights and sizes, but small differences in water content or surface characteristics can throw off the grip of the copier feeding mechanism and cause jamming, resulting in wasted paper and time. For this reason, experienced copy center operators know to run paper from the same brand and shipment on long jobs.

Applying this principle, more control over the input of raw materials in manufacturing implies more control over the consistency and quality of the manufactured product. When subtle changes in materials can affect the consistency of goods, the people and systems running the operations need to have the data about those materials immediately at hand. Bar codes provide an easy way to match manufacturing data with physical goods, and some industries have defined bar coding specifications for this purpose.19

To further support the idea of e-business rather than simple e-commerce (selling to customers using a web storefront), the sharing of data on manufacturing history and product performance constitute an entirely new form of inter-enterprise cooperation made possible by new communications technologies. These exchanges have nothing to do with buying and selling goods, and to focus only on the purchasing process misses vital ways that companies help each other.

One effect of just-in-time inventories, lower customer loyalty, and reducing goods and services to simple commodities is the downward pressure on margins, or the superstore syndrome. Superstores are large retail stores that work on higher volumes and smaller margins, such as Wal-Mart, Sports Authority, and Circuit City, as well as discount warehouse clubs such as Costco. When customers begin to see lower prices at the retail level as a result of superstores and their practices, they expect to see the same practices and effects in their business lives. Companies need to show continually that they are taking steps to reduce costs, or at least to add value to the equation. If they don't, their competitors will. The willingness of many companies to experiment with new kinds of business models, such as vertical exchanges, auctions, or reverse auctions, shows how seriously they take this development.

What Is an Auction?

Auctions have emerged (or rather reemerged) as a viable business model for procurement of goods and services, due largely to the availability of web technology. Peter Fingar, Harsha Kumar, and Tarun Sharma describe the various kinds of auctions and the role the web has played in their recent popularity in their book Enterprise E-Commerce:20

ForresterResearchanticipatesU.S.business-to-business sales using dynamic online pricing models, such as those used in auctions, to reach $746 billion in 2004.21

Companies that sell enterprise-capable auction software are focusing on the computer and semi-conductor industries because their fast-moving product cycles often cause inventory management problems. The auction market is also touching commodity industries like oil and gas.

For buyers, auctions offer a wide range of goods at competitive prices and low transaction costs. Sellers liquidate surplus goods or use the auction to help set prices on first-run goods. Some companies have turned to customized solutions that account for particular inventory-management needs. Media auctions let advertisers take advantage of last-minute deals and bargains as they bid for unsold media time on networks and stations around the country. In building an auction site that emulates conventional business practices, a marketer has to be prepared to do a high degree of analysis. Allowing buyers to access lists of available advertising slots—a task that previously required dozens of telephone calls—cuts administrative costs considerably. Auctions could end up cutting out the middleman in some types of transactions, and fixed pricing will most likely fade in the digital economy.

Generally auctions are segmented into four major one-sided formats: English, Dutch, first-price sealed-bid, and uniform second-price (Vickrey). In one-sided auctions, only bids are permitted, but not "asks." A double auction is not one-sided because bids and asks take place at the same time (bid/ask trading). The English auction, known also as the open-outcy auction, is the format most familiar to Americans. Here the seller announces reserve price or some low opening bid. Bidding increases progressively until demand falls. The winning bidder pays highest valuation. The bidder may reassess evaluation during the auction. The item is sold to the highest bidder unless the reserve price is not met, in which case the item may not be sold. Often, the reserve price is not revealed to thwart rings who have banded together and agreed not to outbid each other, thus effectively lowering the winning bid. Competition and enthusiasm is at its highest in the English auction, where inexperienced participants sometimes end up paying more for an item than its value—the "winner's curse."

The descending-price auction, commonly known as the Dutch auction, uses an open format wherein the seller announces a very high opening bid. The bid is lowered progressively until demand rises to match supply. When multiple units are auctioned together, normally more takers press the button as price declines. In other words, the first winner takes his prize and pays his price and later winners pay less. When the goods are exhausted, the bidding is over. In the Dutch system, a seller tends to receive maximum value, since the bidder with the highest interest cannot afford to wait too long to enter his bid. (The world famous tulip flower market works to this system, with buyers viewing cartons of tulip flowers on conveyor belts and purchasing according to quality, color, and size).

The third auction type, known as the first-price, sealed bid, or discriminatory auction, is common when multiple items are being auctioned. This type of auction has a bidding period in which participants submit one sealed bid in ignorance of all other bids. At the resolution phase, bids are opened, and the winner, who pays exactly the amount bid, is determined. Usually, each participant is allowed one bid, which means that bid preparation is especially important. When multiple units are being auctioned, sealed bids are sorted from high to low, and items awarded at highest bid price until the supply is exhausted. The winners can, and usually do, pay different prices.

In the uniform second-price auction, commonly called the Vickrey auction, the bids are sealed, and each bidder is ignorant of other bids. The item is awarded to the highest bidder at a price equal to the highest unsuccessful bid. When auctioning multiple units, all winning bidders pay for items at the same highest losing price. The price that the winning bidder pays is determined by competitors' bids alone and does not depend upon any action the bidder undertakes. Less bid shading occurs because people do not fear the winner's curse. Bidders are less inclined to compare notes before an auction.

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