Just-in-time vs. Just-in-case: A Pendulum
Inventory Management has always been one of the key elements of Supply Chain. Businesses need to keep track and manage their inventory to maximize the net profit. In the past, we published a couple of blogs on this subject, Inventory Management: How is Your Business Holding Up? and EXPERT INSIGHTS: Modern Challenges in Inventory Management and Tips to Overcome Them. 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, my interest was drawn to revisit this topic. You would appreciate that the aforementioned factors have caused snags in the supply chain and made it difficult for corporations to operate with high efficiency.
With the changing dynamics, companies have had to rethink their corporate strategy. Since not all enterprises are the same, the inventory management methods vary subject to the business’ needs, profile and goals.
While some companies use the Just-in-time (JIT) philosophy, some others use the Just-in-case (JIC) method. There are also enterprises that use a combination of both. Given that there is no “one size fits all” solution, once the Supply Chain Leaders understand the company’s objectives correctly and keep pace with the changing times, they find it less complex in choosing which methodology of the inventory management spectrum the company should lean on.
What is the Just-in-case philosophy?
The JIC inventory management strategy is the opposite of just-in-time and does not require frequent ordering from the supply chain team. The companies that apply this method have their raw materials stocked at any given time just in case products sell out of stock. Companies keep a large number of inventories that are based on expected sales.
Such businesses avoid supplier delays and unexpected increases in demand. They usually face difficulty in making precise calculations about their customer demand. It also may happen that they face large demand at unexpected times because of different reasons. The JIC method might also work nicely for less industrialized countries with poor infrastructure and natural disasters that occur often. It is one of the ways to mitigate risk and ensure business continuity.
Which companies use JIC?
It is seen that quite a number of companies that are much dependent on distributors’ supply chain problems swing towards the JIC method. There are also other companies and industries at large who were following the JIT in a more predictable Supply Chain environment but have been forced to switch gears towards JIC given the dynamics of the market.
Corporations in the semiconductor and electronics industry such as Micron use this kind of inventory management method. In the past years, the world faced chip shortages that drove a lot of just-in-case ordering to prevent it from happening again.
Automotive industry businesses like Ford and GM also use this practice for certain products. It must be noted that car-making companies like Ford are pioneers of the JIT method but shifted to just-in-case because of the semi-conductor shortage. This shortage happened because of the JIT method utilized by rental companies and vehicle manufacturers.
The last ones stopped production for at least two months to some degree or another during 2020. When the quarantine ended and companies got back to work, having the right amount of semiconductors at the desired time became a challenge. Why so? Because automotive semiconductors have unique requirements such as:
- They need to operate in extreme temperatures
- Semiconductors must be supplied in high volumes over long time periods
- Car makers compete with PCs and smartphones to get the required amount of semiconductors at the most optimal time
- Automakers do not have it easy to switch to alternate supplier in short notice
This shortage forced car companies to start doing things differently during the Covid era. Shifting from JIT to JIC helped Ford and other car manufacturers with the above challenges.
They started finding innovative ways of working in a new normal full of supply disruptions and difficult economic activity. Inflation, on the other hand, shot much higher than expected. The just-in-case method helped them fight the rising prices since with the JIC system, most often than not distributors agree on a fixed price contract that cannot be subjected to change.
Some of the other industries that have been seen using this methodology are the military, healthcare industry, including hospitals due to the nature of their operations.
It varies from company to company but JIC’s most significant disadvantage is the additional storage costs which can be quite high, going up to about 30% of inventory’s total value. It also adds more administration costs and raises the risk of wasted stock in case the products get spoiled, damaged, or simply do not sell. Some products can also be seasonal or just a trend, making them phase-out after a timepoint.
The companies using JIC are also tied up to their inventories. They cannot make sudden changes in the production system or supply chain, taking away many opportunities for the company and limiting their flexibility. World events like the pandemic also affect such companies. In 2020, many non-essential businesses struggled with wasted stock.
What is the Just-in-time philosophy?
What is the point of arriving two days before the party even starts? Or seven hours after it has ended? The name of this method tells it all. The JIT practice means having the inventory arriving at the time it is needed. Not sooner. Not later. This method, like anything in the world, has its pros and cons.
Relying on the just-in-time strategy results in minimal storing costs. It also prevents overproduction and allows an efficient use of resources. Elimination of overbuying reduces supply and administration costs too and causes less waste. If your company decides to change the product or fluctuations in demand occur, the time needed to change over the inventory will be minimal.
Which companies use JIT?
Considerable number of SMEs that do not carry a huge quantity of materials use the JIT method; having said that, some big corporations in the Tyre manufacturing industry as well as automotive industry such as Toyota use it, too. Such companies do not start production until an order is placed. Firstly, they organize the delivery of component parts to individual workstations. Then, they require the parts. This way, they also prevent material damage and ensure maximal quality.
Toyota’s non-value-adding waste philosophy has even been mentioned by academics as one of their greatest competitive edges. This philosophy includes the elimination of overproduction, waiting, over-processing or incorrect processing, unnecessary movement, unnecessary transport or conveyance, excess inventory, defects, and unused employee creativity.
This company gets much of its parts from local suppliers with long-term contracts to assure a steady supply. Their JIT strategy involves picking up from one supplier and delivering to the cross-dock smaller orders to minimize inventory at the plant. This means more frequent pick-ups of small levels done hourly for them.
Fast-food chains like McDonald’s, Burger King, computing companies, retail businesses, and restaurants also use the JIT method. McDonalds or any food business, for example, cannot afford to stock high levels of inventory given a large percentage of their ingredients have short shelf lives.
Retail businesses also profit from the JIT philosophy as it lowers the rate of ‘dead inventory’, improves quality control and stops them from running out of cash because of large investments.
The most significant disadvantage of JIT is that the materials needed for the production may not arrive in time and this error postpones the whole process. Delayed time can result in costs for the company if they operate in the B2B field and have agreements to respect. Hence, it is important to work with reliable suppliers when applying this inventory philosophy.
One needs to ensure that there are no shipping disruptions and that your contract with the distributor agrees on a fixed price for the materials. The last point is especially important in this time of high inflation rates. Nevertheless, one needs to keep in mind that even if one chooses a dependable provider, their supply chain may still suffer delays from uncontrollable factors like bad weather/natural calamities.
The best inventory management strategy
Now you may be wondering, ‘Which method is the best for my business?’ As shared before, this depends on the industry you are operating, but also on important world events that are unpredictable and beyond one’s control. Lately, the globe is witnessing huge inflation raises with the Russia-Ukraine war going on and the geopolitical tensions between China and USA.
This is making the just-in-case method a more attractive strategy for the time being for quite a number of companies. Even the Financial Times called for a shift in the supply chain methodology last December, just as they did during the pandemic times. There is no final answer to this question, as many companies adopt a hybrid strategy and different stocking methods for different products.
If you are still unsure of what inventory management method to use or are looking at hiring for strong talent in this area, please reach us for support. The Supply Advisory is specialized in procurement and supply chain recruitment with more than 30 years of combined experience and has strategic partnership ties in the field. And you know what? We are more than pleased to help!
Which companies use Just-in-time?
The just-in-time system is used by a number of small and medium enterprises. However, SMEs are not the only businesses that have found JIT profitable. Some large tyre companies or big fast food chain restaurants like McDonald’s use the JIT inventory method too. Some giant automakers like Toyota are also pioneers of this inventory management methodology.
Which companies use Just-in-case?
It is seen that the JIC method is used by but not limited to some of these industries; the military, hospitals, electronic companies, and car-making corporations such as Ford among others. Despite Ford having used the JIT system for decades, they shifted to the just-in-case inventory method recently.
What is the most used inventory method?
Right now, it is seen that a sizable number of companies use the JIC system because of the rising inflation rates caused by geopolitical tensions and wars happening around the world. The difficult economic conditions and frequent natural disasters have also contributed to this shift.
Ananya Sinha Roy is the Director at The Supply Advisory, a leading executive recruitment firm specialising in Procurement & Supply Chain.
You can view the The Supply Advisory website or contact them directly at firstname.lastname@example.org for a more detailed discussion.