The supply chain is a network involving organizations, processes, and technologies that distribute, and deliver goods to consumers. It begins with customer orders and covers steps from raw materials to end-users. Stages include suppliers, manufacturers, distributors, transportation, retailers, consumers, demand forecasting, supply chain technologies, sustainability, risk management, in global supply chains.
Managing inventory is a critical aspect of the substantial growth of any business. However, with the constant challenges that the world of business has been faced with, such as the pandemic, difficult geo-political situations, and rising inflation, the author's intrigue in this subject was reignited.
Inventory management often consumes a significant portion of a company's operational expenses. This includes expenses related to storing surplus items in warehouses, addressing outdated inventory concerns, and evaluating the viability of transitioning to a just-in-time inventory management approach.
Inventory management in supply chains has witnessed a shift from the traditional "just in time" (JIT) approach to the more precautionary "just in case" strategy. Formerly, JIT aimed to minimize inventory by delivering goods precisely when needed to minimize inventory costs. However, due to increasing supply chain disruptions and uncertainties, the "just in case" approach now emphasizes maintaining slightly larger inventories as a safety buffer. This proactive stance safeguards against unforeseen disruptions, ensuring product availability and minimizing the impact of supply chain shocks.
Top 3 challenges that face as Supply Chain Leaders in Inventory Management
1. Supply Chain Visibility Current disruptions, driven by factors like COVID-19, lockdowns, and supply chain congestion, highlight the need for enhanced visibility into raw material supply. Challenges like the Suez Canal blockage and container shortages add complexity. Early detection of delays through advanced logistics tracking technology allows agile adjustments in downstream supply chains.
2. Parameter Accuracy Fluctuations disrupt historical data reliance, complicating forecasting, safety stock, lead time, and order calculations. Precise parameters require collaborative refinement involving Sales, customers, and vendors, establishing consensus on future expectations for cost-effective supply chain variability.
3. Embracing Precautionary "New Normal" Traditional JIT methods optimize inventory but face disruptions. The emerging "Just In Case" approach involves calibrated Safety Stock levels and proximity to usage points. Striking inventory-expedite balance is vital for efficient operations.
Just-In-Time (JIT) Inventory Management:
JIT, or just-in-time inventory management, is a method where businesses hold minimal stock and order only when customers request items. This approach aims to fulfill orders promptly, minimize storage costs, and streamline production.
Cons of JIT:
- Supplier reliance: JIT relies on stable suppliers, vulnerable to disruptions like the pandemic, leading to delays, customer dissatisfaction, and revenue loss.
- Fluctuation challenges: JIT struggles with unpredictable demand surges or alterations.
- Limited visibility: post-supplier departure, tracking becomes difficult, hampering replenishment timing.
- When to Use JIT: JIT can suit companies with dependable suppliers, short turnaround times, reliable sales forecasts, and contingency plans for disruptions.
Just-In-Case (JIC) Inventory Management:
JIC inventory maintains a stock level to prevent production slowdowns and shortages. Using sale forecasts, JIC stocks within specific parameters, ensuring smooth production and demand fulfillment.
Pros of JIT:
- Mitigating supplier delays: JIC safeguards against supplier disruptions, allowing production to continue from in-stock inventory.
- Navigating demand shifts: JIC accommodates demand surges, enhancing competitiveness.
Cons of JIT:
- Higher capital requirement: JIC prioritizes stock levels over cash flow, tying up more funds.
- Elevated warehousing costs: Stockpiling increases warehousing expenses.
- Risk of waste: Declining demand can lead to slow-moving or unsold inventory.
When to Use JIC:
- Unreliable suppliers.
- Erratic demand.
- Volatile material availability or pricing.
The best inventory management strategy
Choosing the optimal method for business is perplexing. Industry specifics play a role, but unpredictable global events also factor in. Recent events, such as rising inflation due to the Russia-Ukraine or China-USA conflicts, are amplifying uncertainty. Considering these priorities, exclusively adopting either JIT or JIC inventory might not foster optimal resilience. Opting for a hybrid inventory management approach enables companies to capitalize on the benefits and mitigate drawbacks of both systems.
A hybrid inventory approach aims to enhance demand forecasting compared to JIC while holding more stock than JIT. Balancing cost-effectiveness with ample stock, this method swiftly addresses demand shifts and supplier delays.
Steps for a successful hybrid inventory method:
- Inventory Analysis: Identify vital products and select suitable methods (JIC for high-turnover, JIT for less popular or small-quantity items).
- Strengthen Supplier Ties: Enhance relationships to reduce risk.
- Implement Robust Tools: Utilize powerful inventory management tools like Vendor Managed Inventory (VMI) for effective JIT and JIC integration.
