Since the early 1980s, just in time inventory management has been used by businesses in the woodworking furniture industry, particularly manufacturers, as a lean approach to supply chain management. By ordering stock items just in time, based on known demand, businesses could keep stock levels as low as possible.
However, in recent years supply chains have become much more disrupted due to challenges such as the coronavirus pandemic and the lack of availability and rising costs of raw materials and shipping containers. This has led to dramatic increases in material lead times and customer demand volatility. With more and more businesses looking to add resilience to their supply chains, many are now switching from just-in-time to just-in-case (JIC) inventory management.
JIC takes a more cautious approach to inventory management. It’s when companies carry more stock and add redundancy into their supply chain so they can respond to unexpected surges in demand or mitigate supply disruption.
By carrying more stock, businesses are more likely to fulfill orders and prevent lost sales, helping them gain an advantage over their competitors. It also helps them respond quickly to market changes, so they are in an excellent position to facilitate growth.
However, JIC inventory strategies come with the risk of increasing operational costs. Holding more stock means higher carrying costs, less warehouse space, and more cash tied up in stock for longer periods of time.
In this article, we explain how a just-in-case stock management strategy can be implemented without the risk of absorbing too much capital in unnecessary inventory items.
How to implement JIC inventory management with optimum stock levels
Just in case inventory management doesn’t have to mean inflating stock to really high levels. It’s possible to use this approach to effectively mitigate supply chain risk while still keeping inventory investment under tight control.
The key five elements of an effective JIC stock strategy are:
Accurate demand forecasting
Just like any stock management approach, JIC requires good forecasting practices. When preparing forecasts, it’s important to remember that every stock item’s demand profile will differ, based on where it sits in its product lifecycle. For example, new market entrants often have positive demand, those at maturity will more likely be steady and fast-moving and those nearing decline will start to get erratic and then lumpy demand as their popularity diminishes.
Knowing each item’s demand profile helps ensure the best algorithms are used to calculate demand for the most accurate forecast.
It’s also important to consider demand trends, seasonality, and promotional activity when calculating forecasts.
These calculations should then be combined with the simple market insight. Adding ‘human input’ from sales teams, customers, or trade bodies is very useful during times of market instability.
Calculating safety stock
Safety stock is a pivotal element of a just-in-case stock strategy, as it ensures businesses have additional stock to deal with supply chain disruptions or spikes in demand.
It’s important to understand that safety stock is an additional level of stock above the usual cycle stock (stock ordered based on the forecast). The idea is that once cycle stock has been used up, there is still some contingency for unexpected changes in demand or supply.
There are many ways to calculate safety stock, from simply adding a fixed amount of buffer stock to all items, to using statistical calculations that account for demand and lead time variance.
Safety stock should be calculated in addition to usual stock levels. It can then be adjusted based on the latest supply and demand volatility without interfering with usual stocking policies.
If businesses can ‘foresee’ potential upcoming stock shortages, they can act before there’s a stock out. This information can also be used to adjust reordering parameters and safety stock levels to prevent the same thing from reoccurring in the future.
A risk-of-run-out report is a great tool to help understand what stock items are most ‘at risk’ of running out when they are likely to run out, and by how much. It’s a more reactive tactic, but one that can help keep overall stock levels down and simply react to upcoming risks.
With this crucial information to hand, businesses can put a plan in place to deal with the consequences, e.g. organize an emergency order, communicate with the sales team, redistribute stock.
The number one rule to success with a just-in-case stock strategy is: do not treat all items the same! A JIC approach is more effective if it is used to varying degrees across an inventory portfolio. It’s not wise to treat all items the same, as some will be more at risk of erratic lead times or lumpy demand than others.
Classifying stock helps prevent a ‘blanket approach.’ Using ABC analysis helps categorize stock items and assign different stocking policies to each group.
For example, with inventory split into three groups, an inventory manager could decide to prioritize forecasting and carry more safety stock of A items, as they have more supply chain ‘risk’ and demand volatility than B and then C items.
Tracking excess stock levels
A big risk of using a just-in-case approach is that it could lead to excessive levels of stock that could be difficult to move and end up obsolete.
One way to prevent this is to track the ‘health’ of stock:
Healthy stock is when stock levels reflect demand forecasts. With a JIC policy, there may also be a pre-calculated, additional level of safety stock for dipping into now and again.
Excess stock is when there is a lot of stock sitting on shelves that are not moving and is well over the quantities stipulated by forecasts. It’s important to keep an eye on these levels, as stock can begin to perish, be superseded by newer models, or lose market value.
Obsolete stock is when a stock item has had no demand over a number of periods. At this point, items begin to affect profitability, so action needs to be taken before reaching this stage!
Using software to implement a JIC strategy
Keeping on top of the many reports needed to manage a just-in-case inventory plan may sound like a daunting task. However, inventory management software can help.
More and more businesses are using software to help classify stock accurately, forecast demand, calculate optimal safety stock levels, and run risk-of-run-out reports.
With all the above information in one system, there is complete visibility across entire stock portfolios and alerts can be set to make it easier to act before risks become a reality.
Using an inventory management tool also gives inventory teams more time to deal with suppliers, manage customers and look at the bigger picture.
Supply chain disruption looks set to be around for a while longer so moving to a just in case approach to inventory management is wise. If this is your route, make sure to consider the factors above to prevent ‘stock bloat’ (carrying too much) and tying up too much all-important capital.
EazyStock is a cloud-based inventory optimization solution for manufacturers, wholesalers, distributors, and retailers.
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