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Has ‘just-in-case’ replaced ‘just-in-time’ inventory management?
The biggest internal roadblock to a more effective supply chain is the use of supply chain metrics that are too focused on efficiency at the expense of flexibility, according to recent research.
The finding from a retail survey from Blue Yonder and Retail Systems Research (RSR) speaks to pandemic-related supply chain disruptions, which have exposed the shortcomings of “just-in-time” models focused on lean inventory management.
“What companies love to do is to optimize working capital. So many manufacturers went to just-in-time inventory, and, pre-pandemic, that worked pretty well,” said Carol Tomé, CEO of UPS, at a recent industry event, according to the Financial Times. “But when the pandemic hit and everything was shut down, including manufacturing, and then the economy started to open and the demand … jumped, well, that just-in-time inventory didn’t work anymore. Companies are now thinking about, I need ‘just in case’ inventory.”
Speaking recently at the SFIA (Sports & Fitness Industry Association) Trends & Insights conference, Jason Kra, president at Li & Fung, said “just-in-time” drives efficiencies but reduces diversification.
“That tightness really came back to haunt some of our clients,” said Mr. Kra, “because you had all your eggs in one basket and the world went from just-in-time to this inability to get stuff for a multitude of reasons.”
The supply chain crisis, according to Mr. Kra, highlights the importance of assuring redundancies, such as holding extra inventory, not overly relying on short-term, flexible contracts, and having alternative supply sources, to add agility as a “just in case” buffer.
Other lessons include the need for “dependable supply” as well as strong visibility that will also help when over-supply and scarce warehouse space inevitably becomes a problem. He said, “When things go sideways, having access to raw data at different levels is really critical to be able to manage and make good decisions.”
Regardless, a Wall Street Journal article from November indicated that many companies expect to return to pre-COVID inventory levels once trading conditions normalize because holding buffer inventories ties up capital and requires warehouse space, oversight and insurance. Keeping stocks to a minimum level also helps reduce fashion risk and manage items with a sell-by date.
- Retail Supply Chain: Navigating Through Rough Waters With Improved Agility – RSR Research
- Supply chains: companies shift from ‘just in time’ to ‘just in case’ – Financial Times
- SFIA Trends & Insights – SFIA (Sports & Fitness Industry Association)
- Companies Grapple With Post-Pandemic Inventories Dilemma – The Wall Street Journal
Discussion Questions
DISCUSSION QUESTIONS: Has the supply chain crisis exposed the underlying risks of just-in-time inventory management? Should just-in-time approaches at retail be retired, adjusted or brought back once the supply chain bottlenecks are resolved?
Poll
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The issue, in my opinion, is less about inventory quantities and more about supply chain diversity, which leads to agility. Single-threaded and long supply chains work reasonably well in “normal” times, but the past couple of years have exposed how vulnerable they are to abnormalities and crises. Diverse networks that are kept active, nurtured and optimized will lead to greater resiliency and can help minimize the need for just-in-case stockpiling.
Diversity in the supply chain is absolutely critical. In addition to rethinking your sourcing and manufacturing partners, planning the right product + the right quantities is key.
Enabling digital tools to help retailers predict product and quantities, marrying the art and science in merchandising/planning will assist in reducing excess from just-in-case buying.
Don’t look for a major overhaul of the supply chain anytime soon. While the pandemic has highlighted some clear gaps in a “just-in-time” inventory program, most businesses still see it as a short-term anomaly and expect to get back to pre-pandemic levels soon.
Just-in-time just doesn’t work when you introduce the concept of hoarding into the mix. If there is a seismic shift in demand such as hoarding, JIT breaks down. It takes too long to bring a new factory online, and the ripple effect caused by increased production creates a world where components and bill of materials to make a product become unavailable and the nightmare begins. Throw something like COVID-19 into the mix and you have the perfect storm that forces you into just-in-case mode.
The faster retailers can somehow communicate demand shifts to the factories, the more likely it is they would be able to adapt production. Meanwhile, production in factories will need to become more modular and flexible to react to these changes.
It turns out that “lean” and “efficient” are not the same thing these days. Lean can become wildly inefficient with one logistics hiccup. And we are in for a bad case of hiccups for at least several months. This does not mean that the only solution is overbuying. I think a better solution can be found in managing flow. We used to call it “safety stock.” Or we would adjust min/max inventory levels to compensate for changing lead times. We adjusted inventory levels at the distribution level to be sure we could always flow what was needed to the stores. That’s not overbuying. That’s not overreacting at the supply level in the face of uncertainty at the supply level. That’s staying focused on demand (also more difficult these days) and managing flow versus just increasing the level of the buy. Lead times used to be known and highly predictable. Now they are unknown and unpredictable. That’s not a reason to over buy. It’s a reason to beef up inventory at the distribution level with a higher level of safety stock — just in case.
It would be wrong to read into what people are saying as “Build inventory and hold just-in-case stock.” That would be a major retrograde step and would not help retailers at all. The pandemic saw product shortages that are unlikely to be the case going forward. Holding additional just-in-case stock not only ties up capital and warehouse space, it most definitely also reduces a retailer’s operational flexibility and leads to redundant stock, markdowns and write offs as stock goes out of date. Holding an appropriate amount of safety stock is what is required and, as Mr. Kra states, adding flexibility with alternate sourcing is very sensible but holding excessive just-in-case stock is not and we must be very careful not to take a step backwards. Modern supply chain technology really helps retailers understand what is required and how to maintain efficiency and the right inventory. The idea of people overriding intelligent solutions is a fast way to Chapter 11.
Well, the “just-in-time paradigm” has simply been taken too far. We now live in an era where all kinds of unpredictable things are going to happen. So while I’m not a proponent of piling on the inventory, I am a proponent (as Mr. Bruno is) of keeping sourcing options open. All-China-All-The-Time (yes, I know Vietnam is a big source, too) just doesn’t work for more reasons than I can list.
It actually didn’t work before, but buyers tended to overlook the overcrowded stores and racks (yes, Macy’s, I’m talking to you).
However we also have a serious domestic problem, and I can’t find an excuse in the world for that. “Not enough truckers.” “Consumer hoarding.” Hogwash! Pay the people and suddenly drivers will appear. And people to run the manufacturing lines.
Just-in-time inventory, albeit with some adjustments, is likely to return for most companies as we work our way out of the current supply chain bottlenecks. The lure of a higher return on inventory investment is just too great. The alternative is to build and/or acquire additional storage space along the supply chain all the way to the retailer. Companies are understandably hesitant to invest in something they may never need.
The option to keep additional supply for the “just-in-case” and tie up capital, warehouse and insurance costs may be high, but the alternative may be higher. Every business needs to understand their metrics and maintain a reasonable and responsible balance.
My prediction is that nearly all companies will return to previous just-in-time practices with tight inventories and lean assortments, hoping the 100 year pandemic lives up to its historical track record and never sees the light of day until 2121. The simple, hard truth is that companies neither want to tie up precious capital with increased inventory on their books nor fear making a fashion mistake that could end up being the final dagger in the financial heart of the company. Yet, all companies can make progress with this issue, and Jason Kra is spot-on when he was talking about data where he said, “when things go sideways, having access to raw data at different levels is really critical to be able to manage and make good decisions.” This does require companies to invest in enterprise class data and analytic platforms that are highly performant when crunching billions of algorithmic models every single day. Returning insights about your business is how companies can uncover new patterns, new ideas, new ways to work, new models that address customer experience, churn, margin erosion, product affinities, and so on. Running at petabyte scale and one to two second speed are foundational for finding new ways to overcome today’s supply chain issues.
Just-in-case will mean excess inventory due to the concern over not getting what is needed on a timely basis. It’s not cost effective and will eventually be absorbed by the consumer through higher prices (as the cost of business increases). Smart companies will find ways to balance the current supply chain issues with inventory levels, pricing strategies, and other smart strategic decisions.
My hope is that the pandemic leads companies to an understanding that it’s more critical to build value customers pay for than to focus on efficiency. Inefficiency is a problem. Yet efficiency is not a path to success – only the jacks or better to enter the game. Unfortunately, too much company effort focuses on efficiency and fails to deliver value to customers. Value like — having product on the shelf when customers want it.
Robust supply chains remain flexible and don’t break under stress. Strategically, the trade-offs are efficiency and lowest cost versus flexibility and speed. The former builds entrenched flows with hardened supply nodes; the latter expands the supply network for greater redundancy. Efficiency proponents use cost per unit to measure success. Flexibility advocates look at availability and overall impact on the store shelf. Both approaches can learn from identifying and addressing the bottlenecks that limit the general flow of goods irrespective of the design.
Flexibility is the best antidote for uncertainty. “Just-in-time” isn’t the only supply chain issue. There’s diversification of sourcing, geopolitics, changing consumer behavior, etc. Those were all issues pre-COVID-19. I have argued for 20 years that the foundational mistake in supply chains is applying Industrial Age metrics and measures to any activity in a digital world. Our approach to supply chain thinking is regressive and – in some areas – obsolete. Look ahead to 2050. Where will the largest, most attractive retail markets be? Sub-Saharan Africa. Are today’s supply chain thinkers figuring that into the equation? The question is well put. COVID-19 “exposed” existing problems more than it created any new ones. If the system was better designed it would have taken a body blow during the pandemic, but it wouldn’t be out for the count.
Heck, we haven’t even considered the impact of print-at-home replicators in that timeframe. Or industrial replicators in the 2030s. They’ll probably consider COVID as the trigger for radical reworking of supply chain concepts, literally from the atom up….
Just-In-Time methods are supposed to have redundancies built in, including alternative supply sources, and secondary suppliers with contracts in place. The supply chain crisis didn’t necessarily expose risks of JIT, but it did highlight that not maintaining proper planning and contingency planning is risky. Eliminating JIT doesn’t make sense, especially as inventory carrying costs range from 20-30% of the total inventory value. Holding onto excess stock (capital, inventory handling, storage, insurance and risk) translates into much lower profitability and in some cases can even become a loss.
JIT is a powerful technique that’s carried over from the Japanese car development days and it’s used in everything from Agile development to on-the-fly manufacturing. The technique isn’t the problem, the execution is.
There will always be a contest between the two goals of preparedness and cost minimization, and — breathless PR releases and academic papers notwithstanding — nothing works all the time. JIT will be right back in vogue as soon as some activist investor decides some company can “free up” money by not having an inventory … and the cycle will begin anew.
Sure, it makes intuitive sense to adjust the “error bars” somewhat to make the supply lines more resilient, but “safety stock” is a dreadful misnomer, as it ensures a higher tie-up of working capital and leads to product perishability and markdowns. That’s why just-in-time sourcing, brittle as it may be, has been so attractive to retailers and manufacturers.
But there is another damaging practice at work that acts as a force-multiplier when things go off the rails — the mindless pursuit of economies of scale. Super-sized container ships are the poster children for this, as last year’s Ever Given Suez debacle and the bottlenecks at U.S. Pacific ports have painfully proved.
A new thought process is needed around supply chain resiliency. Less concentrated sourcing and transportation methods would allow the system to be more self-healing. Can we envision alternative means to lower transportation costs and also shorten lead times?
Putting on my futurist goggles, I foresee a next wave of economic evolution that prizes less concentration of systems and capital, not more. Scale is no longer the best answer, as it leads to colossal bets and colossal failures.
Right now there are so many issues in the supply chain execution due to Omicron that you have do just-in-case planning and incur the additional costs and hope to pass it down. In the long run the cost savings of just-in-time will force businesses to go back to that model, unless the disruption continues over the next 10-15 years.