Inventory is expensive but often needed when businesses don’t want to turn away customers who place unexpected orders for items that take time to manufacture or acquire. An inventory also gives a business time to line up other suppliers when a key supplier goes out of business. For many companies, things can and do go wrong, and their inventory allows them to continue doing business as usual.
Just-in-case
Inventory therefore, is an insurance policy. No one likes to pay the premiums, but the security is necessary for survival. Businesses that operate this way are using just-in-case inventory management.
The benefits of just-in-case include:
- Robustness in the face of uncertainty - With sufficient inventory, one can weather supply disruptions due to strikes, natural disasters, shipping problems, political instability, etc.
- High levels of customer satisfaction - Just-in-case allows a business to maintain high levels of customer satisfaction because stock outs rarely occur. The business can offer their customers a wider product selection because they're willing to expand their inventory size.
- Savings from purchasing consolidation - Stock is ordered less frequently in larger lots. This reduces purchasing and shipping costs. Bulk discounts are possible which results in a lower cost per stock item.
Just-in-case inventories tie up capital which could be used elsewhere in ways that improve the business’s competitiveness. There is also a risk of losing the inventory to accidents, obsolescence, and degradation.
Just-In-Time
On the other hand, some companies, particularly manufacturers in markets with stable demand, can minimize their business uncertainties to the point where they have little need for just-in-case inventory. This requires deliberate proactive effort and the use of technology.
Businesses operating this way are using a just-in-time process. They know their demand and have good control over their supply chains and internal processes. Parts arrive exactly when needed from suppliers, and final products are produced, shipped, and arrive at the customer’s door when they’re expected. Just-in-time manufacturers produce enough to meet their customer orders rather than to build up a just-in-case inventory.
The benefits of just-in-time include:
- Little capital tied up in stock - This frees capital for more productive use elsewhere within the company. Warehousing costs and labour required for inventory maintenance are minimized.
- Improved supplier reliability - This is born out of necessity because reliable suppliers are the key to a successful just-in-time operation. Collaboration with suppliers who are often given direct access to the business's inventory data makes high reliability possible.
- Less waste - Minimal inventory means less is lost to accidents, obsolescence, and degradation. By necessity, shipments from suppliers are subject to a higher quality control process, because there are few spares available in inventory to use in place of defective items. Therefore, fewer defective items are thrown out.
Businesses using just-in-time must keep a close watch on their suppliers and have contingency plans in place to cope with disruptions. Their vulnerability to supply disruption extends up the supply chain beyond their immediate suppliers.
For more information on parts inventory and warehouse management, please contact us.
