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.”
It isn’t JIT if your company is in the US and your suppliers are in China. The Japanese companies, like Honda, located their suppliers as close as possible to the manufacturing facility.
It was never a good idea to rely on China for everything.
Suddenly Ford’s old River Rouge plant looks better and better. Wood and iron ore came in one side and Model T’s drove out the other side.
I’m not sure everyone knows this - but companies are TAXED on held inventory!
That’s why you see stores ‘doing inventory’ on a yearly basis, usually in August, or having pre-inventory sales - car lots do this usually in October, to shed last year’s models. You know - back when dealerships had more than 15 cars on the lot? *SNORT*
(OT - talked to a friend yesterday who sells campers & RVs. They have FIFTEEN on the lot right now; usual inventory is 200!)
So, you’re TAXED when you purchase the item wholesale, you’re TAXED when you re-sell the item to your customer and you’re TAXED if it sits in your inventory for a year!
It’s insanity! I have managed two multi-million dollar businesses for others, I have NEVER truly understood how any of us manage to make a living with all the TAXES we had to deal with!
Also payroll TAXES, property TAXES, your employees pay TAXES on the income they earn from you, etc. It’s MADNESS when you look at the big picture and compare it to your bottom line, let alone having in stock what everyone wants or needs at any given moment!
Here’s an idea! Quit TAXING businesses to DEATH. That might go some ways to solving some of the problems Mother Government creates for the rest of us in the FIRST place! Grrrr!
I am old enough to remember working in an auto parts store where one person did the job of “INVENTORY”.
He had a card for every item in the store.
When purchases were received from vendors, he added the amount to the cards.
When sales were made, he subtracted the items from the cards.
At any time, he could see how many of whatever were in the store.
LONG before UPC codes, also.
Someone asked me how old my can of heavy axle grease was....
I answered: “WHEN did UPC codes start? This can has NOT got a UPC code number”.
They just looked at me. Axle grease still good in closed can...also Johnson Paste wax.
End the inventory taxes....Keep the warehouse.
Wasn’t even NAPA then......
I worked in a couple of those stores.
Even in one machine shop that still had SOME Flathead parts...but people only called for those when they got Bonneville Flats fever.
ABSOLUTELY
"Until the stability returns, the panic will continue,"LOL. The new normal, panic. Government LOVES this. It lives for panic, and will create panic where none exists. Need more government to get less panic, says the government.
Only the laws of nature will prevail. Reason is out the window,
IF your JIT inventory is sitting on a ship in the Atlantic-—you are NOT making any money on it, either.
You cannot even match a packing slip/purchase order & vendor invoice when nothing is moving.
Profit is affected by the cash flow velocity. Holding inventory is generally negative on profit.
Losing sales is the other side of that gamble.
There is good commercial value to being nimble, able to ramp it up and turn it off on demand.
There are other benefits to JIT, typically that quality issues are nipped in the bud, reducing those losses. Also, design evolution can result in substantial inventory losing value - who wants last year’s garbage?
Costs and prices will go up as business migrates toward JIC
JIT tries to offload risk and cost to suppliers.
In order to satisfy JIT requirements, the supplier has to maintain inventory and spare production capacity. This works, until it doesn't and the supplier is forced to say "Sorry, we are unable to deliver".
It's similar to the 2008 derivatives debacle. Derivatives were a way to re-package risk, so that risk-averse institutions could put the financial risk on others. This worked until a big contra-party was unable to fulfill it's obligation and went bankrupt, sending shock-waves across the financial system.
There is a true accounting of the time from mining, through smelting, through foundy, fabrication, and out the door as a car - dirt to car in two weeks, I think.
Ford River Rouge in the early 1900's. Vertically integrated JIT. Incredible product velocity.
oh.. it’s you again..
Let me ask you a serious question..
Why don’t we make more things in the USA?
What is the reason why we don’t build more manufacturing plants here?
Greedy profiteering in the age of nil import tariffs. The labor "savings" is pocketed and goes to increase profit. The end consumer sees nothing but closed factories, shortages and devastated local economies..
No protective import tariffs to eliminating the cost advantage of exploiting 3rd world labor and charging first world retail prices.
I see you are going to spit out the old union rhetoric again..
No, labor is actually a very small cost in the manufacturing process.
It is also a one time only expenditure in the building of a manufacturing plant.
So, lets try again..
Why aren’t we building more manufacturing plants in the USA?
Then why are you so fixated on labor costs?
Labor cost is a small percentage of expense in the cost of a product.
Only the union spits out the rhetoric you keep spitting out.
So, lets try again.
Why are we not building more manufacturing plants in the USA?
JIT = Just in Time = OSWO = Oh Schiff We’re Out
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