Unless your business relies heavily on holding large levels of stock at all times, the idea of holding inventory that collects dust just doesn’t make sense. With “want it yesterday” levels of demand and JIT solutions, this is a thing of the past. Still, just in time occasionally requires just in case safety stock to accommodate the ebb and flow of todays supply chains.
Why the Need for JIT Safety Stock?
Recent upsets in global supply chain operations, a pandemic, trucking shortages, inventory shortages, delayed deliveries, international conflicts etc have made a mess of inventory management. These seismic shifts have undermined the ability to count on predictable replenishments of materials required to keep many operations running smoothly.
Under extreme conditions, such as what we saw during the beginning of the pandemic, we see how consumer demand has the ability to eat up existing inventory virtually over night.
Under “normal” conditions, safety stock would be used as a reliable buffer against calculable, predictable ebbs and flows in the logistics landscape.
Now faced with unprecedented cost increases, a “Great Resignation”, and companies being forced to do more with less, the bullwhip fallout of the pandemic has created voids within supply chains around the world.
In order to fill the gaps, lean manufacturing and Just in Time (JIT) inventory strategies need to be reassessed to adapt to what is essentially the new normal: a highly disrupted and unpredictable flow of goods on a global scale.
Hence the need for a hybridized JIT safety stock.
JIT Inventory Management and the Kanban Process
The JIT method of inventory management relies on the premise that stock can be rotated according to a predictable availability of materials. Unfortunately, this method doesn’t account for the unpredictability of consumer demand. Nor does it account for the ripple effect that occurs when one stage of the value stream suffers from a materials shortage causing previous stages to grind to a halt.
In a similar fashion, the Kanban manufacturing process developed by industrial engineer Taiichi Ohno at Toyota, relies heavily on the steady control of work-in-process directly attached to customer demand. As finished goods approach the point of replenishment, the value chain engages to produce inventory to fill the void.
Each stage of assembly maintains a level of work-in-process inventory waiting to move on to the next link in the production cycle.
The beauty of Kanban is in utilizing minimal JIT inventory counts. The problem is, if there is a disruption in material supply, each operation in turn is affected on down the line.
What is the Key Risk of JIT?
The inherent risk of the JIT method is the potential for the domino effect. Cascading problems happen when the JIT inventory chain breaks down:
- Delayed Delivery: Shortages or circumstances cause the vendor to be unable to maintain a delivery schedule
- Stock-Out: Results in lost sales, lost gross profit and damaged customer confidence
- Inventory Carrying Costs: Lost sales create backups which increase carrying costs from holding inventory
Just as on an assembly line, if a problem occurs at one point along the process, it affects further points downstream. In the context of the supply chain, there are a number of other factors that can easily become points of failure including:
- Dependencies on local suppliers
Ultimately, the real crux of the problem though is rooted in the hyper-sensitivity to time itself. In other words, if time was not part of the equation, there wouldn’t be a problem.
Is the JIT Method Still Valid?
Because the alternative to not using a JIT method of production automatically implies holding excess inventory, yes, JIT is indeed, still absolutely valid. But the process itself needs to adapt to remain agile enough to weather the highs and lows of an unpredictable supply chain.
One innovative solution to managing inventory in a hyper-paced market is offered by re-thinking how existing warehousing and transportation fit into the supply chain.
Using bank-based financing at exceptionally low interest rates, inventory is moved off supplier and customer balance sheets through a cost-effective globalized network.
With the ability to fulfill just in time deliveries, the result acts very much in the same way as holding safety stock.
problem: less flexibility through limited supplier dependencies.
JIT Safety Stock and the Global Market
Not every company operates in a linear market where demand is consistent enough to warrant a predictable level of safety stock. Yes, the food industry for one would be an exception. But if you’re attempting to count on a consistent, dependable and timely supply of buffer inventory between North America and China, you may have issues.
Moreover, in order for JIT to be effective, your suppliers should ideally be in your back yard. They should also consider your business a top priority.
In terms of the state of the global supply chain and lean manufacturing methods using JIT, there are no massive upheavals – for the moment.
In a recent article posted by SupplyChainDive referencing a Gartner research report, the response to a poll on increasing safety stock showed a total of 54% percent of respondents were either currently investing in inventory, or were planning to within the next two years.
In other words, JIT manufacturing methods are still very much and accepted by global industries.
Managing JIT Safety Stock
There are a number of key factors that you can use to calculate the amount of safety stock to keep on hand. Main factors include:
- Inventory velocity
- Current demand
- Future Demand
- Sales volume
- Supplier lead times
Generally speaking, an ideal level of safety stock should be inventory quantity consumed per day multiplied by lead time required in days.
But how do you manage safety stock levels when key predictive factors are highly unpredictable? Namely, lead time and customer demand during that lead time.
Mitigate Points of Delay
Set expectations through visibility. Transparency in every aspect of the supply chain goes a long way. For instance, partnering with dependable logistics providers who use WMS softwares and cloud-based inventory tracking lets both vendors and suppliers keep an eye on material flows.
Knowing where your products are at any given point in time alleviates stress and, in the case of a business owner, empowers them to make informed decisions on how to manage stock levels should they begin to run low.
Adopt a VMI (vendor managed inventory) strategy. If your suppliers are willing to take responsibility for ensuring inventory availability, and can be counted on to deliver, you increase your ability to have stock on hand when you need it.
Partner with suppliers who have a history of dependability. Company cultures stem from the people that control how the company operates. When a supplier has a consistent reputation for delivering the goods on time and in good order, it’s generally a good bet.
Who wants to carry excess inventory? Nobody.
Just in Time methodologies in supply chain management offer minimized inventory levels, equalized balances between receivables and payables, and reduced capital costs. What’s not to like?
Does safety stock guarantee continuity and stability? Not necessarily, but if your business does use a JIT strategy, it is possible to find the sweet spot that balances carrying charges against the potential for lost sales. Either way you’re better off with safety stock than without it.