Tariff is NOT a four letter word.
Posted on 10/31/2021 9:36:46 PM PDT by lightman
Ongoing disruptions in America’s supply chains have prompted manufacturers to review and modify their inventory management systems.
Just-in-time (JIT) inventory management, which calls for the right amount of inventory at the right time, has long been the standard. However, just-in-case (JIC), a system which focuses on keeping extra inventory on hand, has recently gained attention.
“The question of JIT versus JIC is a question leadership teams the world over are facing,” Billie ‘Akau’ola, a director at Riveron, a national business advisory firm, told The Epoch Times.
JIT, which was developed by Japanese firms around the 1970s, has always focused on efficient inventory management, the exact opposite of stockpiling parts and supplies on shelves and in warehouses.
“The manufacturer would work with the suppliers so that the product or raw materials would arrive right when they were needed and no sooner,” Dan Luttner, managing partner at Plantensive, a MorganFranklin Company that provides supply chain, retail planning, and category management solutions, told The Epoch Times.
“This would result in the exact amount of inventory needed to meet demand and not have any excess inventory, which was generally practiced to avoid any excess costs.”
In 2020, the pandemic’s onset proved to be a quick jolt to the system.
“JIT relied on the law of large numbers, and regression analysis of history to the mean,” Luttner said.
Companies could use past performance and trends to prepare for future sales. When COVID-19 struck, demand suddenly became volatile, plunging in some segments, like transportation and hospitality, and skyrocketing in others, such as toilet paper and groceries.
“The problem with JIT was that when demand became highly variable, prediction of the future became uncertain,” Luttner said.
As companies reacted to the new reality, they evaluated their inventory management systems.
“In the last 18 months or so, as a result of the COVID-19 pandemic, the typical way of managing inventory has changed,” Luttner noted. “Many companies are now planning just-in-case inventory.”
This system for inventory management strives to keep excess stock on hand for high-volume products. The goal is to avoid running short of supplies and thus, losing out on sales. In the case of toilet paper, the transition to JIC could be seen in the steps taken following the shortage in 2020.
“This required the manufacturer to shift to excess inventory to keep up with the high demand,” Luttner said.
For some, the decision to keep high levels of inventory doesn’t mean their shelves are now full. The gaps are a sign of a negative vicious cycle spurred on by consumer panic and manufacturers’ struggles to have an adequate workforce and access to raw materials, according to manufacturing expert Lisa Lang.
“JIC means points in the supply chain have more than they need,” Lang told The Epoch Times. “When this happens, other points don’t have enough. This misalignment causes panic and over ordering and more misalignment.”
It may cause consumers to stockpile more items at home, for instance, which causes a backlog of orders for manufacturers. When shortages ensue due to the lag in filling orders, consumers might be motivated to stock up even more, thus continuing the cycle.
“Until the stability returns, the panic will continue,” Lang said.
When reviewing inventory management systems, “it is vital to understand how long a company can operate with inventory on hand and what operational adjustments need to be made to address the current supply chain headwinds, such as increased container and transportation costs and port backlog, relevant to target financial outcomes,” ‘Akau’ola said.
Identifying supply chain risks and opportunities can aid in the evaluation process. Going forward, some companies will look to implement changes that reduce risk.
“One key advantage of JIC is the ability to manage the volatility in demand without suffering stock outs or low inventory, forcing the decision of which customers to serve,” Luttner said.
JIC also provides the flexibility to have multiple sources in the supply chain, which can help mitigate risk during disruptive periods. Having too much inventory on hand also has its downside.
“In retail, October, November, and December—or calendar Q4—is traditionally the season in which a large portion of the annual profit is made,” ‘Akau’ola said. “Having too much inventory could create unnecessary working capital and financial risk.”
The best path forward may be a balance between the two inventory systems, and organizations are likely to rely on frequent analysis and demand data as they make decisions.
“Companies need to address the vulnerabilities by diversifying their suppliers, which may enable a JIT approach,” ‘Akau’ola said. “They should also stockpile essential materials, which lends itself to the JIC strategy. Neither JIT nor JIC is a silver bullet.”
Leveraging technology will play a role too.
“Many companies are now investing in advanced planning capability enabled by new technology like artificial intelligence,” Luttner said. “These short-term investment increases are being proven to yield long term savings and benefits.”
JIT was adopted by the Japanese because of real estate for warehouses is in short supply and very expensive. For most American businesses to adopt the process it’s like wearing a raincoat in the desert, we have plenty of land and real estate was fairly reasonable until the communist inflation showed up.
The taxes on holding inventory are horrendous.
I remember my dad saying decades ago it got so bad his company made them totally Destroy brand new engines to keep from having to pay the sky-high inventory taxes.
Yea, it always struck me as STUPID, and hopefully that wonderful system will end. We have TONS OF ROOM for warehouses here in Texas and while they do cost money to operate, they also have advantages, such as allowing bulk purchases.
Also, the idea that car companies could fall flat on their faces over COMPUTER CHIPS, of all things. One could probably fit all the chips used by Toyota in a year in a single Home Depot, as they’re not exactly hogs when it comes to storage volume. No excuse for that. Tires, seats, fuel tanks, yea...they do take up room. Not chips.
Remember when every small automotive shop had an array of V=belts and serpanitine belts hanging high on a wall fetched down by an extension pole?
They weren’t depending on the local NAPA doing JIT!
No purchasing agent in the world will be getting fired for excess inventory or laying in safety stock that would have been unthinkable 2 years ago.
Excellent point on inventory taxes—and they vary by location.
The smart business (imho) will keep a large inventory—but go wherever they need to find a location (including offshore if necessary) where it will not be subject to tax.
Just In Case, eh? ...prepping hits the business environment.
JIC was always the norm November - March in the northeast snowbelt.
Now it is just year ‘round.
lol, are they calling JIC new? Then there was “safety stock”
bkmk
Ping
That is certainly a component, but there are other things in play, such as tying up more capital (a major one), supplies getting old (which applies to more than you might think), an extra step in storing and relocating, and paying taxes on the stuff sitting in the warehouses (a very major one).
Prepping is a JIC accounting system.
JIT is usually based on the delusion that everything is always available, the supply chain works perfectly all the time, nothing will fail testing, and there is no adverse weather.
JIT often expose failures within a company, from inbound loading dock to store back rooms. Instead of fixing the problems, the companies lie to themselves about how effective their systems were.
The CORE PROBLEM WAS OFFSHORING US INDUSTRY TO THE 3rd WORLD.
Tariff is NOT a four letter word.
A really high import tariff would knock the legs out from under Free Traitor grip on the economy.
The main benefit of JIT is less inventory costs. One of these is tax as mentioned above. Also, lost opportunity costs as well as storage costs. If you are paying for that inventory you can not make profits doing something else with that money. We may have room but you have to pay for the use of that room. I guess there are more costs also.
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