Given global supply chain disruptions, labor shortages, and other factors driving inflation, some companies are now actively questioning the just-in-time (JIT) inventory practices that have been dominant for the past several decades. In their place, these businesses are adopting a just-in-case (JIC) approach, which involves holding more inventory and working to develop flexibility in the supply chain.
The purpose of just-in-time manufacturing had always been to reduce inventories and save costs in the supply chain. But in this climate, JIT’s reliance on suppliers, who have been unreliable since the COVID-19 pandemic began, seems counter-productive. Incidents early in the pandemic, such as large shifts in demand for items such as protective gear and panic-demand purchases of products like toilet paper and cleaning supplies, quickly underscored just how fragile the world’s supply chains are. And the situation has only deteriorated since then, fueled by factors such as China’s production-slowing COVID policy and an upending of so many supply chains due to the war in Ukraine.
And few expect things to get better any time soon. In its recent PwC Pulse Survey, for example, the firm found that two-thirds of manufacturers predict that inflation will remain elevated throughout 2022, with nearly three-quarters expecting to increase prices during that time and less than half expecting supply chain disruptions to ease.
The surge in demand, coupled with ongoing shortages of people and products, has made it inevitable that manufacturers and businesses would pass along rising costs by sharply increasing prices and driving inflation. This has set the stage for a migration from JIT to a JIC strategy, through which businesses, by stockpiling goods, are able to hedge their bets against increasing prices. As a recent PwC article noted, “Pricing that perfectly aligns with cost of goods or just-in-time inventory management approaches seem like quaint and distant memories.”
Manufacturing expert Willy Shih of the Harvard Business School agrees, writing in Forbes that “having more material on hand can make a lot of sense, especially if it comes off a long supply line from China.”
It is, of course, possible that, in the near term, the shift to a JIC inventory approach could drive up costs and actually contribute to inflation. However, the end result, many financial reporters say, is likely to be more reliable and more local supplies, as well as improvements to the ways in which inventory is designed, manufactured, and sold.
In fact, according to the Financial Times, “Some businesses are increasing the inventory they keep on hand and entering into longer-term contracts with key suppliers. Others are diversifying their manufacturing to create regional hubs with local suppliers and investing in technology to give them greater advance warning of potential bottlenecks.”
The message, say PwC’s business analysts, is that manufacturers must be both resilient and agile in the current business environment if they are to contain the impact of rising price inflation and succeed in addressing supply chain snarls and shrinking margins. The analysts suggest that as prices of energy and materials rise, manufacturers can mitigate the impact on cost of goods sold through actions such as “being more aggressive in finding alternate suppliers that offer more attractive pricing or suppliers that are closer to your operations in order to trim delivery costs.”
What’s critical to consider, regardless of which inventory approach you use, is taking charge of your supply chain from the beginning and making sure your actions are most appropriate to your situation.
• In light of current crises and with inflation in mind, are you thinking about whether JIT or JIC is the right approach to these issues and risks?
• Are you not only anticipating risks but also mitigating them as they develop, whether they’re internally or externally generated?
• At the same time, are you paying attention to each product’s lifecycle, with a clear focus on potential end-of-life issues, ensuring that they won’t cost you time, money, or customers?
These are complicated times. But the solutions don’t have to be complicated. Learn more about Dynamic’s Supply Chain Management Solutions and get a copy of the company’s proprietary Supply Chain Risk ScoringSM process.