Inventory Management: From Just-In-Time To Just-In-Case And Implications On Your Cash Flow

Inventory Management: From Just-In-Time To Just-In-Case And Implications On Your Cash Flows

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From a supply shock caused by a pandemic to ships getting stuck in the Suez Canal, the last several years have seriously strained the conventional “just-in-time” (JIT) inventory approach. Given the inability to build a Second China to serve as a backup, what can SMEs do to avoid hoarding surplus inventory, hoping it will be needed later, or disappointing their highest-value customers? The answer is to take the “just-in-case” approach.

Managing the inventory costs is critical to every company, regardless of size. While smaller businesses can enjoy the benefit of knowing their customers by name and creating a more individualized product, they cannot allow this closeness to customers to interfere with keeping a handle on costs. Excess inventory can get expensive, whether operating from home or running a big company. Fortunately, there are ways to manage inventory to save money and mitigate risks while meeting your customers’ needs.

What is Just-In-Case Stock?

A Just-in-Case inventory, commonly shortened to JIC, is an inventory management process that lowers costs by reducing the amount of goods in stock. Think of JIC as an insurance policy in case you cannot fulfil expected demand because of sudden surges in sales, supply issues, or other problems related to fulfilling customers’ orders. JIC helps businesses store only what they need to fill future orders.

With JIC, you only keep what is needed to meet the subsequent few manufacturing cycles, nothing more, nothing less. It allows businesses to predict demand and cut costs, ordering only new commodities or intermediate goods as they drop in stock sufficiently to match expected demand. This kind of inventory is commonly called safe storage and is common among manufacturers, wholesalers, and retailers. It refers to keeping a larger quantity on hand to fulfil expected demand while not maintaining large amounts of unsold inventory. This way, you avoid the expensive and risky practice of keeping additional inventory on hand without knowing how or when it will be sold.

For instance, let us say that you anticipate that customers will order a particular product in high quantities. You might need to maintain sufficient inventories, such as raw materials or partially manufactured items, to fulfil this demand. You might want to have 100 finished units in stock to ship products to 100 customers without spending time and money making 100 units from scratch.

Expected-demand inventory refers to keeping large quantities of products on hand that you anticipate selling but are unsure of the timing. This kind of inventory is usually called a stockpile.

Wholesalers, distributors, and retailers frequently use this to mitigate their risk of running out of products and losing customers to shortages. Suppose you maintain small inventories to fulfil the expected demand. In that case, you risk being unable to fulfil orders if the supplier suddenly runs out of product or has another problem. Keeping a larger inventory may help you avoid that issue, but it is essential to ensure you are not overstocking and ending up with unsold inventory you cannot sell.

Keeping an expected-demand inventory is riskier than keeping an inventory to fulfil anticipated demand, as it involves keeping a more extensive inventory in stock. It means you risk having unsold inventory, which costs you money and takes up space. However, it also benefits you by meeting your customers’ needs and reducing the risk of losing customers because you are short on supplies.

Keeping stockpiles for expected demand, or JIC, mitigates the risk by keeping extra inventory. However, JIC inventory goes one step further, being extra stock you are not expecting to sell.

While this does come with some risks, it can be an effective risk-reducing strategy. You may incorporate it into an overall stock management strategy, such as replacing something you would typically expect to sell, for example, additional raw materials instead of finished goods, or as additional products often sold in conjunction.

Keeping an inventory of JICs on hand can help you mitigate your risk of running out of a critical component in a product or being unable to locate a supplier when needed.

How does this work in practice?

The key to the JIC inventory approach is focusing on your current relationships and building a solid ecosystem with customers, suppliers, and employees. You would be surprised at how much customers value such an approach and cooperation, especially in this current climate. They will be using this at best to assess what you need from suppliers.

  • Are there any products that you are buying in bulk? Are there regular purchases that you always buy, even if they are small amounts? Can you set up a process for keeping, let us say, 3 or 4 months’ worth of stock for these products?
  • How long do you hold stock? Calculate the “days that inventory is held” — is that an extremely long period? Probably 6-7 months’ worth of inventory could be sufficient for another pandemic or a blockade on the Suez Canal.
  • Suppose you have reasonable foresight, planned orders, and raw materials available at the right time. In that case, there is no reason to hold back on producing, provided you have the capacity in reserve. Can the two/three key suppliers agree on the price again? Can you find at least one alternate supplier for anything you buy?
  • Pay your suppliers on time! You can negotiate better terms, prices, and payment terms with your suppliers if you follow through afterwards (and with a solid projection, you will!). You can hold suppliers to fair competition without damaging relationships.

When managing your inventory, most businesses know that excess stock is one of the highest costs that affect your profit margin.

But coming up with solutions is not always straightforward. Inventory reduction is like dieting: It is easy, in theory, but not as simple as you think. Keeping too much inventory on hand is an expensive practice. However, keeping too little stock on hand can be just as expensive. JIC management techniques can help you spend your money better and lower your stock costs while meeting your customers’ needs.

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