A manufacturer’s approach to inventory management affects everything from cash flow to output and customer satisfaction. It’s a vital component of operational strategy, and it touches much more than production. Thanks to the rapid adoption of smarter, more connected supply chain technologies over the past decade, “just-in-time” (JIT) models have become more accessible to businesses than ever before. This approach offers manufacturers a way to save money and mitigate waste—but only under the right circumstances. However, as the market has changed, JIT’s value has been thrown into question.
At the same time, “Just-in-case” (JIC) models have emerged as a remedy to ongoing material shortages, and many manufacturers are interested in how a shift in management tactics might help them stay afloat in today’s volatile environment. In a world where the benefits of either option are not guaranteed, how should a business go about selecting which methodology they want to utilize, and when — if ever — should they oscillate between them?
Table of Contents
- Understanding Inventory Management Strategies
- Choosing the Right Strategy
- Factors
- Predictability
- Reliability
- Product category
- Goals
- When to choose
- JIT
- JIC
- Factors
- The Hybrid Approach: Combining JIT and JIC
- Optimizing Inventory Management with Intelligent Tools
Understanding Inventory Management Strategies
Before deciding whether JIT or JIC (or something in between) is right for their operations, managers will need to dive deep into each model.
Just-in-time (JIT)
JIT inventory management is essentially a pull system, that can be automated or manual depending on the level of digital integration the manufacturer has completed. Under this model, teams (or software programs) monitor inventory levels and order materials only as they are needed in the production process. They aim to have just enough on hand. The primary goal of businesses operating under this model is to minimize inventory levels to:
- Reduce overhead by limiting the amount of money tied up in stock to just what’s needed to fulfill known demand.
- Help manufacturers that work with perishable materials or those prone to degradation avoid waste due to spoilage or over-ordering.
- Enhance agility by allowing manufacturers to change course quickly without concerns about utilizing on-hand stock.
However, JIT comes with drawbacks, and chief among them is its vulnerability to disruptions in the supply chain. Because manufacturers are only ordering what they need right when they need it, it’s great for managing sudden dips in demand for the manufacturer’s product; changes elsewhere in the supply chain are a different story, though. If a vendor fails to deliver on time or delivers sub-par materials, demand unexpectedly surges, or the industry finds a given material in unexpectedly short supply, businesses using strict JIT models may struggle to meet customer needs.
Just-in-case (JIC)
JIC inventory management uses a push system. Under this model, businesses order materials with an eye toward keeping extra stock available at all times. They place more emphasis on market trends and historical patterns than those using JIT models, but ultimately, they seek to always have more than enough on hand. The primary goal when using this model is to keep enough extra materials in storage to:
- Enhance competitiveness by ensuring ongoing production when materials are in short supply.
- Reduce the risk of lost sales due to stockouts (whether caused by delivery delays, demand spikes, or anything else).
- Mitigate budgetary impacts of fluctuating materials costs.
Of course, these benefits have a cost. Ordering ahead of time means losing opportunity costs by tying up larger portions of budgets in overhead — and not just in the materials themselves. JIC models also come with higher storage spend, the potential for more scrap and waste (if demand forecasts are not accurate), and less flexibility to pivot alongside changing customer preferences.
Choosing the Right Strategy
Picking the right strategy is a key element of operational planning, helping manufacturers maintain efficiency, minimize costs, and meet customer expectations. To determine whether JIT or JIC is right for their business, leaders should take into account:
- Demand predictability.
How much does demand change from year to year, month to month, or week to week? - Supplier reliability.
How stable are your upstream partners? How much can you count on them to fulfill your needs? - Product type.
Are your products subject to seasonality (either in availability of materials or demand for your products)? How likely is spoilage or degradation of produced units or raw materials to impact the business? - Business goals.
Which is more important to you: controlling spend or guaranteeing availability?
| Just-in-time models benefit manufacturers… | Just-in-case models benefit manufacturers… | |
|---|---|---|
| Demand | With stable, predictable demand. | In volatile or unpredictable markets. |
| Suppliers | With highly reliable supplier networks. | With supplier networks that are prone to disruptions. |
| Product Type | That produce perishable items, use materials prone to degradation, or face high costs related to unique storage needs. | That produce goods or use materials that are unlikely to spoil and are easy to store should demand change. |
| Business Goals | Focused on minimizing costs and that are willing to adapt to disruptions in real time. | Focused on availability and that are willing to spend more to ensure it. |
The Hybrid Approach: Combining JIT and JIC
Business leaders who review this chart and find themselves straddling both columns may find value in the middle ground between these two models. In fact, this is likely to be the most effective choice as it allows managers to balance the benefits of each model with their businesses’ needs in mind.
To build a hybrid model, managers must first implement an inventory classification system that categorizes materials based on importance, scarcity, lead times, turnover, and longevity. Generally speaking, JIT models are good for materials with stable availability, short lead times, and low turnover rates—such as those used to make less-popular products or those prone to high scrap rates. JIC models are preferred for materials with longer lead times, uncertain availability, and high longevity or those used to make high-demand items.
| Raw material’s… | Just-in-time | Just-in-case |
|---|---|---|
| Importance | Non-critical | Critical |
| Availability | High | Low |
| Lead time | Short | Long |
| Turnover | Low | High |
| Longevity | Low | High |
Once manufacturers have categorized their inventory using these parameters, they can calculate economic order quantity (EOQ) for each material to further refine both JIT and JIC segments. The formula for EOQ creates a relationship wherein:
- Higher demand or order costs increase the EOQ, encouraging larger orders to spread the ordering costs over more units (encouraging a JIC model).
- Higher holding costs push EOQ down, favoring smaller orders to minimize the financial burden of holding more inventory (encouraging a JIT model).
Optimizing Your Inventory Management
Both JIC and JIT models are possible regardless of a business’ level of digital maturity, but connected tools—like our Manufacturing Execution System (MES), TrakSYS™— offer critical support to manufacturers looking to refine their approach to inventory management. Real-time monitoring of inventory, production performance, demand, and other key factors is the only way to ensure that materials are always there when you need them, regardless of which approach the business favors.
Not only can these platforms automate ordering and fulfillment processes through real-time tracking, but they also enhance the accuracy of performance data to ensure that orders are only placed when the time is right. By reducing redundancies, errors, and the time it takes to collect data, MES platforms ensure decision-makers have the end-to-end visibility they need to ensure the ongoing efficacy of inventory strategies.
To get started on your inventory management improvement journey, contact us today.