Few theories are as highly regarded in the supply chain world as Just in Time inventory management. The idea of supplying the product only at the precise moment in which it is going to be used, eliminating the need to have stock and all its associated expenses, clearly seems like a winning horse. However, there is a way to manage inventories that defends the opposite position: always have plenty of stock to have guaranteed supply and safe from any unforeseen event. It is about the much lesser known Just in Case, which we can translate as “Just in case”.
What is Just in Case
Until the arrival of Just in Time (JIT) during the last century, by default all companies worked according to the Just in Case model. In other words, large quantities of stored products were accumulated to avoid the risk of falling into stock-outs. However, with the arrival of Just in Time and the reduction -and even the elimination- of stocks, many companies reconsidered their supply chains.
To this day, a multitude of firms continue to save millions of euros a year thanks to the JIT philosophy. By having less material in circulation – or waiting on the shelves – companies have more money available to use more efficiently. In addition to saving all the costs involved in having merchandise stored: facilities, machinery, labor, etc.
The Just in Case, on the other hand, does not come with great promises. By assuming the presence of stocks in large quantities, from the beginning we will be incurring expenses that JIT promises to eliminate. In addition, it does not take full advantage of innovations in demand forecasting or information technology and pull management systems, which are based on managing demand in real time.
Why use Just in Case?
So, is Just in Time the right method for all situations? Can there be scenarios in which I live with the Just in Case? Various events have led to the automatic commitment to Just in Time and stock reduction being reconsidered.
The 9/11 attacks in New York, for example, demonstrated that some events could not be predicted even by the most meticulous of demand forecasting or risk prevention algorithms. As a result of the attacks, Ford had to temporarily close five production plants due to an inability to obtain engines and other parts from its Canadian suppliers. This caused the company’s production to decrease by 13% during the last quarter of that year.
Events of this magnitude can jeopardize the most sophisticated supply chains. Events such as Hurricane Mitch -which destroyed 10% of the world’s banana production-, the mad cow crisis -affecting meat companies in Europe- and other situations have shown that some events are practically impossible to predict and, In addition, they are aggravated by the greater speed at which the world currently moves.
But it’s not just these big events that have led some companies to increase their stock amounts again. Companies must also balance the savings generated by reduced storage against the possible consequences of a stock-out, however unrelated the causes may be.
Large volumes make it easier for you to be more efficient when contracting transportation and distribution
Is the cost of stock storage higher or the risk of losing a customer who has made it a condition for us to always have material or product within reach? A sector that usually has good reasons to opt for Just in Case is health, due to the obvious seriousness that a cut in supplies can cause them. A hospital may willingly accept the cost of storage in exchange for knowing that it is covered by the product.
The Just in Case is also common to be able to satisfy those types of customers who make unexpected orders and/or products that take a long time to manufacture. When we value more being able to always fulfill the service even at the cost of incurring expenses and less optimization, we will be moving in Just in Case environments.
In these cases we can see the inventory as a security policy. It will generate expenses that we would not otherwise have, but we accept them in order to be calmer and safer in the face of the unforeseen: be it an unexpected volume of orders or a catastrophe of any kind. Sometimes, companies’ dependence on a very small number of customers is so great that they choose to reduce profit margin to avoid any type of problem, however unlikely it may be.
Operationally, working with stock can also be advantageous on some occasions. Large volumes and stock allow you to consolidate shipments and take advantage of the economy of scale by shipping larger batches. While Just in Time assumes working with smaller shipments, which will usually be less efficient in transportation costs. This point should also be studied before deciding on one or the other.
Combining Just in Case and Just in Time
Outside of the strictly theoretical debate, in real life it is very common for both systems to coexist together. For example, you can analyze which of your products are essential and must have a guaranteed supply, even if it is by increasing the stock, while in the rest of your catalog you can speed up more by reducing the product stored. Or consider if your sector and your customers are stable enough in their purchases to be able to trust your demand forecast, which allows you to save unnecessary expenses on large storage.
It is also important to take into account the nature and difficulty of obtaining each product or material. If you have several providers located near you, it will be easier for you to overcome the failure or absence of one of them. However, if your only supplier of a material is very far away and it takes a long time for you to get the product from the time you order it, you may want to have enough stock that it would take you to find an alternative and that it could supply you. .
Similarly, stocking large quantities of all products would make it very difficult for you to be competitive. A very common solution is to opt for a middle ground and work with safety stocks while taking measures so that these stocks are as small as possible: emergency suppliers, closer proximity to distribution and/or supply centers, reduction of the lead time -time that elapses from the order to the delivery-, etc.
As often happens in logistics, the best way to get it right is to carefully study your needs and those of your customers, avoiding standardized responses.