Companies often agonize over whether to cut their costs or to focus on customer service when managing their supply chains. By holding fewer finished goods, for instance, manufacturers can reduce their warehousing bills and the percentage of unsold items that become obsolete. Lower inventories, however, are troublesome because companies may anger customers by failing to fulfill all incoming orders in a timely manner. Many managers accept this trade-off as unavoidable, but our survey of 40 multinational and domestic consumer goods manufacturers in Germany found that it is possible to achieve both low inventories and high service levels.

Germany’s large, sophisticated, and highly competitive consumer goods market is an excellent place to study trends in supply chain management.¹ To see how consumer goods companies deal with service-inventory trade-offs, we compared levels of service quality (measured by accurate and defect-free order fulfillment and punctual delivery times) with costs (using delivery and warehousing expenses² and finished-goods inventories as indicators).

Conventional wisdom suggests that service quality has its price: if companies were plotted along a diagonal line, with their positions based on whether they emphasized service or costs, those focusing on the former would be clustered in the top right corner and those focusing on the latter in the bottom left. Instead, the companies are all over the map (Exhibit 1). Seven succeeded in holding down costs and in maintaining high customer service levels; nearly a dozen failed in both dimensions. We found that information technology by itself had no direct effect on the manufacturers’ performance, nor did the outsourcing of logistics operations or a company’s size: both multinationals and midsize companies ranked among the high performers.

Our survey results reveal some of the chief differences between the best-performing companies and the laggards (Exhibit 2). Broadly, the logistics costs of the high performers were about 25 percent lower, and they moved goods out of inventory about four times faster. On the service side, they had better quality ratings, as well as delivery times that were almost half those of the laggards.

A closer look at the numbers shows that the best companies refuse to bow to the trade-offs that many supply chain managers accept. The high performers seek ways to increase their flexibility while lowering costs; in logistics, for example, they have informal contacts with about two-thirds of their customers and logistics partners, compared with only about one-third for the low performers. These contacts (among the sales planners, logistics managers, and IT staff members of a supplier and their retail counterparts, let’s say) not only bypass slow formal lines of communication through the companies’ buyers and sales staff but can also generate valuable market knowledge. Also, the high performers are almost four times more likely to participate with their customers in capacity planning—for instance, by agreeing on promotions weeks in advance to smooth order fulfillment.

In production, the best performers had weekly manufacturing slots for about two-thirds of the goods they produced; laggards had such slots for only a third. The leaders in our survey have created this kind of flexibility by doggedly pursuing increased efficiency—taking measures such as shortening the time needed to change dyes or scents in a production line. By manufacturing products more frequently, the best performers simultaneously improve their delivery times and lower their finished-goods inventories. Many of the methods used by these companies are borrowed from lean-manufacturing and other efficiency programs. The results, such as shorter changeover times, help manufacturers not only to improve their operational efficiency but also to increase their output capacity without requiring huge capital investments.

Moreover, the high performers attempt, on a number of fronts, to lower the amount of time their goods spend in inventory—but without compromising their customer service. For example, they reduce the complexity of their operations by cutting the number of stock-keeping units; on average, they had 1.4 SKUs per €1 million ($1.17 million) in sales as opposed to an average of 2.5 for the laggards. Concentrating a company’s sales translates into higher volumes for each SKU, an approach that generally reduces volatility. As a result, sales forecasts are more accurate, and the need for "safety stock" to meet unexpected demand is reduced. The best companies also measure their performance across the supply chain more often (Exhibit 3). In this way, they give their employees, in all functions, incentives to make production schedules more reliable and sales forecasts more accurate, thus further driving down inventories and the danger that certain goods might be out of stock.

None of these factors by itself will put a company among the best supply chain managers, but taken together they show that a management team understands production, logistics, and inventory processes. Armed with this knowledge, a company can lower its costs and improve its customer satisfaction.