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74-7245

JMOFFATT, Joseph Franklin, 1921- ORGANIZATIONAL CONFLICT IN INVENTORY MANAGEMENT.

The Louisiana State University and Agricultural and Mechanical C ollege, D.B.A., 1973 Administration

University Microfilms, A XEROX Company, Ann Arbor, Michigan

THIS DISSERTATION HAS BEEN MICROFIIMED EXACTLY AS RECEIVED. ORGANIZATIONAL CONFUCT IN INVENTORY MANAGEMENT

A D issertation

Submitted to the Graduate Faculty of the Louisiana State University and Agricultural and Mechanical College in partial fulfillment of the requirements for the degree of Doctor of

in

The Department of Marketing

by Joseph Franklin Moffatt B. B. A ., The University of Texas, 1963 M. B. A ., The University of Texas, 1964 August, 1973 ACKNOWLEDGMENTS

I wish to express my sincere appreciation to those who have made this

study possible and who gave their time and effort in the preparation of this

manuscript.

Special gratitude is extended to Dr. Norton E. Marks for taking over as

Chairman and guiding this study to completion. Dr. Roger L. Burford's

assistance and advice was invaluable in the evolution of the research procedure.

As my in Transportation and Logistics, Dr. James P. Payne, Jr. has contributed much to my education and this study. I am indebted to Dr. Adel I.

El-Ansary and Dr. Raymond V. Lesikar for reading and offering suggestions during the development of this study.

Dr. Peter C. Dickinson of the University of Southwestern Louisiana was very helpful on statistical matters and computerization of the survey data. I appreciate very much the courtesy and cooperation from the anonymous members of our business community who participated in this study. I thank

Ms. Blumberg for her excellent typing.

Last, but not least, I thank my wife, Louise, for considerable patience during all my study leading up to and through the dissertation. TABLE OF CONTENTS

Page

ACKNOWLEDGMENT...... ii

LIST OF TA BLES ...... vii

ABSTRACT...... viii

Chapter

I. INTRODUCTION ...... 1

Significance of the W ork ...... 8

Objective of the Study ...... 8

H y p o th e s e s...... 9

Review of the L iteratu re ...... 10

Objectives and g o a ls ...... 11

Causes of organizational conflict ...... 11

Decision making in the firm ...... 12

Organizational reward system...... 13

Measurements of performance...... 13

Inventory objectives...... 14

Inventory planning ...... 15

Example of current technique ...... 16

S u m m a r y...... 16

iii iv

Chapter Page

Limitations of the Study...... 17

Definitions of T e rm s ...... 18

Preview of the Organizational P lan ...... 19

n. RESEARCH PROCEDURES...... 20

S a m p l e...... 20

Questionnaire ...... 21

Appropriate inventory ...... 22

Factors in inventory decisions...... 24

Inventory techniques...... 26

Measuring and rewarding perform ance...... 28

Determining capital cost of inventory...... 29

Respondent background ...... 31

Basic data on com pany...... 32

Pilot Study...... 32

Conduct of S u rv ey ...... 33

Letter requesting interview ...... 34

Executives included in interview ...... 34

Instructions to respondents...... 35

Measurement of Survey R esponse...... 37

Primary hypothesis...... 37

Test of secondary hypotheses...... 38 V

Chapter Page

Test of primary hypothesis...... 41

Methods of measuring and rewarding perform ance...... 42

Influence of background ...... 42

Comparison of conflict extrem es...... 44

Limitations of research d esig n ...... 45

S u m m a r y...... 45

HI. ANALYSIS OF D A TA ...... 47

Survey Response...... 47

Measurement of Intracompany C onflict...... 48

Opinions on inventory goals or objectives...... 48

Differences regarding factors in inventory decisions .... 50

Test of primary hypothesis...... 50

Inventory Control Perform ance...... 52

Measurement of perform ance...... 52

Reward for good perform ance...... 53

Cross classification of data ...... 53

Influence of Respondent B ackground ...... 56

Executive profile ...... 56

Test of independence...... 57

Analysis of Firm s with Least and Most Conflict ...... 61

Selection of firms for analysis...... 61

Organization ...... 62 vi

Chapter Page

Objectives of the f i r m ...... 63

Control of various types of inventory...... 64

Recommended inventory techniques...... 65

Measurement and reward for perform ance...... 67

Cost of capital determ ination...... 69

IV. SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS...... 72

Review of Research Procedures ...... 72

Pertinent Findings of the S tu d y ...... 74

Data compared to hypotheses...... 75

Probe for causes of conflict ...... 78

Conclusions Regarding Conflict in Inventory Management .... 79

Recommendations...... 80

Recommendations based on conclusions ...... 80

Recommendations from current literature ...... 81

Suggested Future R esearch ...... 85

BIBLIOGRAPHY ...... 07

APPENDIX - Survey Questionnaire...... 91

VITA ...... 98 LIST OF TABLES

Table Page

3-1 Measurement of Conflict on Inventory Goals or Objectives ...... 49

3-2 Measurement of Conflict on Factors in Inventory Decisions .... 51

3-3 Cross Classification of Measurement and Reward on Inventory Performance ...... 54

3-4 Chi-square Calculations on Orientation and Profile Relationships. . 59

3-5 Comparison of Firms on Recommended Inventory Techniques . . . 66

3-6 Measurement and Reward on Inventory Performance in Least - and Most-Conflict C om panies...... 68

3-7 Capital Cost of Inventory Determination...... 70 ABSTRACT

Many writers agree that inventory control is the hub of the systems approach to material and product flow and the focal point of conflicts of interest in the business firm. The literature on the financial aspects of inventory management is confusing and in some cases strongly contradictory. Conflicting views within the business seem to m irror the conflicting views of various practicing consultants and academicians.

Purpose; The objective of this study is an investigation of the general attitudes toward inventory management in a representative sample of large manufacturing companies. An attempt is made in this exploratory research to establish the relevant variables and determine whether executives have conflicting opinions regarding inventory. Development of a model reflecting optimum behavior is beyond the scope of this study.

Procedures; Hypotheses are tested by a personal survey. On the assumption that intracompany inventory conflict is not greatly affected by region or industry, a judgment sample of thirty-five companies was selected. It is believed that the twenty-seven firms that participated have enough non-regional ix orientation ( over $30 million) and product (food, beverage, chemicals, electrical, machinery, steel, air conditioning, metal products, publishing, and clothing) to be representative of large manufacturers throughout the United States.

Survey questions were structured to measure attitudes toward inventory goals, factors, and techniques, determine what performance measurements and rewards have been established, and probe the influence of executive background and other possible causes of conflict. For example, executives were asked to indicate the appropriateness of goals and the significance of factors such as:

Inappro- Minor Don’t Know Appro- Very Appro- priate Importance —Neutral priate priate Good service to custom ers

Factor Insig- Minor Sig- Don't Know Signif- Very Signif- ______nificant nificance —Neutral icant ______icant____ Variable transit tim e

Executives surveyed in each firm included the chief executive or division mana­ ger, and the top officer in manufacturing, marketing, , and distribution or purchasing, as applicable.

Even though a probability sample design was not used, random sampling is assumed—based on the premise that the judgment sample is sufficiently representative for this exploratory work. Normal conflict established in this study is a subjective judgment of reasonable intrafirm differences. These

limitations require that inferences be viewed as indicative and not conclusive.

Conclusions: The survey results indicate that the following situations

are generally prevalent in large manufacturing firms: (1) conflict among

executives regarding inventory exceeding normal policy differences,

(2) significant differences of opinion on inventory goals, (3) significant

disagreement regarding factors in inventory decisions, (4) absence of a

systematic method for measuring and rewarding inventory performance, and

(5) conflict or ignorance regarding the capital cost of inventory. There is

some evidence that; (1) an executive’s inventory-control views are influenced by his background and literature, and (2) where executives tend to agree on inventory goals and factors they will tend to agree on techniques.

Recommendations: Manufacturers exhibiting symptoms of conflict should consider the following remedial action: (1) identify all variables relevant to the inventory operation, (2) coordinate all personnel involved in inventory decisions, and (3) establish techniques for controlling inventory and measuring and rewarding performance based on the objective of the firm.

Additional research is needed. It is recommended that future studies be directed toward the following topics: (1) intrafirm and interfirm tradeoffs between inventory and other functions of physical distribution, (2) effect of inventory levels on logistical service and resulting effect on demand,

(3) inventory costs—including stockouts and cost of capital, (4) contribution to profit measurement of inventory decisions, and (5) profit responsibility where inventory and other logistical functions are integrated, where inventory levels are established by joint decisions, and where inventory moves between divisions within a company. CHAPTER I

INTRODUCTION

Considerable advances have been made in the science and of

physical distribution since World War n. Improvements in transportation and

materials handling, increased use of computerized information systems, and

greater sophistication of analytical techniques offer many new opportunities in the design and control of distribution systems.

However, many distribution experts and business executives are point­ ing to serious problems and failures of the total-system approach and the physical-distribution concept. Some writers feel that these concepts have not been sold to management while others think they have been oversold.

According to Gill:

The first myth of physical distribution is that ’the selling phase of PD management is over. ’ I feel that we've only just begun! . . . Many top executives from sales, production, legal and financial backgrounds are acquainted with the PD concept . . . but really don't understand its rami­ fications. This is especially true in the areas of inventory levels today, which in many cases are dictated by the relative 'clout' of the sales, production or financial interests. *

Neuschel agrees that most top executives recognize the importance of tradeoffs between distribution and other major functions of the business.

However, he says:

^Xynn E. Gill, "Through the PD Looking Glass, " Distribution World­ wide, August, 1971, p. 31. 1 2

The concept has seldom been fully translated into reality. To be sure, some companies have established operating interfaces between physical distribution and marketing and manufacturing. But even they have stopped short of bringing the distribution function into the inner councils of top management or gearing the strategic distribution plan into overall corpor­ ate planning. 2

Fredericks contends that the concept has been oversold in almost every

case that he is familiar with. He notes that "a lot of VP's of distribution bit the 3 dust when the promises that were made didn't come true."

But what is this PD concept that so many are discussing? Physical

distribution management is defined as "that responsibility to design and admin- 4 ister systems to control raw material and finished goods flow." Given this as

a definition, what is the concept's most critical aspect? Stewart points out that

inventory control is the foundation of the system. He writes:

It is interesting to note that many companies include inventory manage­ ment in the list of responsibilities assigned to PD management when, in fact, the amount of finished goods inventory in the distribution system is largely determined by decisions made and policies established in other functional areas of the business (i. e. manufacturing, finance, and marketing). ®

2 Robert P. Neuschel, "Corporate Level PD: Creative or Reactive?" Distribution Worldwide, December, 1971, p. 21. 3 W. A. Fredericks, "Implementing the Theory of Physical Distribution, " Distribution Worldwide, May, 1971, p. 44. 4 Donald J. Bowersox, Edward W. Smykay, and Bernard J. Lalonde, Physical Distribution Management, The Macmillan Company, New York, 1970, P. 5. 5 Wendell M. Stewart, "Physical Distribution—Coordinating Inventory, Warehousing, and Transportation for Optimum Service at Lowest Cost, " Handbook of Modern Marketing, Victor P. Buell, editor, McGraw-Hill Book Company, New York, 1970, pp. 4-52 and 4-53. 3

Many writers agree that inventory control is the hub of the systems

approach to material and product flow and the focal point of conflicts of interest

in the business firm. Therefore, an effective approach to inventory control is

essential. Without such a policy a company either loses sales by having too

little stock or, conversely, ties up money, increases storage costs, risks

product obsolescence, and loses flexibility by carrying too large an inventory.

Nelleman and Thiry point out:

Controlling inventories to meet profit goals is not easily attained con­ sidering all the functional areas involved and how they view their own inventory objectives. Consequently, the definition of inventory manage­ ment will vary substantially depending on the area involved: Sales; Generally expresses inventory levels in terms of customer service. Finance; Concerned over the dollar investment and the added capital and cost requirements of any additional inventory. Production: Principally concerned with efficient utilization of operations in terms of large lot sizes and level production. Purchasing: Interested in long lead times and large lot sizes to obtain economic discounts. Top Management: Principally interested in the profit impact of inventory.

Meal states that "from the point of view of physical distribution manage­

ment, I suppose the most important outputs of the planning activity are the

allowed-inventory-investment level, the desired customer-service level, and 7 the operating-cost budget.M Bennett says his most important decisions at

g David O. Nelleman and Donald L. Thiry, "Profit Improvement Through Inventory Management, " Production & Inventory Management, 4th Quarter, 1970, p. 30.

7 Harlan C. Meal of Arthur D. Little, quoted in James M. Dixon, "NCPDM Theme-. Planning," Distribution Worldwide, November, 1970, p. 50. Purex are '’concerning inventory control. "® Murray of AAMCO also points out the importance of this activity when he says "the hardest part about distributing g our products . . . is inventory control. "

The literature on the financial aspects of inventory management is con­ fusing and in some cases strongly contradictory. A considerable volume of this literature—including current textbooks in , finance, manage­ ment, marketing, and physical distribution—contains an EOQ (economic order quantity) formula.10 To use this controversial formula a business firm must determine the cost of capital or expected return on investment in inventory.

Not only are there disagreements on how to calculate the capital charge; some contend that the EOQ model is inappropriate or unrealistic.

Van Horne says "the economic order quantity (EOQ) is an important concept in the purchase of raw m aterials and in the storage of finished goods 11 and in-transit inventories.nJL In contrast, Smykay and Dale write that "the

O Russell Bennett, quoted in Janet Bosworth, "What Does a Traffic Manager Do?" Distribution Worldwide, March, 1971, p. 39. g Warren Murray, quoted in Janet Bosworth, "What Does a Traffic Manager Do?" Distribution Worldwide, March, 1971, p. 47.

1(*Size of order in which the combined cost of procuring and carrying inventory is at a minimum. - / 2(Usage in units)(Order cost/order) - w (Percentage carrying cost)(Unit cost of item)

^Jam es C. Van Home, and Policy, Prentice^ Hall, Inc., Englewood Cliffs, New Jersey, 1971, p. 483, classical EOQ formula is useful as a learning device, but will likely be useless 12 in an actual application.” Arnoff points out that "the case represented by the classical EOQ formula is almost totally idealized.M He further notes that:

The implicit assumptions are so restrictive that there is virtually no real- life situation for which these assumptions are even approximately true . . . Obtaining valid values for the four 'given* factors . . . is, in itself, a major and exceedingly difficult task. Furthermore, in realistic inven­ tory models, we must also consider such factors as quantity discounts, variable and uncertain demand, seasonal demand, variable lead times, variable transit times, and shortage costs. 13

Conflicting views within the business firm seem to m irror the conflict­ ing views of various practicing consultants and academicians. The problem appears to be largely behavioral—involving conflicting experience, interests, and objectives. Managers are trained in functional skills such as manufactur­ ing, marketing, finance, and engineering and are generally evaluated in terms of the performance of their function. Perceptions and motivations of involved in inventory decisions are significant.

In the science of moving materials and products there is a tendency to ignore the human element. The organizational aspects of inventory manage­ ment cannot be ignored. Van Cleave writes:

. . . our question challenges the parochial interests of the person— persons who establish the policy in the first place, and the skills of the or individuals responsible for implementing or executing that policy . . . The inventory control system must be personnel oriented.

12 Edward W. Smykay and Allan D. Dale, ’’Inventory Control; What Price Service?” Readings in Physical Distribution, Hale C. Bartlett, editor, The Interstate Printers and Publishers, Inc., Danville, Illinois, 1970, p. 104. 13 E. Leonard Arnoff, ’’Successful Models I Have Known, ” Decision Sciences, April, 1971, p. 143. Each person who interfaces with the system must understand the impor­ tance of his contribution. ^

In fact, "people and not " turned out to be the current problem

in physical distribution, according to a recent study undertaken by the National 15 Council of Physical Distribution Management. The report concluded that the

"real gap is not in physical distribution cost information but in the evaluative

systems currently used in marketing and inventory investment which do not

associate responsibility with the reward system. " Until the business firm

develops a system for measuring and rewarding individual contributions to

overall distribution performance, decision-makers will not be motivated to develop an integrated system of inventory control. Such decisions involve

sacrificing individual or departmental interests to maximize total corporate performance.

Schiff notes that marketing is evaluated and rewarded through incentive plans in which performance is measured by actual sales volume against expected volume with PD costs viewed as a free service. He writes;

. . . it should appear quite evident that until decision-makers in market­ ing (and this goes down to the field salesman) are evaluated and rewarded on their profit contribution determined after deducting relevant PD costs, PD costs will continue to increase despite the best efforts of PD management. ^

14 James P. Van Cleave, "Who Really Controls Your Inventory?" Production & Inventory Management. 4th Quarter, 1971, pp. 11-12. 15 Judith C reedy, "Problems of Physical Distribution Are Keyed to Evaluative Systems, " The Journal of Commerce, May 12, 1971, p. 5. 7

This concept is usually referred to as the profit center method. The concept normally involves some method of transfer pricing and measuring various functions (production, logistic:,, marketing) for profit performance.

Will this technique solve the problem of controlling total inventory—cutting across departmental lines and involving not only cost but demand considerations 1

There is little research or literature available regarding the organiza­ tional aspects of the systems approach and total-inventory management.

Conrath. says that "though a great deal has been done on entity decision making, much remains to be done in the way of multi-person organizational decision 17 making. " Achieving effective inter-departmental decisions requires consi­ derable commitment by top management and support by subordinates.

According to Cyert and March:

A behavioral theory of the firm has implications for operations research models at two different levels of generality. First, a model of a specific decision-making process could form a basis for identifying organizational constraints on a decision rule. Second, the theory seems to indicate that efforts to improve an organization as an adaptive system might be more relevant than efforts to generate some kind of optimizing decision rule. In the final accounting, it will probably be the first of these implications that will prove the more significant.

From these divergent views several questions arise which are of direct and current interest to both academicians and practitioners. How do business­ men calculate inventory? What is business doing to solve the problems of

17 David W. Conrath, "Organizational Decision Making Behavior Under Varying Conditions of Uncertainty, " Management Science, April, 1967, p . B—499. 18 Richard M. Cyert and James G. March, A Behavioral Theory of the Firm , Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1963, p. 291. conflicting views? Is organizational conflict a principal part of the current

problem with inventory levels? That answers to these questions are not

readily available underscores the need for research in this area.

Significance of the Work

Clashing concepts of inventory management expressed in literature

often lead to confusion as to how this important aspect of business should be

handled. The systems approach and the PD concept, of which inventory

management is an integral part, are both experiencing difficulty. Assuming

that most businessmen are attempting to sort through the maze of their

problems in a logical fashion, the next question is: What are they doing about

inventory management? Literature certainly does not provide ready answers

to this question.

Because of this dirth of good answers, the proposed research has two­ fold . First, the newly-acquired knowledge can be disseminated through and academic journals so that practitioners and academicians will be aware of the problem and what industry is doing to solve it. Academicians will be better armed to teach their students both the theory and practice of inventory management. Second, the researcher will be in a better position to devise a sound and more generally acceptable method of inventory control, which can then be disseminated through both journals and the classroom.

Objective of the Study

The objective of this study is to determine the general attitudes toward inventory management in a representative sample of large manufacturing companies. Specifically, the study will attempt to determine if conflict exists regarding inventory objectives and control and the extent of such conflict. The research will also investigate possible causes of organizational conflict.

Despite considerable evidence that the problems and failures of the total-system approach and the PD concept are largely the result of inventory conflicts, no attempt will be made to prove this relationship. Development of a model reflecting optimum behavior or what is best for the firm is beyond the scope of this study. These aspects must await further research.

Therefore, of necessity, the study is descriptive rather than normative.

The study should be considered exploratory in attempting to establish the rele­ vant variables in inventory management and probing for causes of conflict.

Identification of the variables alone may be a significant contribution to the discipline. The research seeks to analyze and interpret the opinions of executives within the firm regarding the variables of inventory control. An investigation of current conditions and further definition of the problem is the purpose of this study.

Hypotheses

Based on the current information available the following hypotheses are offered (stated in the null form to facilitate statistical analysis):

Primary Hypothesis—In large manufacturing firms the intracompany conflict among executives regarding inventory policy is no greater than normally would be expected when such executives are asked for opinions on a random set of other policy questions. 10

Secondary Hypotheses—(1) There are no significant differences of opinion among executives within the firm on inventory goals or objectives.

(2) There is no significant disagreement among executives within the firm regarding the important factors in inventory decisions.

(3) More than 25 percent of the large industrial firms have devised a method for measuring and rewarding performance of executives on inventory control.

(4) Inventory-control orientations of various executives are not signifi­ cantly influenced by their individual backgrounds and the current literature they read.

Review of the literature

What additional literature is pertinent to the problem, objective, and hypotheses of this studyT literature regarding the organizational aspects of inventory control is almost non-existent. Of course, this void supports the need for the current study. On the other hand, literature regarding the behavioral aspects of the business organization is abundant. A summary of some prominent literature regarding organizational conflict is presented at this point, followed by an examination of current literature on inventory management. A review of organization theory and inventory-control literature provides a vital background for the research design of this study. 11

Objectives and goals

Cyert and March of Camegie-Mellon University point out that agree­

ment on organizational objectives is usually agreement on highly ambiguous

goals. They write;

The studies suggest further that behind this agreement on rather vague objectives there is considerable disagreement and uncertainty about subgoals . . . Most organization objectives take the form of an aspiration level rather chan an imperative to ’maximize1 or 'minimize,' and that the aspiration level changes in response to experience. ^

Ackoff, professor of operations research at the University of Pennsyl­ vania, emphasizes that performance objectives must have an operational definition, i. e ., specification of the method by which progress toward such objectives can be measured. Ackoff notes;

The objectives and goals set for a manager will have little effect on his performance unless the measure of performance that is applied to him reflects these objectives and goals. Managers will try to maximize the performance measures with which their advancement and rewards are associated . . . Measures of performance should be developed for each decision maker or group that are compatible with overall organizational objectives.

Causes of organizational conflict

Athos (Harvard) and Coffey (University of Southern California) list the principal causes of intergroup conflict as; (1) conflicting goals,

(2) for limited resources, status, and power, (3) different

19 Ibid., p. 28. 20 Russell L. Ackoff, A Concept of Corporate Planning, Wiley-Inter- science, New York, 1970, pp. 101 and 111. values, norms, and personal orientations, and (4) perceptions of threat from

another group. ^

According to March and Simon (Carnegie-Mellon) the conditions neces­

sary for intergroup conflict are: (1) a general absence of individual conflict,

(2) the existence of a positive felt need for joint decision making. (3) either

a difference in goals or a difference in perceptions of reality, or both, among 22 participants in the organization.

Decision making in the firm

Cyert and March include four basic phenomena that are fundamental to the decision-making process of their modern, large-scale business- organization model; (1) quasi-resolution of conflict, (2) uncertainty avoid- 23 ance, (3) problemistic search, and (4) . Conflict is resolved by using local rationality, acceptable-level decision rules, and sequential attention to goals. avoid planning where plans depend on predictions of an uncertain future and emphasize planning where the plans can be confirmed with some control device. Problemistic search is directed toward finding a solution to a rather specific problem as distinguished from understanding. Organizations exhibit learning or adaptive behavior over time

21 Anthony G. Athos and Robert E. Coffey, Behavior in Organizations; A Multidimensional View, Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1968, p. 213. 22 James G. March, and Herbert A. Simon, Organizations. John Wiley & Sons, Inc., 1958, p. 121. 23 Cyert and March, o£. cit., pp. 125-126. 13 by changing goals, shifting attention, and revising procedures for search.

This behavorial concept is most important to this study. Cyert and March further state:

Because the decision process is segmented into three sets of decisions each having its own set of goals, it is convenient to think of each firm as being departmentalized into three subdivisions. These subdivisions— pricing, production, and sales—are relatively independent of each other. Each makes decisions independently, subject to cross-departmental pressures . . . In essence, the firm sets production in response to sales. In the steady state, production in one time period is precisely equal to sales of the preceding time period . . . More commonly, the organization seeks to establish a production level that is consistent with a set of changing inventory and production-smoothing goals.2^

Organizational reward system

The reward structure of a firm should motivate employees to pursue organizational objectives. But March and Simon emphasize the point that reward systems are rarely internally consistent. They write;

Rewards that are linked to vague criteria will be ineffective in coordina­ ting individual goals . . . conflict can be stimulated by a reward system that, though fully operational, places individual members or subgroups in competition for scarce resources. 2^

Measurements of performance

Allocative procedures by which the organization disaggregates per­ formance and transfers accounting credit for performance from one divisional ledger to another include, according to Cyert and March: (1) allocation of overhead, (2) various preferential-treatment market systems for the

24m „ pp. 150-151. 25 March and Simon, o£. cit., pp. 125-126. 14 purchase of goods and services by one subunit from another, (3) organiza­ tional conventions for determining subunit responsibility for receipts or disbursements (in money or other criteria of performance), and (4) an 26 assortment of informal devices for exchanging budgetary allotments.

March and Simon write:

We could compare a decentralized planning system in a firm in which production decisions in each department were regulated by prices with a decentralized system in which these decisions were regulated by sales forecasts and feedback of inventory data. (Most actual formal inventory and production control schemes are of the latter kind.

Inventory objectives

Harvard marketing Professor Buzzell and his coauthors state that the general role of inventory in the business firm is to coordinate production and demand. He indicates four specific objectives of inventory;

1. Good service to customers, i. e ., the ability to fill orders within a "reasonable" period of time 2. Maintenance of a level rate of production and 3. Low investment in inventory 4. Avoidance of deterioration and obsolescence. ^

Van Cleave of I. T. T. Europe notes that more sophisticated writers urge specific policy statements, e. g., "provide a customer service level of

93 percent at the lowest possible cost." Van Cleave adds;

26 Cyert and March, oj>. cit., p. 275. 27 March and Simon, oj>. cit., p. 209. 28 Robert D. Buzzell, Robert E.M . Nourse, John B. Matthews, Jr., and Theodore Levitt, Marketing—A Contemporary Analysis. McGraw-Hill Book Company, New York, 1972, p. 502. 15

Some writers extend this concept and suggest that through simulation more explicit parameters may be established and allow management to develop policy based on the 'what if1 principal. This approach offers the potential of allowing (encouraging) all management functions to contribute in a dynamic way to inventory policy. Policy could, therefore, be responsive to changing business conditions. 29

Prince, Northwestern University accounting Professor, says that an effective inventory-management information system must be compatible with corporate policy. Some of the critical areas he lists are* (1) customer serv ice, (2) back o rd e rs, (3) m odel and engineering changes, (4) facilities, 30 (5) personnel policy (including labor leveling), and (6) crash programs.

Inventory planning

According to Stewart, of the consulting firm A. T. Kearney, inventory planning involves forecasting sales by product, by market, and by time period and then translating these anticipated sales into appropriate inventory budgets for each product. Stewart notes that such budgets should be computed monthly for each stock-keeping location, taking into account such considerations as 31 lead times and desired inventory reliability levels.

Magee, vice president of Arthur D. Little, contends that the analyst must determine an appropriate inventory investment—first, by determining how the change in inventory would be realistically accomplished, and second, by estimating the effect of such action on the cash flow. Inventory may be

29 Van Cleave, o£. cit., p. 11. 30 Thomas R. Prince, Information Systems for Management Planning and Control, Richard D. Irwin, Inc., Homewood, Illinois, 1970, p. 197. 31 Stewart, o£. cit., p. 4-66. 16

expanded by reducing sales or increasing production, and it may be reduced by

increasing sales or cutting production. Each method will have its own effect 32 on cash flows.

Example of current technique

At Eastman Kodak responsibility for inventories of finished photographic

goods is basically in the Distribution Division. The Division has the of establishing inventory goals to meet four principal objectives of the company:

1. Service to the customer, assuring timely product availability at point of sale 2. Minimizing inventory size so that funds may find alternative employment 3. Maintaining level employment through inventory-building schedules that meet seasonal demands yet avoid repetitive hiring and firing plus excessive overtime 4. Perishability: Inventories must move properly to protect expiration dates on products such as film and paper.33

Sum m ary

Organizational conflict results from differences in goals, perceptions, values, and orientations. A reward system based on vague criteria will be ineffective in coordinating individual goals. Decision making involves resolu­ tion of conflict, avoidance of uncertainty, and organizational learning.

Companies should develop measures of performance for each decision maker that are compatible with overall objectives.

32 John F. Magee, Physical-Distribution Systems, McGraw-Hill Book Company, New York, 1967, p. 107. 33 Jack W. Farrell, "Distribution Dynamics at Work, " Traffic Management, November, 1971, p. 37. 17

Inventory policy and objectives usually involve customer service, investment, stability of employment, and avoidance of deterioration and obsolescence. Inventory planning must translate the policy into actual monthly budgets for each product and location. As indicated in the statement of the problem for this study there is considerable variation in the literature regard­ ing calculation of inventory investment.

The literature does not show how a firm actually translates several objectives into operating levels or measure performance on inventory deci­ sions. Of course, the fact that these calculations are not in the literature does not mean that industry is completely void of sources of information in this regard. A company is often reluctant to divulge details of a complex control program. The literature reviewed in this section and the statement of the problem are the foundation for the research design in Chapter II.

lim itations of the Study

In this study no limits have been established in the search for literature regarding organizational conflict and inventory control. However, no claim is made that this search is exhaustive.

The regional survey conducted in this research is assumed to be a representative sample of the national population. Explanation and justification of the sample are contained in Chapter H. The regional aspect must be recognized in interpretations and conclusions; however, because of the exploratory nature of this study, geographical limitation of its sampling does not present a major problem. 18

It is hoped that this study will provide the reader with insights into the

inventory problem and will help him to recognize new variables. Additionally,

this effort should sharpen the focus on inventory conflict and open doors to

future research.

Definition of Term s

The following definitions of certain term s used in this chapter are offered for clarity:

System - an array of components designed to accomplish a particular objective(s) according to plan. 34

Total-system Concept - an approach to organization and information system design that views the business enterprise as an entity composed of interdependent systems and subsystems, which, with the use of automatic data processing equipment, attempts to provide timely and accurate information which will permit optimum management decision-making. 35

Physical Distribution or Logistics System - the total flow of materials, from the acquisition of raw materials to the delivery of a finished product to the ultimate user. 36

Total-system Concept in Physical Distribution - integration of the functions of transportation, warehousing, materials handling, packaging, order processing, customer service, market forecasting, inventory control, production planning, , and plant and warehouse location. 37

34 Richard Johnson, Fremont E. Kast, and James E. Rosenzweig, The Theory and Management of Systems, McGraw-Hill Book Company, New York, 1967, p. 113. 35 Peter P. Schoderbek, Management Systems, John Wiley & Sons, Inc., New York, 1967, pp. 150-51. 36_ _ Magee, o£. cit., p. 2. 37 "New Strategies to Move Goods," Business Week, September 24, 1966, p. 112. 19

Preview of Organization Plan

The sequence of this study is a build-up from the secondary research

necessary to develop a survey questionnaire to the actual primary research.

Chapter It gives an explanation of the research procedure, a description and

justification of the sample, and a detailed development of the questionnaire.

Descriptions of the pilot study, conduct of the survey, and measurements of

survey responses against the hypotheses are included. The chapter concludes

with some additional details regarding limitations of the study.

The analyses of data in Chapter m is divided into four parts. First is

the measurement of intracompany conflict. Next, inventory control perform­

ance is analyzed. Third, influence of respondent background on viewpoints is probed. And the chapter concludes with a comparison of company objectives, current practices, and recommended techniques in firm s with the least conflict and those with the most conflict.

Chapter IV includes a review of research procedures, pertinent findings, an over-all conclusion, recommendations, and suggestions for future re se a rc h . CHAPTER H

RESEARCH PROCEDURES

The descriptive and analytical research in this study is an exploratory

inquiry into conflict in inventory management. By analyzing the attitudes of executives regarding inventory goals, factors, techniques, and measurements, the study attempts to determine the extent of conflict and possible causes. The principal objectives are to identify the significant variables and investigate current conditions in inventory control.

This chapter contains an explanation of the research methodology used, a discussion of the sample selection, and a description of the survey- question­ naire. Also included are explanations of how the survey and the pilot study were conducted. Finally, noting the limitations of the research procedure, the method for comparing survey data against the hypotheses of the study is described in detail.

Sample

The hypotheses of this study are tested by a personal contact survey of selected firms in Texas and Louisiana. Time and financial limitations neces­ sitated the use of a regional sample; however, regional bias should be in part reduced in that the large companies selected for the survey include many execu­ tives who are nationally oriented by experience, education, or market.

20 21

A non-probability sample selection was made from firms listed in the

Fortune 1000 1972 listing* and Dun & Bradstreet's 1972 Million Dollar 2 Directory. The judgment sample of thirty-five companies was picked from six

industrial categories. Selected companies manufacture a variety of consumer

or industrial products and each has sales of $30 million and up.

The industrial categories are food, beverage, chemicals, electrical,

general and special machinery, and miscellaneous manufacturing. Steel, air

conditioning, fabricated metal products, publishing, and clothing are included in the miscellaneous group. Because of the size and diversity of selected firms, the sample is believed to be representative enough of large manufacturers throughout the United States to serve the purposes of this exploratory study.

Questionnaire

Literature on organization and inventory theory reviewed in Chapter I includes contributions of some of the foremost scholars in these areas. The design of the questionnaire was based on a study of the literature.

Questions were structured to measure company executives' attitudes toward inventory policy and to determine what reward systems and performance measurements have been established. Each respondent was requested to supply personal background information for development of a professional profile. The

*"The 500 Largest Industrial , " Fortune, May, 1972, pp. 188-224 and "The Second 500 Largest Industrial Corporations, " Fortune, June, 1972, pp. 108-135.

o Dun & Bradstreet Million Dollar Directory 1972, Dun & Bradstreet, Inc., New York, January, 1972 and May, 1972 Supplement. 22 chief executive or product division manager was also asked to provide some basic data on the company.

Since a principal objective of this study is to identify the relevant variables in inventory, the entire questionnaire is explained at this point. Each question is presented in order—followed by a definition or explanation of each 3 term (variable) included in the question.

Later in this chapter a section entitled "Measurement of Survey

Response" explains the way in which various parts of the survey are used to test the study’s hypotheses. How each question is used for measurement and limitations of the research design are explained in detail at that point.

Appropriate inventory goals

The basic questionnaire used for all executives is discussed first.

Later the additional company information sought from the chief executive is indicated.

The opening question requested the respondent’s views on inventory goals or objectives:

A complete survey questionnaire with accompanying instruction sheet is included as Appendix A. 23

1. In your opinion, how apprc>priate are tlve following in ventory goals (objectives) foi • your firm? Check 1 co lumn for each goal—add ing other goals you consiider appropjriate.

V ery Goal Inappro­ M inor Don't Know A ppro­ A ppro­ p riate Im portance —N eutral p ria te p ria te Good service to customers Low investment in inventory Level ra te production/ employm ent Avoid deterioration/ obsolescence O ther

What do these goals mean? The following explanations—offered here as description of the research—were not mentioned to respondents;

* Service to customers might include lead times, stockouts, damage levels, convenience in ordering and handling, and reliability or consistency of serv ice.

* The two basic costs of holding inventory are the operating costs and the capital costs. Operating costs include all costs of storage and handling. The capital cost is an interest cost on the capital invested in inventories. Values placed on this charge range from no interest to opportunity cost.

* The goal of level rates of production and employment is the maintenance of production schedules which meet seasonal demands but avoid excessive hiring, firing, and overtime charges. 24

* The deterioration or obsolescence of products subject to limited lives or

style changes may be an important cost of holding inventory.

Factors in inventory decisions

Question 2 also probed inventory-management attitudes:

2. In your opinion, hovv signifiesint are the fo lowing factc>rs in inv entory decisions? Very Insig­ M inor Don’t Know Signifi­ Signifi­ F acto r nificant Significance —N eutral cant cant Unit Cost Transportation cost Variable lead time Variable transit time Inventory carrying cost Cost of capital Variable storage cost Ordering costs Setup, costs Stockout costs Quantity discounts Uncertainty of demand Demand level Seasonal adjustments Production smoothing

Brief explanations of each factor offered here for clarity were not dis­ cussed with the respondent;

* Unit cost is included in the EOQ formula. Carrying cost is expressed as a percentage of unit cost.

* Transportation costs are lower as shipment size increases. The EOQ formula excludes transportation rates. Including transport costs may increase the size of EOQ but decrease total cost of distribution. 25

* The shorter the lead time or order cycle (i. e., the time required for

transmission, processing, and shipment of an order), the lower the safety

stock requirement. Variable lead time should be considered in the inventory

m odel.

* Variable transit time is part of variable lead time. Reducing transit time will directly reduce stock in transit and indirectly reduce safety stock by decreasing lead time.

* Inventory carrying cost includes storage, handling, , , deterioration, obsolescence, and capital costs.

* Cost of capital might be set at: (1) cost of debt money, (2) target return on investment, (3) opportunity cost, or some other value. The range of possibilities are included in question 7.

* Variable storage cost is also ignored in the EOQ calculation. Public warehouses usually quote a per-unit storage cost based on average inventory.

Lower EOQ's imply lower average inventory, but this reduced amount of stock may increase the per-unit storage cost.

* Ordering cost consists of all cost involved in placing an order— preparation, processing, and transmittal. This charge is included in EOQ.

* Setup costs in manufacturing result from the adjustments necessary to shift the assembly line from one item to another. Setup costs are substituted for order costs in computing ELQ (economic lot quantity).

* Stockout costs may include the cost of a back order or profits forfeited through loss of a sale or a customer. * Given a set of quantity discounts, the optimum, purchase quantity will

depend on the usage, inventory carrying cost, and clerical and receiving cost.

* Uncertainty of demand is a basic consideration in inventory planning.

The level of safety stock depends on a statistical determination of variations in

demand and system operation.

* Base stock is that part of inventory which covers the average demand

level.

* Seasonal stocks are needed to absorb the difference between demand

patterns and production rates.

* Production smoothing may involve stabilization and cycle stocks in

order to obtain economic utilization of labor and machinery.

Inventory techniques

Question 3 sought opinions regarding inventory techniques;

Please check the inventory techniques (as many as needed) you would recommend using in your firm: Economic order quantity Max-Min rules Economic purchase quantity rate goals Economic production lot Linear programming Fixed order quantity Dynamic programming Fixed order time Waiting-line theory Intuition or judgment Flow charts Probability analysis for safety stock and/or reorder point levels Product and material budgets based on sales forecasts Other techniques, specify______These techniques are defined or explained as follows:

* Economic order quantity - size of order in which the combined cost of

procuring and carrying inventory is at a minimum.

2(Usage in units)(Order cost/order) (Percentage carrying cost)(Unit cost of item)

* Economic purchase quantity - same as EOQ.

* Economic production lot (also referred to as economic lot quantity) -

a formula Calculated by the same method as EOQ except that setup costs are

substituted for order costs.

* Fixed order quantity - economic order quantity which is held constant

while time between orders varies.

* Fixed order time - interval between orders which is constant with order

quantity determined by sales forecast over next lead time.

* Intuition or judgment - subjective decision by management—considering

service and cost when determining inventory levels.

* Max-Min rules - minimum and maximum levels set by executive action

for each inventory item.

* Turnover rate goals - ratio of sales/average inventory for the period with a higher rate indicating a more rapid movement—using shelf space for shorter periods and requiring less .

* Linear programming - a procedure for problem solving using various techniques such as the transportation method for distributing material from several sources to various points at minimum cost. 28

* Dynamic programming - a procedure by which a sequential or multi­ stage decision process containing several independent variables is converted into a series of single-stage problems, for example, a multi-stage inventory problem .

* Waiting-line theory - a technique using an analytical model with proba­ bilities which is applicable to differential flow rates.

* Flow charts - illustrations used in ADP for outlining sequential steps such as physical and information flows in various systems,

* Probability analysis for safety stock and/or reorder point levels - the simultaneous determination of safety stock or reorder point levels and order quantity based on probabilities of variance in demand and system operation.

* Product and material budgets based on sales forecasts - inventory budgets for each item at each stockkeeping location which are developed by estimating sales by product, market, and time period.

Measuring and rewarding performance

Questions 4, 5, and 6 probed executive involvement in inventory deci­ sions and company methods for measuring and rewarding inventory performance: 29

4. Are you personally involved in inventory control? ( ) Yes ( ) Somewhat ( ) No If Yes or Somewhat, how are you rewarded for making good inventory d ec isio n s?______

( ) Not rewarded ( ) Don’t know

5. Does your company have a measurement of performance on inventory decisions? ( ) Yes ( ) No ( ) Don't know If Yes, briefly describe ______

6. Is your performance regarding inventory control measured? ( ) Yes ( ) No ( ) Don’t know

If Yes,“ how?• — ______— • —- - — ______- —

Determining capital cost of inventory

Question 7 attempted to determine not only how a firm calculates capital cost of inventory but also whether the executives are familiar with this consideration:

7. Which, if any, of the following techniques is your firm currently using to determine the capital cost of inventory?

( ) Current interest rate ( ) Cost of long-term debt ( ) Minimum investment return ( ) Cost of preferred stock ( ) Opportunity cost ( ) Cost of equity capital ( ) Average return on investment ( ) Weighted cost/debt and equity ( ) Target rate of return ( ) Marginal cost of capital ( ) Other, specify ( ) Do not assess capital cost ( ) D on't know The techniques included in this question may be defined as follows:

* Current interest rate - rate at which additional capital can be borrowed.

* Minimum investment return - the return the company requires to justify an investment.

* Opportunity cost - rate of return which would be earned if the capital were used in some other investment, either internally or externally.

* Average return on investment - charge established by comparison with the current earnings of the company on investment.

* Target rate of return - rate at which the company expects an investment to pay off.

* Cost of long-term debt - rate of return that must be earned on debt- financed investments in order to keep unchanged earnings available to common

4 shareholders.

* Cost of preferred stock - return that must be earned on preferred stock - 5 financed investments to keep unchanged the earnings of common shareholders.

* Cost of equity capital - minimum rate that must be earned on equity- financed investments to keep the value of the existing common equity unchanged/

* Weighted cost of debt and equity - charge calculated as a weighted 7 average of the funds it uses from debt and equity.

4 J. Fred Weston and Eugene F. Brigham, , Holt, Rinehart and Winston, New York, 1969, p. 341. 31

* Marginal cost of capital - rate that is generally constant until the firm has raised an amount of new capital equal to retained earnings plus the incre­ mental debt and preferred stock that can be supported by retained earnings.

Beyond this point, the firm must sell new common, and since common stock has a higher cost than retained earnings, the marginal cost of capital rises.

Respondent background

Question 8 asked the respondent for information about his background and question 9 sought a general reaction;

8. Please indicate i your bac skground by checking tl le approprial;e spaces3; G eneral M anage­ M anufac­ F inance- D is tri­ m ent tu rin g M arketing Accounting bution O ther Current position College major (specialization) Other education (special courses, e tc .) Previous and positions Principal sources of information on inventory control; Books Journals M agazines Consultant R eports School O ther NAME TITLE COMPANY ADDRESS 9. Do you wish a copy of the survey results? ( ) Yes ( ) No 32

Basic data on company

In addition to the basic questionnaire the chief executive or, in cases where a product division is responding, the division manager is asked to supply the following information about the company:

Number of plants ______Number of finished goods warehouses ______Do you own your source of raw materials? ( ) Yes ( ) Some ( ) No Do you have retail stores? ( ) Owned ( ) Franchised ( ) No Do you have a Manager of Physical Distribution (Logistics) responsible for transportation, warehousing, and related functions? ( ) For the company ( ) In each product division ( ) In this product division ( ) No such officer Indicate the title of individual who controls the following categories of inventory: Product Division Purchases (inflow) Work in Process Finished Goods

Our company (division) objective(s) is based on: (Check all that are appropriate) ( ) Percentage return on sales ( ) Maximizing profit in long run ( ) Percentage return on investment ( ) Market share ( ) Fixed dollar amount ( ) Stabilizing prices or competition ( ) Other, specify______

Pilot Study

The questionnaire was pretested by a pilot study consisting of personal interviews in Houston and a mail survey in Dallas. The mail pretest received no response—indicating that it would be very difficult to obtain this type of information by mail, even with an improved cover letter. The personal 33

contact approach, on the other hand, was highly successful. The pretest

also led to improvements in the questionnaire and in the instructions to

respondents.

Conduct of Survey

The corporate headquarters of the selected companies are located

in several of the larger cities in the two-state area. To preclude identi­

fication of respondents, the survey does not indicate type of company

or actual company location. If inventory decisions were made at the

corporate level, respondents were asked to report on the entire company.

If inventory decisions were made primarily within company divisions,

chief executives were requested to select one product division (group) for the survey. 9

9 According to Ernest Dale, Management: Theory and Practice, McGraw-Hill Book Company, New York, 1969, pp. 278-279, ’’Large companies often utilize a divisional form of organization. That is, instead of having all marketing operations report to one executive and all production operations to another, the organization is split up into several semi- autonomous divisions, each of which produces and sells a single product or a single family of products or handles all production and marketing in a given area. " As reported in ’’Profile of a Chief Marketing Executive, ” Marketing News, May 15, 1972, pp. 1 and 3, a study of FORTUNE 500 companies reveals that "some divisionalized firms conduct no marketing activities at the corporate level. " 34

Letter requesting interview

Letters were mailed to companies selected for the sample. ^ The letter attempted to create an institutional and professional image that would motivate all companies in the sample to participate in the survey.

Addressees were informed that interviews would be brief and not involve probing into detailed records or sensitive data. The letter indicated that responding companies would receive a copy of the overall results of the study.

Executives included in interview

In cases where the questionnaire was used at the corporate level, the following executives were surveyed in each company as applicable;11

(1)

(2) Vice President Manufacturing /Production

(3) Vice President Marketing/Sales

(4) Vice President Finance/Comptroller

(5) Vice President Distribution or Purchasing

In cases where a product division was selected, the following division officers were surveyed;

Copy of letter included in the Appendix—Survey Questionnaire on page 92.

1'^Occasionally with variations in one of these executive positions may not be appropriate. 35

(1) Division General Manager

(2) Manufacturing Manager

(3) Marketing Manager

(4) Finance Manager

(5) Distribution or Purchasing Manager

Instructions to respondents

Strict control of communication was necessary during the administra­ tion of the survey. Respondents read the instructions written on the questionnaire and received no other information. To prevent influences on the responses, no discussion of individual questions was permitted. All questionnaires were completed by respondents individually without conferring with other executives. In order to assure respondents that their replies would be treated confidentially, chief executives and product division managers were requested to establish a rule of no intrafirm discussion or analysis of results.

The questionnaire included special instructions for the chief 12 executive or division manager. These instructions included information regarding the participants and the procedure for completion of questionnaires

Instructions to chief executive or product division manager are included in the Appendix (page 93). 36

within the company. The chief executive (division manager) was requested

to identify the level of response (company or division) and the product

or products to be included in the survey. If a certain segment of the

product line required a different or special approach in inventory

control these items were excluded from the response. The top executive

was asked to inform all participants of the products to be reported on.

In addition, this executive was requested to provide the basic data on the

firm .

The questionnaire contained written instructions for the other 13 participating executives. Respondents were assured that their identity

and the identity of their firm would not be revealed in connection with

any of the data to anyone either inside or outside the firm. Completed

questionnaires were returned without any other individual seeing them.

Instructions to other participating executives are included in the Appendix (page 94). 37

Measurement of Survey Response

The questionnaire has been explained. But how are the responses from

each question used in this study? In this section the measurement of the hypotheses from the survey data is described in detail.

A special measurement has been designed for this exploratory study. It is assumed with this judgment sample that the amount of intracompany inventory policy conflict is not greatly affected by the region in which a firm is located or the type of manufacturing in which it is engaged. In order to apply the normal curve in the measurement random sampling is assumed, even though the sample is a regional group of firms in selected industries. The tests also are based on a judgment regarding normal conflict. Therefore, the tests must be interpreted with caution—considered as indicative but not conclusive.

Primary hypothesis

The primary hypothesis involves a measurement of conflict; to simplify this measurement, the main hypothesis is divided into two supporting hypotheses:

Prim ary— "In large manufacturing firms the intracompany conflict among executives regarding inventory policy is no greater than normally would be expected when such executives are asked for opinions on a random set of other policy questions."

Secondary (1)— "There are no significant differences of opinion among executives within the firm on inventory goals or objectives." 38

Secondary (2)— "There is no significant disagreement among executives within the firm regarding the important factors in inventory decisions. "

Test of secondary hypotheses

Survey question 1 measures secondary hypothesis (1), and question 2 tests hypothesis (2). A combination of the results of these two questions forms the basis for acceptance or rejection of the primary hypothesis.

Analysis of questions 1 and 2 compares each executive’s opinion on each goal and factor with opinions of other executives within the firm. Unit differ­ ences are assumed for the five possible responses. No weighting is applied.

Deviations (from 0 to 4) for all executives are summed up for the company on each item of the two questions. The extremes vary from 0 to 4 for a

2-respondent firm to 0 to 24 in a 5-respondent company. Firms are grouped by the number of executives responding. An arithmetic mean of the sums of deviations (x) is calculated for each group on each item.

Suppose the four responses from a company to the first items of questions 1 and 2 are as follows:

V ery Inappro­ M inor Don't Know A ppro­ A ppro­ Q 1-Goal p riate Im portance —N eutral p ria te p riate Good service • • A to customers •

V ery Insig­ M inor Don't Know Signifi­ Signifi­ Q 2 -F acto r nificant Significance —N eutral cant cant Unit Cost • • •• 39 v — *"

The sum of deviations is 1 + 3+ 3+ 2 + 2 + 0=11 on question 1 and

2+3+4 + 1 + 2 + 1=13 on question 2.

Suppose, in this example, that a group of five 4-respondent firms have the following sums of deviation;

Good service to custom ers; 11, 4, 13, 7, 9

Unit cost; 13, 15, 6, 9, 11

The m ean sum s of deviation (x) a re (11 + 4 + 13 + 7 + 9)r5 = 8.8 and

(13 + 15 + 6 + 9 + 11) + 5 = 10.8 respectively.

A subjective judgment must be made for this exploratory study regarding the phrase ’’normally would be expected” in the hypothesis. The hypothesized sum of deviations (u), based on what might be considered normal conflict to a random set of questions or factors pertaining to the firm, has been established as follows;

EXAMPLES OF RESPONSE REFLECTING GROUP NORMAL CONFLICT Significance of Random Questions or Factors Hypothesized (Number of Don’t Know Signi­ Very Sig­ Sum of Null Respondents) —N eutral ficant nificant Deviations (u) Hypothesis HQ t o H 3 r = 2 * • II u0 < 1. 0 r = 3 # • • u = 2. 0 u0 < 2. °

r = 4 • 0 • e u = 4. 0 u0 < i ° r = 5 • • u = 8. 0 u0 < 8 .0

Comparing this sum of deviations (u) with the possible extremes and with a mean sum of deviations (u) calculated on complete randomness (ways responses might occur); 40

Minimum and Population Mean of Number of Maximum Sum Sum of Random Hypothesized Sum Respondents of Deviations D eviations of Deviations (u) r = 2 0 - 4 1.6 1.0 r = 3 0-8 4.8 2.0 r = 4 0-16 9.7 4 .0 r = 5 0-24 16.1 8.0

The mean of random deviations reflects what might be expected from a randomly selected group of people. The hypothesized sum of deviations is more realistic since it reflects reasonable differences or normal conflict between executives within a company (intrafirm). The mean of random deviations has more of an interfirm characteristic. The hypothesized sum of deviations is approximately the midpoint between the minimum sum of deviations and the mean of sum of random deviations.

The group means (x) are compared to the hypothesized values (u).

Establishing a 5 percent level of significance, significant conflict occurs within the firms of a group on an item (goal or factor) where x exceeds u by at least 1.65o//n . The value a is a true standard deviation based on random occurrence. The value n is the number of companies in the group. The total of all groups of responding firms is N.

The calculated x and accompanying a from each group for each item x - u is applied to the statistic; z = with o /i/n

r = 2, o= . 89; r = 3, ar- 2. 23

r = 4, ct= 3.34; and r=5, o= 4.63.

The summing up of differences between executives (x) is a statistic that is 41 not dependent upon any underlying distributions. In cases where the mean value of the sum of differences (x) is transformed into a standard z-score, it is assumed that the z-score is normally distributed. As the size of n increases this assumption becomes more valid. As has been noted, these tests must be interpreted with caution since random sampling was not used.

Four items (goals) are included in question 1 to test secondary hypo­ thesis (1). Fifteen items (factors) are included in question 2 to test secondary hypothesis (2). All items are analyzed to determine the extent of conflict in each group to the various inventory goals and factors.

Conflict is considered significant in a respondent group if it occurs on any item. If respondent groups with a sum of n greater than 50 percent of total N show significant conflict, this measurement is sufficient to reject the appropriate secondary hypothesis. An example of dominance would be two of the four groups with significant conflict and 2 n > . 5N . Analyzing all items strengthens the tests of the secondary hypotheses.

Test of primary hypothesis

Rejection of both secondary hypotheses (1) and (2) would be sufficient evidence to reject the primary hypothesis. Acceptance of these two secondary hypotheses means acceptance of the primary hypothesis.

The possibility exists of accepting the first and rejecting the second secondary hypothesis. It is expected that question 1 will not reveal, in many cases, significant conflict where it exists. The rational or ’’school solution” is fairly obvious. Question 2 is a good test of whether the executives in a firm 42

understand and agree on the factors involved in their inventory decisions.

Rejection of secondary hypothesis (2) at the 5 percent level is sufficient to

reject the primary hypothesis. Rejection of the primary hypothesis establishes

the existence of significant intracompany conflict on inventory policy. The

measurements, however, are subjective and must not be interpreted as

conclusive.

Methods of measuring and rewarding performance

Secondary hypothesis (3) concerns measurement and reward for inven­ tory performance;

Secondary (3)— "More than 25 percent of the large industrial firms have devised a method for measuring and rewarding performance of executives on inventory control."

Responses to questions 4, 5, and 6 are checked in a simple analysis to determine how many firms have a measurement and reward system and how the system is implemented. Contradiction among executives within a firm regard­ ing how their system works should be considered in this analysis. Based on this response a very general inference is made regarding the status of large industrial firms as a group. The hypothesis will be rejected if less than 25 per­ cent of responding firms have an effective and coordinated system for measurement and reward of inventory performance.

Influence of background

Secondary hypothesis (4) involves the influence of individual backgrounds on inventory philosophy: 43

Secondary (4)— "Inventory-control orientations of various executives are not significantly influenced by their individual backgrounds and the current literature they read."

The profiles of each respondent as indicated by the completion of question 8 are studied. Selected for the analysis are those profiles in which the respondent's current and previous positions, his education, and his information sources indicate a specific identifiable category (background primarily in manufacturing or marketing, etc.).

Chi-square analysis is used to test the null hypothesis. A cross classi­ fication between the executive categories and the five-scale rankings is developed for each item in questions 1 and 2:

M inor V ery Inappropriate Im portance D on't Know AppropriateAppropriate (Insignificant) (Significance —N eutral (Significant) (Significant) G eneral M anagement Manufacturing M arketing Finance Distribution

The above chart records the total number of these narrowly profiled respondents who marked each column for the particular goal or factor item. To increase the number of expected values which meet the minimum level of 2, the two columns on the left and the two on the right are combined. Since the middle column is neutral it is deleted. The rows and columns are totaled: 44

Inappropriate or Appropriate or Minor Importance Very Appropriate Total G eneral M anagement Manufacturing M arketing Finance Distribution Total

The chi-square test is run on all four items of question 1 and fifteen

items included in question 2. A blanket rejection of the null hypothesis is made

if the majority of the nineteen items are significant at the 10 percent level.

Selective rejection can be made on specific items which reveal a chi-square

figure significant at the 5 percent level. These interpretations are, of course,

judgments and must be viewed with caution.

Comparison of conflict extremes

The final analysis of this study goes somewhat beyond the hypotheses to

seek additional insights. Responding firms indicating the least conflict and

those indicating the most are studied in regard to organization, company objec­ tives, control of various types of inventory, recommended inventory techniques,

methods of measuring and rewarding inventory performance, and cost of

capital calculations. Information for this analysis comes from the answers to

questions 3 - 7 and the basic data on the firm provided by the chief executive.

The purpose of this analysis is to probe causes of intracompany conflict. 45

Limitations of research design

The survey sample in this study excludes small firms which, of course,

have inventory problems too. However, intracompany differences may not be

as significant in the smaller organizations because there are usually fewer

executives involved and they are generally in close contact with each other. The

hypotheses of this study refer to the large manufacturing enterprise.

The regional nature of the judgment sample must be taken into account

in interpretations and conclusions. Absence of industry or regional biases will not be verified in this exploratory work. The tests which assume random

sampling and measure against a subjective judgment of normal conflict must not be interpreted as conclusive.

Sum m ary

The judgment sample used in this study is a cross section of Texas and

Louisiana manufacturing companies with consumer or industrial product sales of more than $30 million per year. In selected companies and divisions, inter­ views were conducted with the chief executive, as well as the top executives in manufacturing, marketing, finance, and distribution or purchasing,,

Measurement of intracompany conflicts includes a calculation of dis­ agreement among executives about inventory goals and factors involved in inventory decisions. Analysis of the methods responding firms use to measure and reward inventory performance is made by a simple count which takes into consideration the validity of conflicting responses. The influence of position, education, and literature on individual inven­ tory views is determined by a chi-square test of cross classification among executive categories and responses to questions about inventory decision goals and factors. Finally, the causes of conflict are explored by a comparison of responding firms with the least and most conflict. CHAPTER HI

ANALYSIS OF DATA

In this chapter the survey response is described and the data is analyzed and interpreted. First is the test of the primary hypothesis with analysis of intracompany conflict regarding goals and factors in inventory decisions. Next, methods for measuring and rewarding inventory performance are investigated.

A chi-square test of independence is used to analyze the influence of respondent background on inventory views. The final analysis is a comparison of firms with the least conflict and those with the most conflict. This comparison con­ siders company organization, objectives, control of various types of inventory, inventory techniques, performance measurement and reward, and cost of capital calculations.

Survey Response

From the sample of thirty-five companies producing consumer and indus­ trial products with sales volumes of $30 million and up, the following response was obtained;

47 48

Industrial Category Sample Responding

Food 8 6 B everage 3 3 C hem icals 5 5 E le c tric a l 2 1 Gen. & special machinery 6 5 Misc. manufacturing 11 7 T otal 35 27

The miscellaneous category included steel, air conditioning, fabricated metal

products, publishing, and clothing.

The number of executives responding in each firm were as follows: five

in eleven companies, four in seven companies, three in eight companies, and

two in one company. Variation in response within firms was due to the differ­

ences in organization and executives involved in inventory control. Where a

company indicated that a certain executive was not involved in any way in inven­

tory decisions he was excluded from the survey.

Measurement of Intracompany Conflict

Testing two supporting hypotheses provides the measurement of the

primary hypothesis. Response from question 1 tests secondary hypothesis (1)

and question 2 tests secondary hypothesis (2). Results of these two analyses

are considered in accepting or rejecting the primary hypothesis.

Opinions on inventory goals or objectives

Measurement of question 1 compares each executive's opinion regarding

each inventory goal with the opinions of the other executives within the company.

The calculated arithmetic mean of sums of deviations (x) and accompanying 49

standard deviation (o) for each group of responding firms are applied to the x — u statistic z = ------as explained in Chapter n. Results of these computations o / / n are indicated in Table 3-1.

TABLE 3-1

MEASUREMENT OF CONFLICT ON INVENTORY GOALS OR OBJECTIVES

i= 2 it=l r= 3 n=8 i=4 n=7 1=5 n = ll Goal (Objective) tfc=l. 0 o=. 89 u=2.0 o=2. 23 u=4. 0 o = 3 .34 u=8. 0 o=4. 63 Good service to x = 0.00 X = 1. 25 x = 1. 63 x = 2.80 cu sto m ers z = -1.12 z = - .95 z = -1 .8 7 z = - 3.71 Low investment in x = 2.00 x = 2. 00 X = 7. 00 X = 7.40 inventory z = 1.12 z = 0. 00 z = 2.36 z = - .43 Level rate production/ x = 2.00 x = 3.25 x = 5. 78 X = 12. 22 em ploym ent z = 1.12 z = 1. 58 z = 1.40 z = 3.01 Avoid deterioration/ x= 0.00 x = 3.56 X = 4.57 Y= 11.80 obsolescence z = -1.12 z = 1.97 z = .4 5 z = 2.71

Source: Primary r = number of respondents n = number of firms in group u = hypothesized sum of deviations o = true standard deviation (random)

The standard normal deviate value (z) exceeds 1.65 (5 percent level of significance for this one-tailed test) on the goals low investment in inventory in the r = 4 group, level rate production/employment in the r= 5 group, and avoiding deterioration/obsolescence in the r = 3 and r = 5 groups. Total of n in these three respondent groups with significant conflict far exceeds the 50 percent of total N level (majority of firms) necessary to reject the hypothesis:

2 n = 8 + 7 + 11= ||n = .96 N.

In four of the twenty-seven companies one executive indicated an additional goal 50

but no other executive in the firm agreed with the goal. Based on these

measurements the secondary (1) hypothesis "There are no significant differ­

ences of opinion within the firm on inventory goals or objectives” should be

rejected .

Differences regarding factors in inventory decisions

Measurement of question 2 compares the views of executives within the

firm regarding various factors in inventory decisions. Here again the calcu­

lated x and a for each group are applied to the statistic. Table 3-2 shows the

calculated z values.

The standard z value is significant at the 5 percent level on two

factors in the r = 2 group, eight factors in the r = 3 group, nine factors in the r = 4 group, and twelve factors in the r = 5 group. Summation of n

reflecting significant conflict is 100 percent of N. The secondary (2) hypo­ thesis "There is no significant disagreement within the firm regarding the important factors in inventory decisions” is strongly rejected by this test.

Test of primary hypothesis

As indicated in the research procedure, rejection of secondary hypo­ theses (1) and (2) is a sound basis for rejection of the primary hypothesis "In large manufacturing firms the intracompany conflict among executives regard­ ing inventory policy is no greater than would normally be expected when such executives are asked for opinions on a random set of other policy questions." 51

TABLE 3-2

MEASUREMENT OF CONFLICT ON FACTORS IN INVENTORY DECISIONS

r =2 n=l r=3 n=8 r=4 n=7 jp=5 n = ll F acto r u = l. 0 cr= 89 u=2,0

Source: Primary 52

Conflict on factors in inventory decisions is greater than the conflict

regarding inventory goals or objectives. Comparison of opinions on inventory

factors is probably the best test of organizational conflict in inventory management.

As explained in the previous chapter, the limitations of non-random

sampling and judgment of normal conflict require that the primary hypothesis be rejected with caution. The overall measurement cannot be interpreted as con­ clusive. However, the study results do show considerable intrafirm disagreement regarding inventory factors.

Inventory Control Performance

Questions 4, 5, and 6 measure secondary hypothesis (3) MMore than 25 percent of the large industrial firms have devised a method for measuring and rewarding performance on inventory control. ” The two aspects of measuring and rewarding will first be analyzed separately and later cross-referenced.

The actual measurements and rewards revealed by respondents are indicated in the section on cross classification of data.

Measurement of performance

From the response to question 5 the following situations are evident:

1. In seven of the twenty-seven firms responding executives either indicated that their company has no measurement of performance on inventory decisions or that they do not know what the measurement is. 53

2. In nineteen firms some executives said their company has a measure­

ment and others said the company does not; or the respondents indicated r different measurements within the same firm.

3. In only one company did all executives indicate the same measure­

ment of performance on inventory management.

This response suggests that only a very small percentage of industrial firms have a standardized system for measuring performance on inventory decisions,

or if one exists, it is not well understood.

Reward for good performance

Responses to question 4 reveal the following situations;

1. In nine of twenty-seven companies all executives replied that they are not rewarded for making good inventory decisions.

2. In seventeen companies the respondents indicated that they are rewarded in different ways.

3. Only one firm shows a coordinated system of rewarding inventory performance, and this company is not the one that indicates a systematic method for measuring performance.

These data strongly indicate that industrial firms really have no coordinated method for measuring and rewarding inventory performance.

Cross classification of data

Table 3-3 shows the different methods respondents indicated their firm uses to measure and reward inventory performance. The arrangement of the Measurement of Individual Performance on Inventory Control (Question 6)

TABLE 3-3

CROSS CLASSIFICATION OF MEASUREMENT AND REWARD ON INVENTORY PERFORMANCE 8

I I *3 i 1 CO u >» © t» "o 1 3 © u S . ■a Reward for Making Good Inventory shortages losses from replacement expansion expenses inventory compared with previous level obsolescence and Bales grlpeB Is Is measured stockout percentages and and Btockoute order activity process, and finished goods production scheduling volume measured*4 1 11 3 o Total Total respondents Price Price and usage variances, gains and Profit and loss statement Ability to predict future capital Measured Measured with corporate team Against goala, results Measured Measured against forecast Monthly survey of raw materials, in Comparatlve-balance sheet vs. sales Crttloal Inventory levels Total value related to sales and Against budget with Interest penalty Weekly or monthly check of total $ in Monthly oheck of annual plan Indirectly by total $ volume to Decisions (Question 4) Performance in inventory control is Performance not measured Don't know how Inventory performance 3 Turnover, $ value reports, Monthly measurement and comparison Tabulating service 98% level in of 60% Computer runs to check deficiencies In Monthly balance sheet analysis Actual expenses compared to budgeted fa H 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 1. Involved in inventory control* 2 4 1 7 7 1 2. Somewhat involved in inventory control* 2 2 2 2 3. Not personally involved in inventory control 1 23 5 1 1 1 1 33 21 3 4. Indirectly-total management responsibility 3 1 1 5 5 4 5. Reward based on overall performance 4 1 1 6 4 5 6. Recognition by top management of good performance 1 1 1 1 4 4 6 7. Overall performance and growth of firm 1 1 1 7 8. Personal satisfaction from improved operation 2 1 1 1 5 4 8 9. Profit improvement 1 1 1 1 1 1 1 1 8 7 9 10. Bonus plan based cm profit 1 1 1 10 11. Chief officer of firm 1 1 1 11 12. Maintain position and authority in firm 2 2 2 12 13. Receive no criticism , e. g .. over budget items 1 1 2 2 13 14. Satisfaction customer will have good product 1 1 1 14 15. Having stock to fill orders quickly 1 1 2 2 15 16. Not rewarded 1 13 2 1 1 2 1 21 15 16 17. Don't know how rewarded 2 1 1 1 1 6 5 17 Total respondents 5 57 10 3 2 2 1 1 1 1 1 1 1 1 1 1 7 1 1 1 1 1 1 1 2 1 1 io*r Total firms 4 25 7 3 2 1 1 1 1 1 1 1 1 1 1 1 7 1 1 1 1 1 1 1 1 1 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 IS 19 20 21 22 23 24 25 26 27 Source; Primary ♦Did not Indicate how rewarded ♦♦Did not indicate how measured ♦♦♦Two respondents of 109 did not answer these questions 55 table offers a cross reference between measurement and reward and the total of respondents and firms indicating the various methods. Explanations of measurement and reward in the table are as expressed by the respondents.

Measurement techniques are bewildering in their diversity while rewards are mostly indirect and general in nature. Of the fifty-seven respondents who indicated their inventory performance is not measured, twenty-three said they were not personally involved in inventory control. Thirteen executives admitted they were personally involved but neither measured nor rewarded. The fact that five respondents indicated their performance was measured even though they were not personally involved confuses the issue. It is interesting that many respondents who said they were rewarded admit their performance is not actually measured. The fact that thirty-three of the 109 respondents were not personally involved in inventory control does not present a problem for the study as a whole. There is very little indication from these thirty-three execu­ tives of greater conflict on goals and factors in inventory decisions than executives who were involved in control.

Ignoring the ’’not measured" column and the "not rewarded" row in

Table 3-3, the vertical axis seems to be column 17 and the horizontal axis row 9. Eight respondents in seven firms pointed to profit improvement as the reward but all either have different methods for measurement of performance, or do not know the measuring device. Seven executives in seven companies indicated a measurement of weekly or monthly check of total inventory dollars compared with previous levels—with various rewards for making good inventory decisions. 56

The overriding question seems to be; How do you measure contribution

to profit on inventory operations? If this sample is somewhat representative of

the national population, the conclusion must be that inventory performance as

part of a business operation is difficult to isolate, measure, and reward. As

revealed in Table 3-3, rewards apparently will be largely based on overall

professional performance.

The secondary hypothesis (3) ’’More than 25 percent of the large indus­

trial firms have devised a method for measuring and rewarding performance on

inventory control” is strongly rejected. The limitations of the research design

do not appear to be significant in this simple measurement and generalization.

Influence of Respondent Background

The secondary hypothesis (4) ”Inventory-control orientations of various

executives are not significantly influenced by individual backgrounds and

current literature” is tested by a chi-square analysis of independence. Execu­

tive categories and the five-scale rankings developed for the four items in question 1 and the fifteen items in question 2 are the two classifications in the te st.

Executive profile

Careful study of the respondents' backgrounds as indicated in question 8

shows sixty-three of the 109 respondents with a specific identifiable profile as

general management, manufacturing, marketing, finance, or distribution. The

selection is a judgment—picking out those respondents with current and previous positions, education, and sources of inventory information that 57

strongly emphasize a particular executive category. Breakdown of the profiled

respondents is as follows:

Profiled Total Respondents General Management 13 25 Manufacturing 8 18 M arketing 12 22 Finance 24 25 Distribution 6 15 P urchasing 0 4

Total 63 109

The finance field has a strong profile because many executives in this category

remain in this career field.

Test of independence

The chi-square test is run on the four items of question 1 and the

fifteen items of question 2. The response to the variable storage cost item

of question 2 is chosen to illustrate the calculations which were made for all

responses. Frequency counts were made as follows:

a> (0 •Hal 0) 53* i 13 a ^ CO o « a ! a Pu § a a S a, o 1 »—I & a.& its° 2 u o = < ' I § c "3 a Sb n o CO I « o a) n. *i—i w ft General Management 3 7 1 1 1 13 Manufacturing 0 4 0 2 2 8 Marketing 0 3 2 5 2 12 Finance 2 5 1 12 4 24 Distribution 0 2 1 2 1 6 T otals 21 22 10 63 58

To increase expected values and exclude the neutral response the two left columns and the two right columns were collapsed and the middle column deleted. Rows and columns were totaled and expected values computed with e = column total x row total / grand total:

Insignificant or Significant or Minor Significance______Very Significant Observed Expected Observed Expected Total G eneral M anagement 10 5.3793 2 6.6207 12 Manufacturing 4 3.5862 4 4.4138 8 M arketing 3 4.4828 7 5. 5172 10 Finance 7 10. 3103 16 12.6897 23 Distribution 2 2. 2414 3 2.7586 5 Total 26 32 58

According to Dixon and Massey the chi-square approximation is adequate

1 2 k <£i - Fi>2 where the minimum expected value is two. The calculation Ot = 2 ------i=• i l Fi - in this case is 10.1429, which is significant at the 5 percent level.

The overall results of chi-square calculations on the nineteen items of questions 1 and 2 are shown in Table 3-4. The right-hand column indicates those factors for which all expected values in the calculation exceed the minimum of two. At four degrees of freedom the percentiles of the chi-square distribu­ tion for six levels of significance are:

Wilfrid J. Dixon and Frank J. Massey, J r., Introduction to Statistical Analysis, McGraw-Hill Book Company, New York, 1969, p. 241. 59

Level of significance Chi-square distribution

. 05 9.49 . 10 7. 78 . 25 5. 39 .5 0 3.36 .7 5 1.92 . 90 1. 06

Since the calculated chi-square value must be 7. 78 (significant at the 10 per

cent level) on the majority of the nineteen items a blanket rejection of the null

hypothesis (4) cannot be made.

TABLE 3-4

CHI-SQUARE CALCULATIONS ON ORIENTATION AND PROFILE RELATIONSHIPS

2 Expected values Goal or Factor X exceeding minimum of 2 Good service to customers 1.9956 Low investment in inventory 2.4372 Level rate production/employment 1. 5846 Avoid deterioration/obsolescence 2.2420 Unit cost 4.1509 Transportation cost 3.9938 e > 2 .0 Variable lead time 5.3522 Variable transit time 10.7522 e > 2. 0 Inventory carrying cost 2.2332 Cost of capital 4.2385 Variable storage cost 10.1429 e > 2. 0 Ordering costs 1. 5693 Setup costs 2.7333 e > 2. 0 Stockout costs 2. 7087 Quantity discounts 3. 7014 e > 2. 0 Uncertainty of demand 2.2282 Demand level 0.9223 Seasonal adjustm ents 1. 8480 e > 2. 0 Production smoothing 1. 3158 Source; Primary 60

A selective rejection can be made regarding the factors of variable transit time and variable storage cost, which are significant at the 5 percent level. Other factors where expected values are greater than two are significant at the following levels;

F acto r Level of significance Transportation cost .50 Quantity discounts .5 0 Setup costs .7 5 Seasonal adjustments .90

In making this check of independence between orientations and executive profile the following additional experiments were conducted;

1. Collapsing the Don’t Know—Neutral column into the left side rather than deleting it

2. Deleting the Distribution category with its small number of respondents

3. Computing chi-square for all 109 respondents profiled on current position—as a comparison with the calculations for the 63.

None of these experiments yielded anything of significance. Therefore, it is assumed that the procedure used is correct.

Validity must be considered in this test. With only selective rejection of the null hypothesis based on a judgment of executive profile, the appropriate conclusion seems to be that there is some evidence that inventory-control orientations of various executives are influenced by individual backgrounds and 61 current literature. Future research with larger samples and possibly by industry should produce a better measurement of this hypothesis.

Analysis of Firm s with Least and Most Conflict

The final analysis of this study attempts to probe the causes of conflict by comparing firm s having the least conflict with firms having the most conflict.

This comparison includes the following factors: organization, objectives, control of various types of inventory, techniques, measurement of performance and reward, and capital cost calculations.

Selection of firms for analysis

The four categories of responding firms, based on number of executives participating, must be considered in selecting firms with least and most conflict for the analysis. Excluding the one company with two executives responding, the following numbers of firms were selected;

r = 3 r = 4 r = 5 n = 8 n = 7 n = 11 Least conflict 2 2 3 Most conflict 2 2 3

The determination of amount of conflict is based on the deviations regarding inventory goals (question 1) and factors (question 2) which were used to measure intracompany conflict. The total number of deviations between executives to the four goals of question 1 and the fifteen factors of question 2 was divided by nineteen to determine the average sum of deviations for each firm. The two firms with the lowest average sum of deviations and the two 62

firms with the highest average were picked in the three- and four-executive

categories. In the five-executive group the three lowest and three highest

average deviation companies were selected.

The seven firms indicating the least conflict and the seven firms showing

the most conflict represent nine different industries. There are no apparent

industry patterns in these least- and most-conflict groupings.

Organization

Comparison of conflict extremes should first consider organizational

levels and configurations. Of the twenty-seven responding firms fifteen

responded at the corporate level and twelve responded at the division level. Of

the seven firm s with least conflict two responded at the corporate level and five

responded at the division level. Of the seven firms with most conflict four

responded at the corporate level and three responded at the division level. This

level contrast may have some influence. Greater conflict could occur at higher

levels because of increased size and diversity of operations.

However, plant and warehouse configurations of the two groups seem to

offset the organizational level influence. The ranges are:

Least Conflict Most Conflict All Firms Plants 1 to 6 1 to 2 1 to 21 Warehouses 2 to 150 1 to 10 1 to 150

Even though five of the seven least-conflict firms reported at divisional level, the least-conflict companies have more plants and warehouses than most-

conflict companies. This comparison suggests that size and conflict are not 63

related, but this aspect needs further investigation.

Consideration of channels of supply and distribution reveals no insights.

Five firm s of the total twenty-seven own some raw m aterials—and both conflict

groups have one firm with this characteristic. Only one company out of twenty-

seven has retail outlets and this firm is not one of the conflict extremes.

Response to the question "Do you have a manager of physical distribution

(logistics) responsible for transportation, warehousing, and related functions?" indicated that thirteen firms overall have such an executive. The least- and most-conflict groups both include four companies with this type officer. Consid­ eration of organizational aspects do not appear to offer any significant clues to causes of conflict.

Objectives of the firm

Objectives of the firm, as indicated by general management, are as follows:

Least-Conflict Most-Conflict Total Firms O bjective Firms Indicating Firms Indicating Indicating Percentage return on sales 4 4 16 Percentage return on investment 3 4 16 Fixed dollar amount 2 0 3 Maximizing profit long run 5 4 17 Market share 4 5 15 Stabilizing prices/ competition 1 1 O ther Net profit contribution 1 1 Customer service 1 64

The number of objectives indicated by a single firm are;

N um ber of ______Number of Firms ______Objectives Least Conflict Most Conflict All Firms 1 1 2 4 2 2 19 3 2 2 7 4 1 2 5 5 1 2

The mean number of objectives per firm is very close to three in the least-

conflict, most-conflict, and total groups. Objectives of responding companies

tend to show no relationships to the extremes of conflict.

Control of various types of inventory

Chief executives or product division managers were asked to indicate the

individuals who control various categories of inventory. The least- and most-

conflict groups have the following operational control:

Category of Least Conflict Most Conflict Inventory C ontroller F irm s Controller Firms Purchasing agent 4 Purchasing agent 4 Plant manager 1 Production control 1 P u rch ases Material control mgr. 1 Distribution mgr. 1 Not indicated 1 Not indicated 1 Production control 2 Production control 1 Plant manager 2 Plant manager 1 Work in process Mfg. & distr. mgr. 1 Mfg. manager 2 Inventory mgr. 1 Distribution mgr. 1 Not indicated 1 Operations mgr. 1 Not indicated 1 Distribution mgr. 2 Distribution mgr. 1 Plant manager 1 Production control 1 Finished Goods Inventory mgr. 1 Inventory mgr. 1 Mfg. & distr. mgr. 1 Service & finance 1 Marketing mgr. 1 Marketing mgr. 1 Not indicated 1 Customers (custom) 1 Not indicated 1 65

In two least-conflict firms the same individual controls work in process and finished goods. In one least-conflict firm one individual controls all three categories. In two most-conflict companies one individual controls the three categories. Among all firms there are five companies that have one individual controlling work in process and finished goods and five companies with one controller for all three categories.

Organizational responsibility for actual operational control of the various categories of inventory are very similar in the two conflict groups. The important point to note in this analysis is that only a small percentage of firms have centralized control of the total inventory operation. Relationship between inventory policy makers and operational controllers was not investigated.

Recommended inventory techniques

All respondents were asked to indicate the inventory techniques they would recommend using in their firm. Table 3-5 contains the response to this question. This tabulation shows which techniques were recommended by the different executives in least-conflict firms, most-conflict firms, and all firms.

Totals of respondents and firms are indicated—from which an average number of respondents per firm figure is computed. This average gives some indica­ tion of intrafirm agreement regarding inventory techniques.

In all cases, except, for economic order quantity, fixed order quantity, and flow charts, the least-conflict firms had more respondents and a larger average per company recommending the various techniques than the most- conflict firms. As was indicated in Chapter I the economic (fixed) order TABLE 3-5

COMPARISON OF FIRMS ON RECOMMENDED INVENTORY TECHNIQUES

7 Firms with Least Conflict 7 Firms with Most Conflict All Resp. F irm s Recommended Inventory Exec. Avg. Exec. Avg. Avg. Techniques Categories Total Resp./ Categories Total Resp./ Total Resp./ C P M FDB Resp. Firms Firm C P M FDB Resp. Firms Firm Resp. Firms Firm

Economic order quantity 4 % 3 4 3 16 6 2 .7 fi 2 ?, 5 5 20 7 2.9L 72 25 2.9 Economic purchase quantity 5 3 4 6 3 21 7 3 ,0 3 1 3 3 5 15 7 2 .1 73 27 2.7 Economic production lot 7 4 5 5 3 24 7 8 ,4 4 4 3 3 3 17 6 2,8 73 25 2.9 Fixed order quantity 1 1 1 1.0 1 1 2 2 1.0 14 10 1.4 Fixed order time 1 1 2 1 1 6 3 2.0 1 1 2 2 1.0 21 14 1.5 Intuition or judgment 4 5 3 3 3 18 6 3.0 3 1 2 3 1 10 5 2.0 46 24 1.9 Max-Min rules 4 3 5 5 3 20 7 2.9 5 2 2 3 12 6 2.0 58 25 2.3 Turnover rate goals 5 4 5 5 4 23 7 3.3 6 2 1 1 3 13 6 2.2 63 23 2.7 Linear programming 2 3 2 7 3 2.3 1 1 1 1 4 4 1.0 18 12 1.5 Dynamic programming 1 1 1 1 1 5 2 2.5 1 1 1 3 3 1.0 12 7 1.7 Waiting-line theory 1 1 1 1.0 1 1 1.0 Flow charts 1 1 3 1 2 8 4 2.0 3 2 1 3 9 5 1.8 20 13 1.5 Probability anal, for safety stock/reorder point levels 4 5 2 4 2 17 5 3,4 5 2 3 3 3 16 7 2,3 64 24 _ 2. 7 ... Product and material budgets based on sales forecasts 5 3 5 5 3 21 7 3.0 4 2 4 4 3 17 6 2.8 76 26 2.9 Other—Production scheduling 1 1 2 1 2.0 1 1 1 1.0 5 3 1.7 Other—Forecasting technique 1 1 2 1 2.0 3 2 1.5 Other—Standard costing 2 2 1.0 TOTALS 44 33 38 46 31 192 40 16 25 26 34 141 109 27 Source: Primary C - Chief Exec./Gen. Mgt. P - Manufacturing M - Marketing F - Finance DB - Distribution/Buying 67 quantity technique, which is preferred more in the most-conflict group, may be very impractical or inappropriate.

Study of the totals at the bottom of Table 3-5 reveals that most of the difference between the 192 respondents in the least-conflict group and the 141 in the most-conflict group are executives in production (33 versus 16), marketing (38 versus 25), and finance (46 versus 26). This situation is probably quite significant. In the least-conflict firms these three executives, who you might expect to disagree, generally agree on inventory goals and factors. The reason for greater agreement is probably the fact that the execu­ tives have a better understanding of these goals and factors and their importance in the company operation. It seems logical to expect that these same executives are familiar with various inventory techniques and which techniques are appropriate in their firms.

Comparing the least-conflict firms with all responding firms, the average respondents per firm (measure of agreement) is greater in the least- conflict group for all inventory techniques except economic order quantity, fixed order quantity, waiting-line theory, and standard costing. What this analysis seems to indicate is that firms that agree more on inventory goals and factors agree more on techniques or vice versa.

Measurement and reward for performance

Comparison of the conflict extremes regarding measurement and reward for inventory performance is shown in Table 3-6. This table reflects where individual respondents indicated both a measurement and a reward— MEASUREMENT AND REWARD REWARD AND MEASUREMENT In directly—total m anagem ent ent anagem m directly—total In Reward based on overall overall on based Reward Personal satisfaction im proved proved im satisfaction Personal ent anagem m top Recognition Satisfaction customer have have customer Satisfaction ou pa bsd n profit on based plan Bonus rft mpoe ent provem im Profit

TO - LEAST IN PERFORMANCE efr ance perform responsibility operation od product good ance perform good Reward for Making Good Good Making for Reward

8 MOST-CONFLICT AND

re ecisions D Inventory re ON INVENTORY INVENTORY ON •d COMPANIES H in > w p R w i o s

g F Monthly review of g F i i F Turnover, $ value reports and stockouts

n »n Control Inventory Performance re re cq co g Tabulating 98% service level in 60% of orders Individual of easurement M S o g g S' S' Computer checks deficiencies production a a © scheduling 3 F Total value related to sales and shortages 3 re O p c-hto mrt- F Weekly or monthly check of total $ in inventory— I O compared with previous level o Price and usage variances, gains and losses g g F M* P-* o c from replacement © Indirectly § Against goals, results

F Ability to predict future capital expansion OS 00 denoted by L for a least-conflict firm and M for a most-conflict firm. The

L’s outnumber the Mfs eight to three. However, the circled L's should be deleted in this analysis because the measurement or reward is too indefinite.

Comparing the remainder, the least-conflict group has a greater emphasis on profit improvement than the most-conflict group. A study of Table 3-6 and

Table 3-3 on page 54 shows that least-conflict firms are prominent in the

’’profit" axis. This analysis seems to indicate that where conflict exists to a lesser degree a measurement and reward system geared more to profit can be expected.

Cost of capital determination

Respondents were asked to indicate which techniques their firms currently are using to determine the capital cost of inventory. Results of this question are contained in Table 3-7. The number of individual respondents indicating the various methods is shown for the least-conflict group, most- conflict group, and all firms. Apparently least-conflict firms use more techniques or combinations of various methods. 70

TABLE 3-7

CAPITAL COST OF INVENTORY DETERMINATION

Individual Responded s Technique . Least Conflict Most Conflict All Firms Current interest rate 15 8 38 Minimum investment return 5 13 Opportunity cost 2 3 Average return investment 4 6 21 Target rate return 1 2 11 Cost long-term debt 1 1 7 Cost preferred stock 1 1 Cost equity capital 2 Weighted cost/debt & equity 2 Marginal cost capital 1 2 Don't know 4 7 25 Do not assess 7 4 18 O ther Part of return on asset 1 2 Interest based on monthly inventory 1 1 Cost short-term debt 1 1 Monthly return investment 1 "Scientific wild ass guess" 1 TOTAL 41 31

Further study of capital determination is necessary. Seven respondents in six least-conflict firms said their company did not assess capital cost. This situation indicates definite conflict in the least-conflict group. Analyzing how executives agree on the method being used reveals the following: 71

No. of Executives in Firm Number of Firms Agreeing on Capital Technique Least-Conflict Most-Conflict . All Firms 4 of 4 1 1 4 of 5 1 1 3 of 5 2 3 2 of 5 1 3 2 of 3 3 1 6 2 of 4 3 0 of 2 1 2 0 of 3 1 3 0 of 4 2 0 of 5 1 3

TOTAL 7 7 27

The contrast regarding capital cost agreement in the two groups is striking. This analysis strongly suggests that where conflict exists regarding inventory goals and factors it will exist regarding cost of capital determination.

Apparently many respondents do not know how their firms calculate this charge but attempted to conceal their ignorance. The significant conflict in most firms indicates that a large percentage of executives are not familiar with capital cost of inventory. CHAPTER IV

SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS

In this final chapter the study is summarized, conclusions are drawn, and recommendations are offered based on the findings and the current litera­ ture. The study is concluded with suggestions for further research in this area.

Review of Research Procedures

The objective of this study is an investigation of general attitudes toward inventory management in a representative sample of large manufacturing com­ panies. An attempt is made in this exploratory research to establish the relevant inventory variables and determine whether executives within the firm have conflicting opinions regarding inventory.

On the assumption that intracompany inventory policy conflict is not greatly affected by region or industry, a judgment sample of thirty-five com­ panies located in Texas and Louisiana was selected. It is believed that the twenty-seven firms that participated in the study have enough non-regional orientation (sales over $30 million) and product diversity (food, beverage, chemicals, electrical, machinery, steel, air conditioning, metal products, publishing,and clothing) to be representative of large manufacturers throughout the United States.

72 73

The hypotheses are tested by a personal survey using a questionnaire which incorporates all identified variables and techniques in inventory manage­ ment. Questions were structured to measure executives' attitudes toward these variables and to determine what inventory performance measurements and reward systems have been established in their firms.

Executives surveyed in each firm included the chief executive or division manager, and the top officer in manufacturing, marketing, finance, and distri­ bution or purchasing, as applicable. The number of executives responding in a company varied because of differences in organization and personal involvement.

Executives who were in no way involved in inventory decisions were excluded from the survey. This exclusion probably strengthened the measurements because these executives should reflect greater randomness and conflict.

Thirty-three executives who did respond indicated that they were not personally involved in actual inventory control. However, this situation does not reflect a contradiction because there is a difference between input into inventory policy and operational control of inventory. Furthermore, intracompany conflict is not significantly different between executives who are not personally involved in control and those who are.

Measurement of intracompany conflict includes a calculation of deviations of opinions among executives about goals and factors involved in inventory decisions. Analysis of the methods responding firms use to measure and reward inventory performance includes a simple tabulation, consideration of contradictions in responses, and a cross reference between measurement and reward methods. 74

The influence of position, education, and literature on individual inven­

tory orientations is tested by a chi-square cross classification of executive

categories and responses to questions regarding inventory goals and factors.

Executive categories are profile judgments based on the emphasis of current

and previous positions, education, and inventory information sources. Causes

of conflict are investigated by a comparison of responding firms with the least

conflict and those with the most conflict regarding organization, objectives,

inventory control, techniques, performance measurement and reward, and

cost of capital calculations.

Even though a probability sample design was not used, random sampling

is assumed—based on the premise that the judgment sample is sufficiently representative for this exploratory research. This assumption is made in order to apply the normal curve in the special measurement of intracompany deviations designed for this study. Another limitation that must be considered is the fact that the normal conflict established in this study is a subjective judgment of reasonable intrafirm differences. These limitations require that inferences from this study be viewed as indicative and not conclusive.

Pertinent Findings of the Study

A comparison of the critical data with each specific hypothesis provides the ultimate test for the study. The significant data are summarized first in respect to the hypotheses and then reviewed regarding possible causes of con­ flict. In the next section an overall conclusion is made based on these findings and the research limitations. 75

Data compared to hypotheses

The hypotheses are considered here in the same order as covered in the analysis of Chapter HI: secondary (1), secondary (2), primary, secondary (3), and secondary (4).

There are no significant differences The standard normal deviate value X _ u of opinion within the firm on inven- (Z = ------) exceeds the 5 percent a/fn tory goals or objectives. significance level of 1,65 on the goals low investment in inventory in the r = 4 group, level rate production/employ­ ment in the r = 5 group, and avoiding deterioration/obsolescence in the r = 3 and r = 5 groups. There is no indication of conflict on the goal good service to customers. Conflict is considered significant in a respondent group if it occurs on any of the four goals. The total number of firms in these three groups

( 2 n = 8 + 7+ll = 26) far exceeds the 50 percent of total responding firms

(2 n = . 5 N or majority of firms) necessary to reject the hypothesis; 26 2 n = r r N = . 96N. This test indicates that there are significant differences of Z i opinion on inventory goals and that this null hypothesis should be rejected.

There is no significant disagreement The standard z value is significant at within the firm regarding the impor- the 5 percent level on the: following tant factors in inventory decisions. factors (indicated by respondent group^;

r = 2 n = 1

Stockout costs Quantity discounts 76

r = 3 n = 8

Transportation cost Stockout costs Seasonal adjustments Ordering costs Quantity discounts Production smoothing Setup costs Demand level

r = 4 n = 7

Variable lead time Setup costs Demand level Variable transit time Quantity discounts Seasonal adjustments Ordering costs Uncertainty of demand Production smoothing

r - 5 n = 11

Unit cost Variable storage cost Quantity discounts Transportation cost Ordering costs Uncertainty of demand Variable transit time Setup costs Seasonal adjustments Cost of capital Stockout costs Production smoothing

Even though factors of conflict increase as respondents per firm increase,

there is apparent similarity in factors—particularly between the r = 3, r = 4,

and r = 5 groups. Conflict regarding inventory factors is significant in all

groups and therefore significant for the aggregate of all firms. This measure­ ment indicates that this null hypothesis should be strongly rejected.

In large manufacturing firms the The research procedure of this study intracompany conflict among execu­ established that rejection of both secon­ tives regarding inventory policy is dary hypotheses (1) and (2) is sufficient no greater than would normally be evidence to reject the primary hypo­ expected when such executives are thesis. The survey indicated asked for opinions on a random set differences of opinion on inventory of other policy questions. policy that exceed normal conflict.

However, an overall conclusion regarding this basic null hypothesis must be tempered with consideration of the research limitations. More than 25 percent of the large In twenty-six of the twenty-seven

industrial firms have devised a firms executives either indicated their

method for measuring and rewarding company has no measurement of per-

performance on inventory control. formance, said they do not know what

the measurement is, or contradicted each other as to whether the firm has a

measurement and what it is. In twenty-six companies all respondents within

the firm either replied that they are not rewarded for making good inventory

decisions or indicated that they are rewarded in different ways. Examples of

some of these generally non-specific rewards are recognition by top manage­

ment, overall performance, profit improvement, and personal satisfaction.

These data strongly indicate that the large majority of industrial firms have no coordinated method for measuring and rewarding inventory performance.

A cross classification of the responses emphasizes profit improvement as a principal reward but every respondent indicating this reward either does not know how performance is measured or describes a different method for measurement from the others. The fact that twenty-three of the fifty-seven respondents indicating no measurement are not personally involved in inventory control does explain part of the situation. However, this response indicates that no company in the survey has devised an acceptable or understandable method for measuring and rewarding inventory performance and that this hypothesis should be rejected. 78

Inventory-control orientations of Based on a judgment of identifiable various executives are not stgnifi- executive profile (considering the cantly influenced by individual respondent’s current and previous backgrounds and current literature. positions, education, and information sources) a chi-square test of independence between profile and responses regarding goals and factors in inventory decisions shows a strong relationship on only two items. The factors of variable transit time and variable storage cost are significant at the 5 percent level—indicating selective rejection of the null hypothesis. Other factors where expected values exceed two are significant at the following levels; transportation cost - . 50, quantity discounts - . 50, setup costs - . 75, and seasonal adjustments - . 90. These tests reveal some evidence that individual inventory-control orientations are influenced by back­ grounds and literature, but a blanket rejection of this hypothesis cannot be made.

Probe for causes of conflict

Of the twenty-seven responding companies, the seven firm s indicating the least conflict and the seven firms showing the most conflict represent nine different industries with no apparent industry patterns in the two groups. Con­ sideration of organizational aspects—level of control, plant and warehouse configurations, channels of supply and distribution, and management of physical distribution—do not reveal any major differences between the two groups.

Objectives of the least- and most-conflict companies offer no clues to causes of conflict. Only a small percentage of firms, including those with a lot of 79

conflict and those with little conflict, have centralized control of the total

inventory operation.

In most cases the least-conflict firms had more executives and a larger

average per company (measure of agreement) recommending the various inven­ tory techniques than the most-conflict firms. Most of the difference seems to be among executives in production, marketing, and finance. Apparently when these executives agree on inventory goals and factors they also agree on techniques. The analysis suggests that where conflict exists to a lesser degree a performance measurement and reward system emphasizing profit may be developed. The analysis strongly indicates that where there is conflict on inventory goals and factors a general lack of knowledge regarding the capital cost of inventory determination will be evident.

Conclusions Regarding Conflict in Inventory Management

On the basis of the data obtained from the survey the conclusion of this study is that there is a strong indication that the following situations are generally prevalent in large manufacturing firms: (1) conflict among executives regarding inventory exceeding normal policy differences, (2) significant differ­ ences of opinion on inventory goals or objectives, (3) significant disagreement regarding factors in inventory decisions, (4) absence of a systematic method for measuring and rewarding inventory performance, and (5) conflict or ignor­ ance regarding a method for determining the capital cost of inventory. There is some evidence that: (1) an executive’s inventory-control views are influenced by his background and literature, and (2) where executives 80

tend to agree on inventory goals and factors they will tend to agree on

techniques.

The strength in the conclusion, expressed as "a strong indication, " is

based on the view that the sample is an adequate representation of large manu­

facturers of consumer and industrial products. The principal reasoning for

this opinion is the fact that the sample is a diverse group of large manufacturers with considerable national orientation and the judgment that intracompany

conflict is not greatly affected by region or industry.

Recommendations

A few recommendations are appropriate. First, general recommenda­ tions are offered based on the conclusions of this study. Following this, various comments from some of the most significant and recent literature are reviewed. Solving the problem of organizational conflict in inventory manage­ ment is not an objective of this study. Further definition of the problem and setting forth recommendations based on these findings and the current litera­ ture is the scope of this work.

Recommendations based on conclusions

As was indicated in Chapter I, principal causes of organizational conflict include conflicting goals, values, norms, personal orientations, and perceptions of reality. Even though this study does not show a strong indication of it, inven­ tory conflict probably results from a lack of information or conflicting information. Manufacturers exhibiting the symptoms of conflict in inventory control described in this study should consider taking the following remedial 81

action: (1) identify all variables relevant to the firm 's inventory operation,

(2) coordinate all personnel involved in inventory decisions regarding goals and

factors in inventory management, (3) attempt to develop the concept of

optimization of the total flow, (4) establish and coordinate the necessary

techniques for determining the capital cost of inventory and controlling inventory

operations, and (5) develop a systematic method for measuring and rewarding

inventory performance based on the objective of the firm.

How can these recommendations be implemented? There is no complete

answer. Additional research is necessary. A review of the ideas and recom­

mendations offered by some recognized authorities is presented as a preface to

suggestions for future research.

Recommendations from current literature

Dr. Michael Schiff, Chairman of the Department of Accounting of New

York University, was engaged by the National Council of Physical Distribution

Management to conduct a study of the problems involved in developing a respon­

sibility accounting system for planning and controlling physical distribution

costs. The report of the study was first published in 1972. Schiff emphasizes

that the real gap is not in cost information but in the evaluative systems

currently used in marketing and inventory investment which do not associate

responsibility with the reward system. ^

*Mw;hael Schiff, Accounting and Control in Physical Distribution Manage­ ment. The Rational Council of Physical Distribution Management, Chicago, 1973, p. 1-19. Schiff found that a significant number of companies do incorporate an

imputed interest charge for inventory in profit reports or apply such a charge

indirectly when using retum-on-investment as part of the measurement of performance. However, the effect of decisions by product managers and marketing managers on inventory size is not considered. Schiff reports that

"to the extent that marketing decision makers are evaluated by achieved sales volume, they are indifferent to accretions in inventory resulting from their 2 decisions."

Ackoff makes it quite clear that; "Measures of performance should be developed for each decision maker or group that are compatible with overall organizational objectives, and hence do not produce conflict between decision 3 makers or organizational units." Ackoff does not describe a system for measuring performance of executives whose decisions include inventory levels.

The flow of inventory and organizational responsibility for it often cuts across several segments of the firm. Cyert and March describe various schemes of "transfer pricing" to allocate responsibility for aggregate organiza­ tional responsibility. But they write:

. . . we expect to find that organizational participants view the rules for making transfer payments as largely arbitrary (at least within wide limits). From the point of view of the subunits, performance is determined partly by the return from the external environment and partly by the transfer payment rules they can arrange by bargaining with other parts of the organization. Subunit success involves dealing effectively with the

2lbid.. p. 1-17. 3 Russell L. Ackoff, A Concept of Corporate Planning, Wiley- Interscience, New York, 1970, p. 111. 83

environment and negotiating effectively with the organization on accounting conventions . . . we should find that transfer payment rules result primarily from a long-run bargaining process rather than a problem­ solving solution. ^

McMillan and Gonzalez contend that: MFor the inventory system under uncertainty it appears that formal analysis with some reliance on simulation may 5 be most appropriate.” Ballou writes:

. . . it may seem that all inventory problems should be approached by means of a dynamic analysis. To a degree this is true, since the future is another important dimension to the problems that cannot be neglected. However, there are shortcomings to this dynamic analysis that should be realized. First, it is assumed that we have knowledge of the demand and cost levels for significant periods in the future . . . Second, the problem involved must be fairly simple to be handled by current analysis techniques . . . If a dynamic analysis . . . cannot be used, plans should be made to review inventory policies periodically so that they remain relevent to current conditions. ®

Inventory control is being integrated in many firms into a physical distri­ bution management system for controlling total flow. The philosophy is optimization of the total system. Tradeoffs are considered in respect to achieving the balance between service and cost that will maximize the objective of the firm. For example, Taff notes that: ’’Transportation can be used as a partial substitution for storage facilities under the right conditions, and

4 Richard M. Cyert and James G. March, A Behavioral Theory of the Firm, Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1963, pp. 275-76. 5 Claude McMillan and Richard F. Gonzalez, Systems Analysis— A Computer Approach to Decision Models, Richard D. Irwin, Inc., Homewood, Illinois, 1973, p. 129. 6 Ronald H. Ballou, Business Logistics Management, Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1973, pp. 308-309. 84

conversely, it is possible to use transportation to reduce the total volume of 7 goods in the pipeline by accelerating their movement. " Heskett says;

Time rather than distance will be the unifying dimension of an integrated model for helping plan and control a logistics system. This model— adapted to each company’s special needs—will combine elements of a temporally-oriented location model with an inventory model to produce information for planning purposes and a set of devices for the control of various elements of a company's logistics system. ®

Bowersox says that long-range planning in physical distribution involves

continuous or periodic review, selection, and implementation of a "best" com­

bination of tradeoffs among the components of the system. He contends that the

selection should be based on the current objectives or goals related to cost 9 and/or customer service. Ballou notes that an appealing approach for control­ ling logistics is to treat the function as a separate business in the firm, that is, as a profit center. But he contends that a major problem is the pricing of services provided by the logistics function—relating the customer service level provided and the contribution made to logistics function profits.10 Ammer feels that this is not a serious problem and suggests that transfer prices be estab- lished in much the same way as gpods are priced moving between divisions in a

7 Charles A. Taff, Management of Physical Distribution and Transporta­ tion. Richard D. Irwin, Inc., Homewood, Illinois, 1972, p. 121. 8 1 J. L. Heskett, "A Missing Link in Physical Distribution System Design, " Journal of Marketing, October, 1966, p. 41. g Donald J. Bowersox, Omar K. Helferich, and Edward J. Marien, "Physical Distribution Planning with Simulation, " International Journal of Physical Distribution, October, 1971, p. 38.

10Ballou, oj>. cit., pp. 458-59. 85

multidivisional company. Schiff clarifies the problem somewhat:

Logically, a manager of a profit center should be measured by the profit resulting from those elements of revenue and cost which are influenced by the decisions he makes. Common costs which are incurred as the result of the combined action and interaction of a group of profit centers cannot be deemed to be the responsibility of any one of the profit centers . „ . Profit center reporting should reflect only those elements of revenue and cost (fixed and variable) influenced by the manager of the profit center.12

The question remains: How do you handle the costs and measure perfor­

mance of inventory when levels are established by a joint decision of various

executives or profit center managers? Schiff suggests that; "Further research

is recommended with a view to achieving congruence between the criteria used

in admitting costs in decision models and using costs in systems which report

on performance. "*3

Suggested Future Research

Manufacturers that are attempting to establish procedures for optimizing inventory and other functions of physical distribution should investigate the possibilities of developing a model for their system. A mode! which describes an entire company or system can be utilized to demonstrate how action upon one part of the system will influence the entire system. The most important role of the model is to compare many distribution alternatives and indicate the con­ sequences of each. The model should include the effect on demand of the

^Dean S. Ammer, " as a Profit Center, " Harvard Business Review, January-February, 1969, pp. 72-82.

12Schiff, og. cit., p. 1-10.

13Ibid., p. 1-19. 86 various levels of customer service—including availability of inventory—and the resulting effect on long-run profit.

The sophisticated management that has developed decision models still is confronted with the problem of measuring performance. Further research in this area is necessary. It is recommended that future research be directed toward the following topics; (1) intrafirm and interfirm tradeoffs between inventory and other functions of physical distribution, (2) effect of inventory levels on logistical service and resulting effect on demand, (3) inventory costs—including capital cost and stockout cost, (4) measurement of the contri­ bution to profit of inventory decisions (operations), and (5) profit responsibility where inventory and other logistical functions are integrated or centralized, where inventory levels are established by joint decisions, and where inventory moves between divisions within a company. Research contributions in these areas should help the business firm reduce the problem of conflict in inventory management. BIBLIOGRAPHY

Books

Ackoff, Russell L ., A Concept of Corporate Planning. Wiley-Interscience, New York, 1970, 158 pp.

Athos, Anthony G., and Robert E. Coffey, Behavior in Organizations; A Multi­ dimensional View, Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1968, 549 pp.

Ballou, Ronald H ., Business Logistics Management. Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1973, 514 pp.

Bowersox, Donald J ., Edward W. Smykay, and Bernard J. LaLonde, Physical Distribution Management, The Macmillan Company, New York, 1970, 469 pp.

Buzzell, Robert D., Robert E.M. Nourse, John B. Matthews, Jr., and Theodore Levitt, Marketing—A Contemporary Analysis, McGraw-Hill Book Company, New York, 1972, 776 pp.

Cyert, Richard M ., and James G. March, A Behavioral Theory of the Firm, Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1963, 332 pp.

Dale, Ernest, Management; Theory and Practice. McGraw-Hill Book Company, New York, 1969, 743 pp.

Dixon, Wilfrid J ., and Frank J. Massey, J r., Introduction to Statistical A nalysis. M cG raw -H ill Book Company, New York, 1969, 638 pp.

Johnson, Richard, Fremont E. Kast, and James E. Rosenzweig, The Theory and Management of Systems. McGraw-Hill Book Company, New York, 1967, 513 pp.

March, James G., and Herbert A. Simon, Organizations, John Wiley & Sons, Inc., 1958, 262 pp.

Magee, John F ., Physical-Distribution Systems, McGraw-Hill Book Company, New York, 1967, 189 pp. 87 88

McMillan, Claude, and Richard F. Gonzalez, Systems Analysis—A Computer Approach to Decision Models. Richard D. Irwin, Inc., Homewood, Illinois, 1973, 610 pp.

Prince, Thomas R ., Information Systems for Management Planning and Control. Richard D. Irwin, Inc., Homewood, Illinois, 1970, 523 pp.

Schiff, Michael, Accounting and Control in Physical Distribution Management, The National Council of Physical Distribution Management, Chicago, 1973, 200 pp.

Schoderbek, Peter P ., Management Systems, John Wiley & Sons, Inc., New York, 1967, 483 pp.

Taff, Charles A ., Management of Physical Distribution and Transportation, Richard D. Irwin, Inc., Homewood,Illinois, 1972, 520 pp.

Van Horne, James C., Financial Management and Policy, Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1971, 721 pp.

Weston, J. Fred., and Eugene F. Brigham, Managerial Finance, Holt, Rinehart and Winston, New York, 1969, 848 pp.

Articles and Periodicals

Ammer, Dean S., "Materials Management as a Profit Center, " Harvard Business Review, January-February, 1969, pp. 72-82.

Arnoff, E. Leonard, "Successful Models I Have Known, " Decision Sciences, April, 1971, pp. 141-148.

Bosworth, Janet, "What Does a Traffic Manager Do?" Distribution Worldwide, March, 1971, pp. 33-52.

Bowersox, Donald J., OmarK. Helferich, and Edward J. Marien, "Physical Distribution Planning with Simulation, " International Journal of Physical Distribution. October, 1971, pp. 38-42.

Conrath, David W ., "Organizational Decision Making Behavior Under Varying Conditions of Uncertainty," Management Science, April, 1967, pp. B:48 7-500. C reedy, Judith, "Problems of Physical Distribution Are Keyed to Evaluative Systems, " The Journal of Commerce. May 12, 1971, pp. 5 and 9.

Dixon, James M ., "NCPDM Theme: Planning," Distribution Worldwide, November, 1970, pp. 48-50.

Farrell, Jack W ., "Distribution Dynamics at Work, " Traffic Management, November, 1971, pp. 29-31+.

Fredericks, W. A ., "Implementing the Theory of Physical Distribution," Distribution Worldwide, May, 1971, pp. 44-47.

Gill, Lynn E ., "Through the PD Looking Glass, " Distribution Worldwide. August, 1971, pp. 31-33.

Heskett, J. L ., "A Missing Link in Physical Distribution System Design, " Journal of Marketing. October, 1966, pp. 37-41.

"The 500 Largest Industrial Corporations," Fortune, May, 1972, pp. 188-224

Nelleman, David O ., and Donald L. Thiry, "Profit Improvement Through Inventory Management," Production & Inventory Management. 4th Quarter, 1970, pp. 26-39.

Neuschel, Robert P ., "Corporate Level PD: Creative or Reactive?" Distribution Worldwide, December, 1971, pp. 21-25.

"New Strategies to Move Goods, " Business Week, September 24, 1966, pp. 112-121.

••Profile of a Chief Marketing Executive, •’ Marketing News, May 15, 1972, pp. 1 and 3.

"The Second 500 Largest Industrial Corporations, " Fortune, June, 1972, pp. 108-135.

Smykay, Edward W ., and Allan D. Dale, "Inventory Control; What Price Service?" Readings in Physical Distribution, Hale C. Bartlett, editor, The Interstate Printers and Publishers, Inc., Danville, Illinois, 1970, pp. 94-107.

Stewart, Wendell M ., "Physical Distribution—Coordinating Inventory, Ware­ housing, and Transportation for Optimum Service at Lowest Cost, " Handbook of Modern Marketing, Victor P. Buell, editor, McGraw-Hill Book Company, New York, 1970, pp. 4:51-67. 90 Van Cleave, James P ., "Who Really Controls Your Inventory?" Production & Inventory Management, 4th Quarter, 1971, pp. 1-12.

Miscellaneous Publications

Dun & Bradstreet Million Dollar Directory 1972, Dun & Bradstreet, Inc., New York, January, 1972 and May, 1972 Supplement. APPENDIX

SURVEY QUESTIONNAIRE LOUISIANA STATE UNIVERSITY and Agricultural and Mechanical College Baton Rouge - Louisiana - 70803 College of Business Administration Department of Marketing (504) 388-8684 (Date)

D ear

Would some up-to-date information on inventory control in American industry be of benefit to you? We feel a strong need for current thinking on inventory in our business schools.

Professor Joseph F. Moffatt has undertaken a study on inventory management. If you will give him some information about your company, he will send you the overall results of his study.

The survey involves a brief interview with four or five executives of the firm. If your inventory decisions are made primarily within product divisions, one division (preferably in the Houston area) can be selected for the survey.

The interviews do not involve probing into detailed records or sensitive data. All replies will be strictly confidential. The identity of an individual company will never be revealed in connection with any of the data.

Professor Moffatt plans to visit companies in Houston July . He will call July to check your approval and coordinate on a time. If necessary, he can be contacted at telephone numbers (318) 233-3850 Ext. 219 or 234-4889.

We believe that this research will be beneficial and we are grateful for your company's cooperation.

Sincerely,

Norton E. Marks Professor of Marketing 93

Survey on Organizational Conflict in Inventory Management

Instructions to Chief Executive Officer or Product Division Manager

The questionnaire is to be completed by the following executives of the company or selected product division: Chief Executive (or Product Division Manager) and Top Executives in Manufacturing, Marketing, Finance, and Distribution (if appropriate).

Please ask each executive not to confer and to give the completed questionnaire to the interviewer. Since the study is devoted to attitudes in inventory manage­ ment we request that completed questionnaires not be collected by the company or division. It is important that each respondent works alone—with the feeling that his reply will not be subject to correction or criticism.

Identity of your company and respondents will be confidential.

If your inventory decisions are made primarily within product divisions, please select one division for this study, identify______, and furnish data on division only. If not, report on your entire company.

If a certain segment of your product line requires a different or special approach in inventory control please disregard those items. All responses to this study are based on i______products or all products in our line e x c e p t______.

Basic Company Data Requested from Chief Executive

Number of plants ______Number of finished goods warehouses ______

Do you own your source of raw materials? ( ) Yes ( ) Some ( ) No

Do you have retail stores? ( ) Owned ( ) Franchised ( ) No

Do you have a Manager of Physical Distribution (Logistics) responsible for transportation, warehousing, and related functions? ( ) For the company ( ) In each product division ( ) In this product division ( ) No such officer 94

Indicate the title of Individual who controls the following categories of inventory:

Product Division Purchases (inflow) Work in Process Finished Goods

Our company (division) objective (s) is based on; (Check all that are appropriate)

( ) Percentage return on sales ( ) Maximizing profit in long run ( ) Percentage return on investment ( ) Market share ( ) Fixed dollar amount ( ) Stabilizing prices or competition ( ) Other, specify______

Instructions to Other Participating Executives

We appreciate your cooperation in answering the following questions. Your reply will be strictly confidential. Your identity and the identity of your com­ pany will not be revealed in connection with any of the data to anyone either inside or outside your firm. This questionnaire can be completed quickly with­ out detailed records or revealing any confidential models.

Answers should be based on products or all products in your line except______.

Your company is aware that your response will be given directly to us. Overall results of the survey will be available to your company.

Please answer the questions on the basis of your own viewpoint and personal knowledge without conferring with others. 95

Questionnaire

1. In your opinion, how appropriate are the following inventory goals (objec­ tives) for your firm? Check 1 column for each goal—adding other goals you consider appropriate.

Don’t M inor Know— Very Goal InappropriateIm portance N eutral AppropriateAppropriate Good service to customers Low investment in inventory Level rate produc­ tion/employment Avoid deterioration/ obsolescence O ther

2. In your opinion, how significant are the following factors in inventory decisions?

Don’t M inor Know— Very F acto r Insignificant Significance Neutral Significant Significant Unit Cost Transportation cost Variable lead time Variable transit time Inventory carrying cost Cost of capital Variable storage cost Ordering costs Setup costs Stockout costs Quantity discounts Uncertainty of demand Demand level Seasonal adjustments Production smoothing Please check the inventory techniques (as many as needed) you would recommend using in your firm: Economic order quantity ( ) Max-Min rules Economic purchase quantity ( ) Turnover rate goals Economic production lot ( ) Linear programming Fixed order quantity ( ) Dynamic programming Fixed o rd er tim e ( ) Waiting-line theory Intuition or judgment ( ) Flow charts Probability analysis for safety stock and/or reorder point levels Product and material budgets based on sales forecasts Other techniques, specify ______

Are you personally involved in inventory control? ( ) Yes ( ) Somewhat ( ) No If Yes or Somewhat, how are you rewarded for making good inventory decisions? ______

( ) Not rewarded ( ) Don’t know

Does your company have a measurement of performance on inventory decisions? ( ) Yes ( ) No ( ) Don't know If Yes, briefly describe ______

Is your performance regarding inventory control measured ? ( ) Yes ( ) No ( ) Don’t know If Yes, how? ______97

7. Which, if any, of the following techniques is your firm currently using to determine the capital cost of inventory? ( ) Current interest rate ( ) Cost of long-term debt ( ) Minimum investment return ( ) Cost of preferred stock ( ) Opportunity cost ( ) Cost of equity capital ( ) Average return on investment ( ) Weighted cost/debt and equity ( ) Target rate of return ( ) Marginal cost of capital ( ) Other, specify______( ) Don't know ( ) Do not assess capital cost

8. Please indicate your background by checking the appropriate spaces:

G eneral M anage­ Manufac­ M arket- F in an ce- D istri­ O ther Dther m ent tu rin g ^ ting Accounting bution Current position College major (specialization) Other education (special courses, e tc .) Previous jobs and positions Principal sources of information on inventory control; Books Journals M agazines Consultant R eports School O ther ...... j _ _ ,

NAME______TITLE COMPANY______' ADDRESS

9. Do you wish a copy of the survey results? ( ) Yes ( ) No VITA

Joseph Franklin Moffatt, son of David M. and Mary E. Moffatt, was born in Austin, Texas, on July 16, 1921. He completed elementary and secon­ dary education in Austin, graduating from high school in 1939.

He entered The University of Texas in September, 1939. In November,

1940 he was called to active duty with the U. S. Army and was discharged in

April, 1946. He reentered The University of Texas in 1946 for one year, being recalled to duty in the Army in August, 1947. In March, 1962 he was retired in the rank of Lt. Colonel.

Following retirement he completed a Bachelor of Business Administra­ tion degree in June, 1963 and a Master of Business Administration in August,

1964 at The University of Texas.

During the period September, 1964 to August, 1967 he served as a

Teaching Assistant, while enrolled in the Doctor of Business Administration program at Louisiana State University.

From September, 1967 to June 1971 he was employed by Virginia

Polytechnic Institute and State University as Assistant Professor of Business

Administration.

Since August, 1971 he has been in the position of Assistant Professor of

Marketing at the University of Southwestern Louisiana.

98 99

He married E. Louise Gustafson, daughter of Axel H. and Matilda

Gustafson in June, 1952. They have three children.

Permanent address; 3904 Ave. F

Austin, Texas

This thesis was typed by Ms. Margaret Blumberg. EXAMINATION AND THESIS REPORT

Candidate: Joseph Franklin Moffatt

M ajor Field: Marketing

T itle of Thesis: Organizational Conflict in Inventory Management

A p p r o v e d :

M ajor Professor and C hairm an

D eanfof the G raduate School

EXAMINING COMMITTEE:

Date of Examination: