An organizational perspective on inventory control: Theory and a case study

Leonieke G Zomerdijk
,

, Jan de Vries

Department of Operations Management, Faculty of Management and Organization, University of Groningen, P.O. Box 800, 9700 AV Groningen, The Netherlands
Abstract
Inventory control is a well-covered area in literature. Nowadays, many concepts and techniques are available for effectively controlling inventories. Eminent examples are stochastic models to determine order quantities, techniques for forecasting demand and different kinds of ABC analysis. Remarkably enough, the theoretical backgrounds of these concepts and techniques show a great deal of similarity: they all stem from the field of operations management and operations research. Despite the value of the available concepts, such a one-sided approach has its limitations in practice. In this article it is argued that it is important to take a broader view when dealing with practical inventory control problems. First of all, an organizational perspective on inventory control is developed. The main idea behind this perspective is the importance of the organizational context of inventories. This means that in addition to the traditional points for attention, such as order quantities and replenishment strategies, other aspects need attention as well. They are, for example, the allocation of responsibilities and authorities regarding inventory management, the quality of inventory information and the relevant decision-making processes. These contextual factors as well as the traditional factors are mapped out and integrated into a framework to be used in solving practical inventory control problems. One of the main features of the framework is that it is useful in both analyzing and redesigning an inventory situation. Secondly, this article describes the results of a case study regarding the application of the organizational perspective to a practical inventory control problem. The central issue of the case study is the spare parts inventory of a missionary aviation organization in Africa. The case study shows that the organizational perspective on inventory control is very helpful in dealing with inventory control problems. It is illustrated that taking into account the organizational context of inventories, especially the responsibilities and authorities of the persons concerned, is a necessity to accurately understand inventory control problems. In addition, it is illustrated that the organizational perspective leads to a more appropriate redesign. Keywords: Case study; Inventory control; Organizational perspective

Article Outline

1. Introduction 2. An organizational perspective on inventory control 3. An integrated framework 4. Research methodology 5. Findings of the case study

6. Conclusion References

1. Introduction
During the last few decades inventory control has been the topic of many publications. It may fairly be called one of the classics in operations literature. As a result, a large collection of concepts and techniques is available for effectively controlling inventories. There are for example stochastic models to determine order quantities, techniques for forecasting demand and different kinds of ABC analysis. Recently management systems such as manufacturing resource planning (MRP) and enterprise resource planning (ERP) have been added. However, most of these contributions have similar theoretical background: the field of operations management and operations research. This means the concepts and techniques are mainly based on mathematical assumptions and modeling inventory situations. Although this established approach to inventory control has proved to be very valuable in determining inventory parameters and planning resources, its value can be questioned in dealing with practical inventory control problems. Plossl and Welch for instance state that many firms have inventory control techniques working but they are not reducing inventories. On the other hand, some others are doing a fine job of managing the total inventory investment even without these tools (Plossl and Welch, 1979, p. 26). In addition, nowadays authors realize that many of the quantitative methods from the field of operations management and operations research are insufficient to cope with today's organizational complexity (e.g. Hayes, 1998; Lovejoy, 1998; Machuca, 1998). These authors favor a broader scope on operations management issues, including qualitative aspects and linkages with other functional areas in an organization. Therefore, there seems to be a need for an extended view on inventory control. In this article we argue that it is highly important to take the organizational context of inventories into account when dealing with inventory control problems. This means that in addition to the traditional points for attention, such as order quantities and replenishment strategies, contextual aspects need attention as well. They are for example the allocation of responsibilities and authorities regarding inventory management, the quality of inventory information and the relevant decision-making processes. These contextual factors as well as the traditional factors can be integrated into an organizational perspective on inventory control. The development and practical application of this organizational perspective are the main topics of this article. The article is organized as follows. First, the organizational perspective on inventory control is developed. To that end, the organizational context of inventories is investigated to determine aspects that play a part in inventory control. Second, a framework is presented to facilitate the application of the organizational perspective to practical inventory control problems. The third section of this article describes the research methodology of a performed case study in which the organizational perspective has been applied. The case study regards the spare parts inventory of a missionary aviation organization in Africa. Fourth, the results following from the case study are presented. It can be concluded that taking the organizational context of inventories into account leads to a better understanding of the problem and to a more appropriate redesign of the inventory situation. The final section of this article summarizes the conclusions.

2. An organizational perspective on inventory control

Within the area of operations management and operations research many contributions regarding inventory control can be found. Traditionally they focus on three topics that are widely recognized to play an important part in inventory control: order quantities, order intervals and inventory control systems. See, for example, Plossl (1985) and Silver et al. (1998). The first topic regards order quantities or how much to order. In order to determine economic order quantities, several costs associated with inventories play a part, such as ordering costs and inventory carrying costs. The second topic regards the order interval or when to order. In this respect demand and lead-time processes are important. Finally, the third topic regards the inventory control system. Common subjects concerning systems for controlling inventories are ABC classifications and information systems. These three aspects represent the traditional characteristics of an inventory situation. In addition, they are considered to be starting points for improving inventory control. Over the past two decades, as the field of operations management has developed and matured, several new concepts have been added to the list of relevant inventory control topics. These more management-oriented topics include MRP, just-in-time (JIT) and ERP (Hayes, 1998; Leschke, 1998). Although these recent contributions have a more qualitative nature, they show the same one-sided scope on inventory control as the previous contributions. In fact, most contributions pay little or no attention to the fact that the majority of inventories are situated in an organizational context. From a practical point of view it seems that the organizational setting of inventories should not be disregarded. Being situated within an organizational context several other factors play a part in inventory control. In general these factors lie outside the field of operations management and operations research but should nevertheless be taken into consideration. Most factors regard the organizational incorporation of inventories and the associated information flows. A significant example concerning inventory management is the allocation of responsibilities and authorities. Inventory control problems can easily arise when for instance nobody in the organization is responsible for the inventory or the responsible person has insufficient authorities to carry out the task. Likewise, high inventory values indicating a lack of control may just be the result of inaccurate inventory records or of a reporting system that does not function well. Thus, the organizational context of inventories also contains several aspects that can affect inventory control. In order to identify significant aspects in the organizational context of inventories four dimensions can be distinguished. They are the allocation of tasks, decision-making processes, communication processes and behavior of the parties involved, as displayed in Fig. 1. First, the allocation of tasks is an important dimension in the organizational context of inventories. According to Lovejoy (1998) this dimension should be part of the foundations of an integrated view on operations management issues. Relevant characteristics in this respect are the number of people that are responsible for inventory management, their functional positions and their hierarchical positions in the organization. Another relevant characteristic is the fit between allocated responsibilities and authorities. Each one of these characteristics might influence the effectiveness of inventory control.

Full-size image (16K) Fig. 1. The organizational perspective on inventory control.

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Second, organizational theory shows that decision-making processes form a significant organizational dimension (e.g. Daft, 1998). Like in other organizational areas, many decisions are made in inventory management, varying from annual strategic decisions to operational decisions concerning day-to-day activities. The resulting inventory control is influenced by how these decisions are made. Furthermore, the effectiveness of inventory control depends on the ways in which inventory decisions relate to each other and to other decisions in the organization. It is evident that, for instance, contradicting decisions or decisions that are based on wrong information can influence the effectiveness of inventory control. Third, communication processes represent another dimension in the organizational context of inventories. As stressed by organizational behaviorists, communication is a key process underlying all aspects of organizational operations (e.g. Greenberg and Baron, 1993; Robbins, 1993). In this respect it is important to consider the influence of communication processes on inventory control. For example, the forwarding of inventory information, the quality of that information and the provision of feedback can have a large impact on the effectiveness of inventory control. The fourth and final dimension of the organizational context that is important with respect to inventory control is the behavior of the parties involved. Since the Hawthorne experiments in the thirties it is widely recognized that social aspects influence the functioning of organizations (Dessler, 1986; Paul et al., 1994). Lovejoy (1998) points out that human behavior should not be ignored in operations management issues. In fact, social aspects can be significant determinants of the effectiveness of inventory control. For example, conflicts might prevent people from passing on important inventory information. In addition, power can obstruct decision-making processes concerning inventory. Likewise, motivational problems, uncertainty or incompetence influence the ways in which inventory tasks are executed. Therefore, it is important to consider not only the formal aspects of the allocation of tasks, decision-making processes and communication processes, but also the informal aspects in terms of behavior and underlying factors.

Hence, in the organizational context of inventories four dimensions that play a significant part in inventory control can be identified. These dimensions should be taken into consideration when dealing with practical inventory control problems, additional to the traditional points for attention following from the field of operations management and operations research. The resulting approach can be called an organizational perspective on inventory control. This approach has two important characteristics. In the first place, the concept of inventory control is looked at from a multiform point of view. This means attention is no longer focused on just order quantities, order intervals and inventory control systems. Instead, other aspects of inventory control, belonging to the fields of organizational theory and organizational behavior, are highlighted as well. In the second place, the concept of inventory control is looked at from an integrated point of view. This means not only several different sides of inventory control are discussed, but also a great deal of attention is paid to the coherence between the different dimensions. This is an important aspect, since it is the coherence that ultimately determines the effectiveness of inventory control in a practical situation. For example, suitable replenishment strategies can be counteracted by inappropriate allocation of responsibilities. In the same way undesirable behavior may disturb sound decision-making and communication processes. A lack of coherence can easily arise as a result of conflicting interests. It is generally accepted that organizational members involved in for instance sales, production or finance value inventories differently (Plossl, 1985; Silver et al., 1998). Depending on their involvement in determining aspects of inventory control, there will be little or much coherence. .Thus, it is desirable to pay attention to the interaction between the several dimensions of inventory control rather than to traditional aspects or communication processes separately. The next section of this article presents a framework that can be used to apply the organizational perspective to practical inventory control problems.
3. An integrated framework

The employment of the organizational perspective on inventory control in practice can be facilitated by means of the framework presented in Fig. 2. The framework displays a way of approaching practical inventory control problems. It is based on a basic control loop to represent the underlying problem-solving process. In general, the starting point for a problem-solving process is an inventory system that performs below pre-set standards. In many cases, these preset standards are defined in terms of costs. Some examples of costs associated with the performance of inventory systems are storing costs, stock-out costs, ordering costs and costs due to obsolescence. The performance of an inventory system refers, however, not only to well-defined cost criteria. Actually, the main purpose of inventory management is to facilitate the smoothing between supply and demand. So any symptom indicating a lack of harmony between supply and demand may refer to a poor performance of the inventory system. Examples of some of these symptoms are instabilities in the (production) planning process, the existence of numerous rush orders and inefficient operation of production facilities. In many cases a deviating performance of the inventory system will activate a diagnosis of the inventory situation in which several aspects regarding inventory control are investigated (cf. Fig. 2). The outcome of this diagnosis then serves as input for the construction of a redesign of the inventory system.

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Fig. 2.

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Framework for solving inventory control problems.

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Within this framework, there are a few guidelines for the diagnosis and redesign phase following from the application of the organizational perspective on inventory control. To begin with, applying the organizational perspective on inventory control in a problem-solving process partly determines the structuring of the diagnosis phase of the process. The objective of this phase is to achieve a clear insight in the inventory situation under consideration and a thorough understanding of the cause(s) of the inventory control problem. To that end, the inventory system needs to be described and analyzed. With regard to describing an inventory system it is important to obtain a comprehensive description of the inventory system. The end result should contain detailed descriptions of both traditional aspects of inventory control and aspects from the organizational context of the inventory system. This is to ensure a large amount of factors that might play a part in the inventory control problem are included in the description. Therefore, the first guideline of applying the organizational perspective on inventory control in practice regards describing an in 3666ventory system by paying attention to each of the five dimensions that have been identified to play a part in inventory control. The table in Fig. 3 can be a useful tool to do so. The table presents an elaboration of traditional aspects, the allocation of tasks, decision-making processes, communication processes and behavior regarding inventory control. Each dimension is divided into relevant aspects and their characteristics. Although the list of characteristics is by no means meant to be exhaustive, it is composed in such a way that it will lead to a fairly complete insight in an inventory situation.

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Full-size image (75K) Fig. 3. Overview of dimensions of inventory control.

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The second guideline of applying the organizational perspective on inventory control in practice regards analyzing an inventory system. When trying to determine causes for an inventory control problem, all five dimensions should be taken into account. It is important to begin with analyzing each of the five dimensions separately and subsequently focus on analyzing the coherence between the dimensions. This implies that firstly for each of the dimensions it is investigated in what ways it contributes to the inventory control problem. The table in Fig. 3 can provide starting points for identifying possible causes. This part of the analysis might reveal for instance that an inappropriate replenishment strategy is applied or that communication systems are not functioning properly. Secondly, the findings from every dimension are integrated to determine how the dimensions relate to each other. For example, malfunctioning communication systems might cause the inappropriate replenishment strategy. In addition, the malfunctioning communication systems might be the result of an inappropriate allocation of tasks. Doing so, it will become clear what causes the inventory control problem from an organizational perspective. Besideks guidelines for the diagnosis of an inventory control problem, the organizational perspective on inventory control also provides guidelines for the redesign of an inventory system. Based on an accurate understanding of the inventory control problem, the redesign aims to improve the situation or solve the problem by means of recommendations. From the organizational point of view it is important to take all five dimensions of inventory control into consideration. However, unlike in the description and analysis of an inventory system, the five dimensions are not expected to be equally important. Depending on the outcomes of the diagnosis of an inventory system, it might be sufficient to redesign just one of the dimensions. In other cases, a redesign of the entire system might be required. Still, in all cases it remains necessary to consider each of the five dimensions, since they are closely interrelated. For example, changing the allocation of tasks can influence communication processes. Likewise, improving decisionmaking processes can solve behavioral problems. Therefore, the third guideline of applying the organizational perspective in practice regards redesigning an inventory system by taking the five dimensions of inventory control into account, although it is not needed to change them all. To conclude, the framework presented in Fig. 2 facilitates the practical employment of the organizational perspective on inventory control. The accompanying guidelines provide support in diagnosing and redesigning an inventory system. This way of applying the organizational perspective to practical inventory control problems is expected to lead to more satisfying solutions. In the first place this is due to the comprehensive description and analysis of an

inventory system. Compared to the traditional approach to inventory control, the organizational approach is more likely to capture the complex environment most inventories are situated in. This is expected to lead to a more accurate understanding of the inventory control problem. In the second place, more satisfying solutions are to be expected because of more appropriate redesigns. Traditionally, redesigns were focused on changes in order quantities, order intervals or inventory control systems. However, it has been argued that in several practical situations the organizational context of inventories needs to be changed in order to improve inventory control. Therefore, the organizational perspective paying attention to both traditional and contextual aspects will lead to more appropriate redesigns. The next sections of this article describe the research design and results of a case study in which the organizational perspective has been applied to a practical inventory control problem.

4. Research methodology
The organizational perspective on inventory control as introduced in the former sections has been applied in a practical situation. This case study regards the spare parts inventory of Mission Aviation Fellowship (MAF) Europe. MAF Europe is an international missionary aviation organization that is part of a worldwide group of MAF organizations. The purpose of the organization is to multiply the effectiveness of the mission of the body of Christ in areas of need through aviation, information technology and logistical services. Through these services MAF Europe is attempting to enable national churches, international missions and non-governmental organizations to provide spiritual and social benefits to people in developing countries. Today, MAF Europe programs are located in Chad, Kenya, Madagascar, Tanzania and Uganda, while a new program is being set up in Mongolia. The headquarters of the organization is located in the United Kingdom. In order to provide its services, MAF Europe operates an aircraft fleet consisting of almost 30 aircrafts in eight different types, mostly from the Cessna factory. In general, engineers in the programs maintain the aircraft. To that end, every program carries a spare parts inventory that is controlled at the spot. In order to limit the amount of money that is tied up in spare parts, the Board of Directors of MAF Europe has declared that the aggregate value of aircraft spare parts is not allowed to exceed 7.5 percent of the insurance value of the aircraft fleet. However, the MAF Europe programs have been outside this constraint for some time. In January 1999, the inventory of spare parts had a value of $850,000 while the aircraft fleet was insured for $10,000,000. That results in a ratio of 8.5 percent. Therefore, the organization was in need of a research study leading to recommendations to improve the situation. The research study has been carried out during a period of 6 months in which the researcher was part of the organization and located in Africa. Data were collected by interviewing people, studying documents and analyzing numerical data. Since there were indications that factors from the organizational context were contributing to the inventory control problem of MAF Europe, the organizational perspective was adopted to approach the problem. The research performed can be characterized by the framework presented in the former section. First, the current inventory situation in the MAF Europe programs was described multiformly by means of the five dimensions identified to play a part in inventory control problems. Second, the current inventory situation was analyzed in order to determine factors contributing to the inventory control problem. Both traditional and contextual aspects were analyzed by using theoretical concepts from the fields of operations management and operations research or more organizational literature, such as theories on motivation and information. Third, following from the main causes of the inventory problem in the MAF Europe programs, recommendations for improvements were presented. The recommendations mainly regarded improvements affecting the organizational context of the spare parts inventories.

Together the recommendations were aimed at more effective inventory control. The next section of this article describes some of the findings of the case study.

5. Findings of the case study

The main finding of the case study is the clear value of the organizational perspective in solving practical inventory control problems. Through the application of the organizational perspective to the inventory control problem of MAF Europe, significant causing factors were brought to light that probably would not have been recognized when the problem was approached from a more traditional point of view. Likewise, the resulting recommendations regarded essential changes in the organizational context of the spare parts inventories that most likely would not have been part of a traditional redesign. This is explained in more detail below. In the case of MAF Europe, the inventory control problem was reflected in the high value of the spare parts inventories, which caused the programs to be outside the inventory constraint imposed by the Board of Directors. Describing and analyzing the inventory control problem from the traditional perspective revealed that the MAF Europe programs were applying a suitable control policy for ordering spare parts. Despite some minor issues, there were no factors that contributed significantly to the inventory control problem. Therefore, from this operations management point of view the spare parts inventory situation seemed to be in order. Recommendations that could be made regarded fine-tuning order quantities and implementing the
ABC

classification. However, these recommendations were

not expected to solve the inventory control problem of MAF Europe. In fact, the main cause for the inventory control problem was to be found in the organizational context of the spare parts inventories. Each of the four contextual dimensions contributed to the inventory control problem. In the first place, the allocation of tasks in the MAF Europe programs hampered effective inventory control. In the organization of MAF Europe Chief Engineers are responsible for the spare parts inventories. However, the main task of a Chief Engineer is to ensure maximum availability of aircraft for operational use. Since it supports the maintenance of aircraft, the engineers will naturally pursue a large spare parts inventory. Second, decision-making processes in the MAF Europe programs influenced inventory control. This particularly regarded goal setting. For example, the decision to limit the aggregate value of the spare parts inventories to 7.5 percent of the insurance value of the aircraft fleet was used as a goal. However, for various reasons this goal was unsuitable so that it had little effect. The third dimension of the organizational context, communication processes, also played a part in the inventory control problem of MAF Europe. One communicational aspect that hindered effective inventory control was the low quality information that was used to determine the value of the spare parts inventories. Fourth and finally, there were behavioral aspects that contributed to the inventory control problem in the MAF Europe programs. Although power games, politics and conflicts were not involved, a lack of clarity played a part. This made for instance that certain inventory procedures were not followed. Besides analyzing the five dimensions separately, the inventory system as a whole has been analyzed as well. This revealed that the dimensions were closely interrelated. For example, the allocation of tasks in which engineers were responsible for the spare parts inventories caused traditional inventory characteristics, such as order quantities and replenishment strategies, to be aimed at large spare parts inventories. In addition, this was enabled by a lack of supervision due to an inappropriate allocation of responsibilities in the hierarchical layers of the organization. In the

same way, this inappropriate allocation of tasks caused communicational problems such as a lack of feedback. Furthermore, the decision-making processes in MAF Europe induced certain behavior damaging inventory control. Finally, a combination of the allocation of tasks, communication processes and behavior of the parties involved caused inventory information to be of low quality. To conclude, the organizational context of the spare parts inventories in the MAF Europe programs consisted of a set of interrelated factors, i.e. regarding the allocation of tasks, decision-making processes, communication processes and behavior, that contributed to the ineffectiveness of the control of the inventories. Therefore, from the organizational perspective on inventory control the spare parts inventory situation was not in order at all. In accordance with the findings from the diagnosis the spare parts inventory situation in the MAF Europe programs has been redesigned. Two major recommendations were made to the organization. They mainly regarded changes in the organizational context of the spare parts inventories, as the main causes for the inventory control problem stemmed from the organizational context. Since there were a number of factors contributing to the inventory control problem, the recommendations were focused at aggregate solutions laying foundations for further improvements. First of all, it was recommended that MAF Europe replaces the current inventory constraint by another goal that would be more suitable. Having an appropriate goal to compare the programs performance to is an important requirement for effective inventory control (Plossl and Welch, 1979). Although the inventory constraint in its current, aggregate form can remain as a tool for top management, it has to be translated in inventory values for the individual MAF Europe programs. It was recommended this should be done by defining end-of-year inventory values per program, like a budget. This recommendation will have an effect on decision-making processes and subsequently behavior of the parties involved in inventory management. Second, it was recommended that MAF Europe improves its information flow by means of communicating inventory procedures and adopting a new reporting system for inventory values. These changes will affect communication processes and behavior in the MAF Europe programs. The proposed reporting system also affects the allocation of tasks. Doing so, the spare parts inventories in the MAF Europe programs will most likely be controlled more effectively. In conclusion, applying the organizational perspective to the inventory control problem of MAF Europe has given the organization a comprehensive description and analysis of its spare parts inventory situation. In itself, this information can already be of large value to the management of the organization. Furthermore, MAF Europe has received recommendations that are not that evident from an operations management point of view, but nevertheless are important. In fact, they are essential starting points in order to improve the control of the spare parts inventories. Hence, from this case the conclusion can be drawn that the organizational perspective is indeed valuable in solving practical inventory control problems.

6. Conclusion
From the above several conclusions can be drawn. First, this article has lead to a broader view on inventory control. This broader view regards the organizational perspective on inventory control that has been developed. The main idea behind this perspective is the importance of the organizational context of inventories for the effectiveness of inventory control. It has been argued that the traditional approach to inventory control from the fields of operations management and operations research pays little or no attention to the organizational setting of inventories. However, the organizational context of inventories contains several factors that play a part in inventory control. They have been

identified as the allocation of inventory tasks, decision-making processes regarding inventory, communication processes concerning inventory information and behavior of the parties involved in inventory management. In the organizational perspective on inventory control these four dimensions are taken into account along with traditional aspects of inventory control. It can be concluded that this organizational perspective on inventory control can be of large value in practice. The case study regarding the spare parts inventories of MAF Europe has shown that factors from the organizational context of an inventory can indeed play a significant part in inventory control problems. In particular, the case study has emphasized the importance of coherence between the dimensions. Second, in this article a way of approaching practical inventory control problems from the organizational perspective on inventory control has been developed. This approach consists of a set of guidelines referring to a problem-solving process. In the first place it has been argued that a diagnosis of an inventory system should contain a comprehensive description. This means both traditional characteristics of an inventory system and the four dimensions in the organizational context of an inventory should be described. Secondly, it has been argued that an inventory system should be analyzed by paying attention to each of the dimensions separately and subsequently to the coherence between the dimensions. Thirdly, when redesigning an inventory system each of the traditional and contextual dimensions should be taken into consideration, although it might not be needed to change them all. This is due to the interaction between the dimensions. It can be concluded that this proposed set of guidelines is a helpful tool in solving practical inventory control problems. It aids in systematically applying the organizational perspective on inventory control. The case of MAF Europe has shown that this way of applying the organizational perspective leads to a more accurate understanding of an inventory control problem and a more appropriate redesign of an inventory system. Nevertheless, future research is required for the organizational perspective on inventory control to grow in size. This article has initiated its development, but it mainly focused on the creation of an instrument that would be most useful in practice. Therefore, further research needs to be conducted to consolidate the foundations of the perspective. In this respect the relation between the organizational context of inventories and the effectiveness of inventory control needs to be investigated in more detail. In particular, it is worthwhile to explore the specific contributions of the dimensions that have been identified in this article research is likely to contribute to a refinement of the guidelines proposed in this article, so that the practical employment of the organizational perspective on inventory control will be further improved as well.