In this QAD Precision Report, Ian Berman asks the question: Is Just-in-Time no longer a viable inventory management strategy.
There should be no surprise that companies are starting to rethink their whole supply chain organization. After more than two years, we are all familiar with the supply chain woes that currently plague almost every industry.
The bullwhip effect is being played out over and over again. For many industries, there is no real end in sight. I believe that this can be directly attributed to the reliance on Just In Time (JIT) inventory management programs.
For decades manufacturers and retailers have been trying to figure out how to minimize their inventory costs. Instead of ensuring high inventory levels, even of critical items, manufacturers wanted these goods to arrive at their facilities “just in time” for the production schedule.
This led to a reliance on expedited freight transportation and an unhealthy requirement of availability in the transportation realm. Companies kept looking for ways to cut inventory holding. One of the ways many did this was to push inventory back upstream to 3PLs or contract warehouses. By doing so, they could write off those costs to make the bottom line look better.
This came at the expense of near perfect world transportation network designs. In theory that was amazing. Nevertheless, for a while we saw this working well. Therefore, it is no surprise that many and more companies looked at these strategies to keep up with the market.
JIT worked well… until it didn’t. Ocean shipping — the backbone of the transportation of mercantile trade — was deeply impacted by port closures in many parts of the world. This included some of the busiest ports in North America and Asia.
Port closures had two important impacts. First, it became impossible to unload goods that had already arrived. Secondly, it became very difficult to get new goods from originating countries.
In the United States specifically, much of this disruption was caused by a heavy reliance on China and other Asian countries for raw materials and finished goods.
At this stage, most consumers are now familiar with those issues affecting the goods that they buy every day and week. However annoying stock outages are for consumers, some manufacturers are facing an existential crisis.
A manufacturing company that cannot get the raw materials or parts they need cannot produce goods. Even if consumers favor buying products that are “Made in the USA”, chances are that manufacturers are importing raw materials from suppliers in other countries.
The good news for manufacturers is that ocean container freight prices have been dropping. However, prices are still significantly higher than they were pre-pandemic.
The snarled global supply chain has prompted many companies to reconsider their operations. Some companies with the financial clout to do so responded by placing larger than necessary orders to hedge against worst-case scenarios.
However, many general merchandise stores have been left with piles of unsold goods. This is because strategies to ensure that stock is on hand are out of alignment with consumer buying patterns.
This type of overcompensation can significantly impact a company’s bottom line. If the customer orders simply are not there, a company is left holding raw materials and finished products nobody wants to buy.
In addition, while companies are dealing with these issues, a new constraint has arrived — inflation.
Inflation is, unsurprisingly, driving consumer spending habits. This has a larger butterfly effect. Again, unsurprisingly, major organizations are hesitating to spend money if there is a recession coming.
Furthermore, on June 15 this year, the Federal Reserve on June 15, 2022, raised interest rates by 0.75 percentage point. This was the third time the rate was raised in 2022. As a result, capital investment costs more.
This confluence of events means that companies that have heavily invested in minimizing inventory and safety stock are rethinking this strategy. The question they need to answer is whether or not meeting specific deadlines is more important than carrying costs.
It is no wonder many organizations are looking at new ways to reduce costs associated with their inventory. For some, this means seeing if they can leverage economies of scale by partnering with customs brokers or 3PLs.
Others are seeking to get a much clearer picture of their costs per item — including landed costs or freight and importation costs. This would allow companies to perform more accurate modeling and review of their supply chain.
Yet again, other companies are looking at ways of reducing costs in other parts of the supply chain. These include duty minimizing strategies such as leveraging free trade agreements or foreign-trade zones (FTZs).
FTZs in particular can help companies balance the cost savings of JIT, while still keeping inventory on hand. With an FTZ, no duty is paid until finished goods are released to the market. Furthermore, companies that rely heavily on imports can also achieve significant savings with weekly entry procedures.
Visibility and control are key. But so is sharing this visibility and control outside the four walls of your organization. For companies navigating these uncertainties, making sure their partners share the same vision is something that is going to be a talking point for many quarters to come.
Ian Berman is a Solutions Consultant with QAD Precision. Ian has over 10 years of experience in international transportation and compliance. He holds a Masters Degree in Supply Chain Management and has APICS CLTD Certification.
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