Even as the U.S. economy is emerging from the lows of the pandemic, disruption to global supply chains have threatened to derail the recovery process. However, behind some of these challenges is an unlikely culprit: an undue emphasis on being lean. Lean supply chains, which emphasize efficiency, leave very little slack in the system, with small changes in demand and supply patterns potentially leading to severe shortages. The overemphasis on keeping costs down means that the systems are not set up to respond quickly. When things go south—there is very little wiggle room.
Modern supply chains are inherently complex. The search for low-cost production and manufacturing has resulted in multiple layers and networks of suppliers and contract manufacturers. Coordinating the decision making across these different entities can be challenging. Given this backdrop, although low inventory levels can enable firms to deploy their capital more effectively, any kind of disruptions can have global implications leaving the same firms without adequate backup plans. Indeed, the simple but effective strategies used by the Girl Scouts of the USA to manage their cookie selling season offers important lessons about the value of inventory and flexibility while dealing with uncertainty.
Cookies and inventory
On the face of it, the Girl Scouts and modern-day supply chains cannot be more different from each other, but in reality, they share many common features. Seasonal products with a short selling season, substantial variability in demand patterns, independent agents responsible for sales, multiple layers of partners with differing objectives and incentives are all norms in both. One of the most anticipated and celebrated activities of the Girl Scouts is the yearly cookie sale, where individual girl scouts go door-to-door selling varieties of cookies in their neighborhoods.
In interesting research with my co-authors Canan Savaskan and Tom Tan of SMU Cox, we analyzed this cookie selling process. The objective of the research was to understand the implications of operational policies on a firm’s ability to manage demand and supply uncertainty. A key finding of this research was that inventory and the risk it imposes can offer strategic value to an organization. Importantly, inventory can encourage greater sales effort from downstream partners and independent agents, which in turn can result in greater demand and sales. This is a novel insight particularly because we are trained to think of inventory as a necessary cost that does not provide value beyond satisfying immediate demand.
Our research linking inventory ownership and supply chain performance was possible due to an operational policy change that was implemented at a local Girl Scout council. Until 2013, the local council ran the cookie selling process like a pull system in which troop members were offered the flexibility to collect customer orders before placing their own orders with the troop. This enabled the troop members to avoid any inventory risk because they could order exactly according to demand, i.e., demand pulls the supply. From 2014 onwards, this policy was changed and the troop members were required to place orders before the season, based only on their estimates of final customer demand (or prior experience). This shift in policy brought the cookie operation closer to a push system, where you sell from your stock, which in turn, also imposed inventory risk onto the troop members. We wanted to know if the higher inventory in the push system, and the risk it imposed on troop members, reduced the overall sales and performance of the girl scouts, as conventional wisdom would have predicted.
Interestingly, that is not what was observed when we subjected the cookie sales data through a rigorous statistical analysis. Instead, whether inventory risk dampened or improved sales performance of girl scouts depended on their sales ability. Girl scouts with high sales abilities thrived under the new push system because the risk induced greater effort and increased sales. The same was not true of girl scouts with lower sales ability, for many different reasons such as age and other activities and commitments. In their case, the inventory risk acted as a barrier that prevented them from ordering more, which coincidentally reduced their sales potential.
A sales lesson
The improved performance that was possible in an inventory-driven push system of cookie selling illustrates the limitations of lean pull-oriented systems. Inventory has the obvious advantage of stimulating demand. Customers are more likely to purchase cookies when they see the boxes of Do-si-dos or Thin Mints. So, when girl scouts went door-to-door with actual cookies rather than order sheets, it was possible to generate more sales. Beyond this immediate benefit, the higher inventory risk incurred by the girl scouts offered a less-obvious benefit — higher effort. What this means is that the shift to a push system in this setting resulted in higher sales, higher effort, and potentially, a more satisfied customer base.
Some of the practices of the Girl Scouts organization were key in unlocking the potential of the new push process. In collaboration with the local councils, the parent organization spent considerable effort to onboard new troop members and educated them about the mission of Girl Scouts and the value of the cookie selling process. They offered guidance regarding popular varieties, optimal assortment allocation and how to organize cookie selling activities. The incentives are also structured in a way that rewards not only total sales quantity and but also active participation in the selling process. Most importantly, Girl Scouts works hard to instill a sense of community that is striving towards a common goal. These initiatives ensured that even inexperienced girl scouts did not view the cookie selling process with fear and trepidation but with excitement. The end result was a flexible resilient salesforce that was empowered to manage demand and supply uncertainty in a better fashion.
Toward a better model
The role of inventory and how it can impact sales, as in the case of the girl scouts, offers important lessons in managing supply chains. For starters, the pursuit of lean and just-in-time systems has its limitations and own set of costs. When there is very little uncertainty, the lean approach can help bring about much needed efficiency, and enable supply chains to operate with lower costs. In the presence of uncertainty, however, inventory holds strategic value, even when it might impose costs. With unpredictable demand or potential supply disruptions, firms can satisfy demand with stock on hand. This isn’t possible in lean systems—and such lost sales opportunities can lead to an erosion in long-term competitive ability.
Push systems require a greater understanding of demand because stocking decisions have to be made in anticipation of demand, which is typically uncertain. Stocking decisions cannot be made independently and are instead integrally tied to many other strategic choices in supply chains. For example, should you diversify your supply base? Should you near-source versus offshore production? Who should be responsible for carrying inventory and how should they be compensated for the costs? As the Girl Scouts organization was able to effectively transition from a pull to a push system through empowerment, managing disruptions in the supply chain will also require firms to accept different levels of a supply chain, not as independent pieces of the puzzle, but as partners with shared goals. It’s time to evaluate supply chains, not just on the basis of their efficiency, but also on their resiliency.
The paper, “Impact of Inventory Risk on Sales Effort Provisioning: Theoretical Predictions and Empirical Evidence” by Sreekumar Bhaskaran, Canan Savaskan, and Tom Tan of the Cox School of Business at Southern Methodist University is under review.
Edited by Jennifer Warren