Just-in-time inventory management has become common practice for distributors to be more competitive and boost their bottom line. The goal is to order and receive raw materials when they’re needed for production, but not sooner.
While just-in-time inventory management frees up valuable resources by keeping only the inventory you need to meet demand, this strategy can present significant challenges as we’ve seen throughout the COVID-19 event. Supply chain disruption caught nearly every industry off guard. And while this is likely considered an anomaly, it’s forcing inventory planners to re-evaluate their inventory strategies. We’re seeing more companies implement just-in-case strategies with an eye on lowering risk for mission critical inventory.
What is Just-in-time Inventory Management?
While just-in-time (JIT) is often thought to be associated with manufacturing, many other companies use JIT inventory to improve operations. Wholesale distributors and online retailers see similar benefits by timing the arrival of goods based on upticks in demand that they identify through historical trends and seasonal patterns. Even companies in the services space can use a just-in-time approach to coordinate the inventory and materials needed to complete a specific job.
Advantages of Just-in-time
In a nutshell, just-in-time inventory management allows you to lower inventory carrying costs, decrease waste and boost efficiency. And the resulting impact on your cash flow and profitability can be significant.
Lower inventory costs: With JIT, your inventory levels are much lower – you have what you need, when you need it. This reduces the working capital needed for big batch inventory purchases and frees up cash for other uses in the company. Your holding costs will also drop as you don’t need near as much space for warehousing.
Decrease waste: Anytime you purchase a large volume of inventory or materials, you run the risk of having obsolete or dead stock over time. Just-in-time eliminates that problem. You order what you know you’ll need based on demand, so there’s no extra cluttering up the shelves of your warehouse.
Boost efficiency: When your inventory is arriving as you need it, you eliminate the extra work (and costs) that come with stocking and managing additional materials. You’ll see higher inventory turns, minimal inventory obsolescence and faster production turnaround.
Disadvantages of Just-in-Time
Well, that all sounds great. If you can achieve big benefits like that, why on earth wouldn’t you move to just-in-time inventory management? The benefits are great. But it’s also important to understand that this approach changes the way you operate. While it’s good to be aware of these factors, keep in mind that they can be managed with the right software.
Supply chain disruptions: A just-in-time approach can make you more vulnerable to disruptions in your supply chain. A shortage or late delivery from one supplier can stall the production process and delay shipment to your customer (or push your job schedule if you’re in the services space). With a proper inventory forecasting tool, you can mitigate this risk by accounting for safety stock in your planning calculations.
Greater cost variation: When you’re purchasing small quantities more frequently, you may lose out on bulk discounts and won’t always get the best price when there’s a time pressure involved. Companies that adopt just-in-time also rely on local sources, which can sometimes cost more, but you could benefit from lower shipping costs that balance out the difference. While your inventory carrying costs will drop, these factors can affect your margins if not considered.
Missed opportunities: Adapting to sudden changes in demand can be more difficult because you’re highly reliant on forecasting. Meeting a sudden influx of demand isn’t always possible because you don’t have the inventory on-hand. This is where an ERP system gives you an advantage. Having timely sales information feeding directly into your inventory plans gives you more accurate forecasts and allows you to adjust more quickly.
What is Just-in-case Inventory Management?
With a just-in-case (JIC) inventory strategy, you keep large quantities of product on hand with the goal of reducing backorders. Some consider JIC to be a more traditional method used by companies that lack visibility into demand. But the supply chain disruptions we’ve seen in the past year are prompting inventory planners to use just-in-case for critical products.
Advantages of Just-in-case
Fewer backorders: Large inventories provide a certain confidence that you’ll always have the product you need. Even if your next shipment is delayed, you’ll have enough to bridge the gap, ensuring you can keep your customers happy.
Lower risk of disruption: Any number of things can impact inventory shipments – supplier reliability issues, weather or a pandemic. A JIC approach gives you a bigger safety net when the unexpected arises, allowing you to keep running business as usual.
Disadvantages of Just-in-case
Increased carrying costs: The more inventory you store in the warehouse, the higher your carrying costs. And the capital you have tied up in your safety stock can’t be spent elsewhere.
Higher obsolete inventory levels: The longer inventory sits on the shelves, the greater the chance that it will become obsolete. Using an inventory planning tool can lower obsolescence by helping you set the right ordering levels. In this case, the goal is to have enough to cover your needs plus safety stock, while still minimizing waste.
Boost Supply Chain Resiliency with a Hybrid Inventory Management Strategy
While we don’t expect global supply chain disruptions to become the norm, the COVID-19 pandemic has made resiliency a higher priority for most companies. A hybrid inventory strategy that uses a balance of both just-in-time and just-in-case is the way to achieve that.
Think of it like a sliding scale. For mission critical items, you’d slide toward just-in-case, ensuring you have a large safety stock. For lower priority items or those that you have more tolerance on, the bar would slide toward just-in-time. This approach gives you the best of both worlds, allowing you to deliver on demand, while still managing costs.
If you’re thinking this sounds complicated to manage, it doesn’t have to be. But you need the right inventory planning software. An ERP solution for inventory management is the way to go here. You get the visibility you need into sales and purchasing data, plus planning tools that allow you to run multiple scenarios based on different assumptions (e.g. business as usual, a Zombie apocalypse, etc.). And the best part? It’s all in one system. So, you can focus your time on testing scenarios, analyzing the data and making decisions, instead of reconciling data from multiple systems.
Here are a few things to consider as you move toward a hybrid strategy.
1. Strong Supplier Relationships are Key
When you’re relying on products and materials arriving at precisely the right time to keep things moving, you need reliable suppliers. Invest the time in building strong, long-term relationships with your suppliers. The effort you invest will pay off ten-fold when something goes wrong, and your supplier steps up to help minimize the impact on your business. It’s also best practice to have multiple suppliers in nearby locations, so you have a backup in place if your preferred vendor can’t deliver. Implement a vendor performance strategy to identify your top suppliers and prioritize your fallback plan.
2. You Need Sales Forecasts You Can Trust
Proper sales forecasting is critical. Without it, your ordering schedule will be unpredictable, and you’ll be facing constant stockouts and production delays. This isn’t something you can do effectively through manual processes. Implementing a strong inventory ERP system is a must to give you full visibility on demand from the sales side, as well as production schedules and purchasing.
3. Let Technology do the Heavy Lifting
An ERP system combines the tools you need across all areas of the business so you can implement an effective inventory management strategy. As BDC Consultant and operational efficiency expert, Guy Chartrand, says, “You should automate as much as possible.” The right ERP solution is designed with industry best practices in mind, eliminating common bottlenecks and simplifying processes so you can achieve greater efficiency. Even if you decide to stick with a single inventory strategy rather than a hybrid approach, ERP software will give you the visibility you need to plan effectively.
4. Keep Extra Inventory for Essential Items
Analyze your inventory data to identify essential items. These are the ones you’ll want to shift toward JIC and keep a larger safety stock. While you’ll have higher carrying costs, it will be worth it when you can meet demand without delay. If you can’t identify which products are essential…the move to ERP is more important that ever.
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