The End of Just-in-Time Supply Chains?
Product stocking challenges and supply chain interruptions across a variety of industries have resulted in many companies transitioning from just-in-time (JIT) inventory practices to just-in-case (JIC) supply methods. The inventory build-up in several companies has been observed in recent earnings calls, according to Forbes Senior Contributor, Willy Shih. Now could be the turning point for this critical part of the supply chain.
A quick history of JIT
JIT, or lean manufacturing systems, emerged after WWII. They were developed in response to business constraints and limited resources. A major Japanese automaker found themselves struggling to keep pace with the auto industry in America that had benefitted from abundant resources and manufacturing scale. The founder of the process aimed to produce parts at a rate that matched demand as opposed to mass-production in batches.
“Production smoothing” and the JIT method were built through a great deal of refinement. It wasn’t until the 1980s that many companies in the West began implementing these practices. By the early 2000s, nearly every production facility in the world had implemented elements of JIT inventory management.
Benefits of JIT
While JIT manufacturing has numerous advantages, the main benefit is the complete elimination of waste, excessive production resources, overproduction, excessive inventory, and unnecessary capital investment. If a company has a substantial amount of stock or inventory pipeline, any design alterations or defects will be problematic because the parts will either need to be modified or discarded. In the 1985 journal Area, author R.C. Estall described JIT as “a more lasting possibility of major cost reduction” with the “potential for reducing cash tied up in inventory”. Companies must consider the cost in terms of space needed to store larger amounts of inventory. JIT allows for a lean system with minimal storage capacity required.
The current situation
Lately, there’s been plenty of discussion on whether this is the end of just-in-time and if there will be a shift to the just-in-case inventory methodology. According to Shih, “Many manufacturers have been struggling with logistics delays and parts shortages, so having more material on hand can make a lot of sense, especially if it comes off a long supply line from China.”
With challenges such as congestion with ocean freight, slow return to international travel—which air freight depends on for cargo space in the belly of passenger planes, and ongoing disruptions around the globe, it’s imperative to consider more when forecasting your production and purchasing schedule.
What lies ahead
The other side of stockpiling critical components and using the JIC methodology is the potential for excess and obsolete parts. “We could be facing a wave of what the accountants call ‘excess and obsolete,’ the write-downs of excess inventory that often follows stocking binges,” said Shih. “If the economy slows for whatever reason… that could mean a lot more excess and obsolete as companies everywhere try to reduce the inventory lines on their balance sheets and generate cash.” However, excess inventory can prove to be a valuable asset to offset the increased prices during a shortage market. Working with a connected distributor like Converge can provide you the visibility into optimizing your inventory.
Businesses need to remain agile and resilient with their supply chain strategies. While traditionally it has been beneficial to use JIT methods, the prominent disruptions over the past few years have made JIC inventory methods appealing to many companies. By collaborating with trusted partners like Converge, you can develop a plan to implement the most advantageous inventory strategy for your supply chain objectives and goals. Get in touch today and let’s solve the future.
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From Just-In-Time To Just-In-Case: Is Excess and Obsolete Next?