Supply Chain & Logistics - Connected Corners

Exploring a hybrid JIT/JIC inventory strategy scenario for manufacturers (Part 3)

This segment takes a look at a high level example of a hybrid JIT/JIC inventory model for manufacturer & resellers

Continuing from Part 1 & Part 2; this segment takes a high level view at some of JIT inventory model’s key challenges as well as what a corresponding hybrid JIT/JIC inventory strategy for a manufacturer could look like

Quick note: Despite some similarities inherent to the supply chain function across various industry verticals, each business is relatively unique (geographic presence, product mix, operational capabilities, strategic goals, industry partnerships, et al.) and as such their hybrid JIT/JIC inventory strategies, supply chain solutions & CX programs will be reflective of their individual goals & capabilities

Why develop hybrid JIT/JIC inventory strategy?

Generally speaking; the 3 key reasons why businesses or even entire industries may seek to develop a hybrid JIT/JIC inventory strategy would be to –

  • Build a more resilient inventory management strategy for the future
  • Develop the capability to fulfill unpredictable & asymmetric demand spikes across an omni-channel footprint
  • Prevent customer churn & improve/maintain competitive positioning in market

For a JIT-aligned value chain players, even a single unforeseen yet high-impact adverse event may be enough to significantly cause disruption to their upstream (raw materials/parts) and downstream (finished goods) supply chain operations…

…which; in a low-loyalty, hyper-competitive &/or price-sensitive market could even lead to negative customer sentiment and potentially even loss of business to competitors (read: customer churn)

Add to that, occurrence of multiple adverse events (think: extreme weather conditions) – either in quick succession or concurrently – could have the potential to cause traditional JIT-aligned supply chains to buckle under pressure

For the most part; each business would seek to develop their own unique version of hybrid JIT/JIC inventory model that best suits their goals, needs & capabilities

For the purposes of this simplified example; let’s assume that a manufacturer –

  • Runs an ideal 100% efficient manufacturing process i.e. zero wastage
  • Diversifies their parts sourcing across local, regional & global suppliers
  • Maintains a JIT contingency plan; albeit one that isn’t very tolerant of sudden &/or extended supply interruptions
  • Doesn’t maintain large storage facilities

High level view of key JIT inventory model risks: Manufacturer scenario

Whilst JIT-aligned manufacturers enjoy a range of benefits from holding minimal-zero inventory on hand, they aren’t entirely immune to some of the (JIT) inventory model’s inherent risks [discussed in Part 2]

For one; a sudden &/or excessive interruption in regular supply of crucial raw materials / parts could pose a significant risk; particularly if the manufacturer’s existing JIT contingency plans aren’t flexible enough to sustain/offset their inventory supply gap for extended periods of time

The following example takes a simplified high level view of outlining some of the key inventory risks a JIT-aligned manufacturer (in this case vehicle manufacturer) may face; including any correlating impacts on production and fulfillment schedules

Actual inventory risks, mitigation strategies, modeling and management principles are typically far more complex in nature and would likely be unique to each business; based on a range of factors (industry type, geography, operational capabilities, product mix, risk appetite, supplier relationships/VMI, digital capabilities, consumer demand, et al.)

Highlighting key JIT inventory risks

JIT inventory potential risk scenarios - manufacturer example - Connected Corners
1

Virtually zero inventory risk for parts A & B

In this scenario, the manufacturer faces virtually no inventory risk for parts A & B; largely owing to the predictability & stability of their associated supplier and distribution networks

This also translates to minimal risk (if any) of potential production slowdowns, shutdowns and/or order fulfillment disruptions (as long as the vehicle doesn’t require parts that are under supply constraint)

As part of their ongoing JIT operational excellence protocol, these relatively ‘safe’ suppliers & distributors too would be subjected to continuous assessment & improvement; particularly as it relates to proactively developing inventory risk control plans
2

Potential inventory risks for part C due to issues in upstream distribution network

In this scenario; the manufacturer faces potential inventory risks for part C; specifically due to the unreliability / disruptions within their upstream transport distribution networks

This would likely translate to the manufacturer also facing risk of production shutdown &/or fulfillment disruption due to reduced inventory for part C

Though the manufacturer may have built some form of JIT contingency plans (think: diversified supplier base and distribution networks) to ensure un-interrupted supply for part C; it may not be tolerant enough to counter select unpredictable high-impact events such global shipping delays (e.g. key shipping lane backlog, adverse weather conditions, et al.)
3

Likely parts inventory risks for part D due to one or more supplier issues

In this scenario; the manufacturer most likely faces inventory risks for part D; specifically due to disruptions within their upstream supplier networks

The severe shortage of part D may also lead to production shutdowns & even fulfillment disruptions; particularly for vehicle models that absolutely rely on part D

In this case too, the manufacturer’s existing JIT contingency plans may not even be relevant as the issue is prevalent across their entire supplier network; who in turn maybe facing supply chain disruptions &/or demand/supply issues of their own
4

Fulfillment inventory risk caused by sudden demand spike for vehicles relying on part D

In this scenario; a sudden demand spike (above normal forecast limits) for vehicles that absolutely rely on part D – itself facing supply shortages – would likely adversely impact fulfillment inventory

Put another way; the manufacturer already facing supply shortages for key vehicle component (say part D)

…may concurrently see a sudden demand spike for the very vehicle model that that absolutely rely on Part D (e.g. smart vehicle model requiring latest semiconductor chips or 5G connectivity module)…

…leading to a very high likelihood of fulfillment disruptions (prematurely closing new order books & delaying existing orders); which could in turn have various adverse impacts on their brand, competitive positioning, customer churn, et al.

To mitigate some/all of these inventory risks; the traditionally JIT-aligned manufacturer may seek to integrate aspects of JIC (Just-In-Case) inventory principles – notably stockpiling / cushion inventory – as part of developing a more resilient hybrid JIT/JIC inventory strategy

Addressing risks with hybrid JIT/JIC inventory strategy: Manufacturer scenario

The manufacturer may consider developing a hybrid JIT/JIC inventory model when the sum of all risks (think: brand name, competitive positioning, customer satisfaction / retention, et al.) associated with not meeting market demand (current, pent-up, forecasted)significantly outweighs the costs associated with holding the cushion inventory for raw materials / parts

This hybrid JIT/JIC inventory model could then be continually improved to aptly mitigate any unforeseen inventory risks arising due to instability within their supplier and/or distribution networks as well as to optimally fulfill any sudden demand spikes across their product portfolio

What a hybrid JIT/JIC inventory strategy scenario could look like

Hybrid JIT/JIC inventory model scenario: manufacturer example - Connected Corners
1

Continue solely applying JIT modeling for parts A, B & partially part C

Based on factors such as supplier and distribution reliability, parts requirements, priority, et al…. the manufacturer continues applying JIT strategy in ordering Parts A, B as well as some of Part C from their respective suppliers (local #A1, regional #B1, local #C1)

As with any other operational excellence protocol; this process too would be continuously monitored & improved to prepare for any potential eventualities
2

Apply mix of JIT & JIC modeling partially for part C & all of part D

Where global supplier #C2 may very well be reliable; but its associated distribution network isn’t; the manufacturer may consider bulk ordering more than required quantities (JIC principle) of part C from supplier #C2 so as to optimally regulate the overall category inventory (in tandem with JIT volume from supplier #C1)

In this scenario the manufacturer is essentially stockpiling part C (cushion inventory) to mitigate potential risks arising from the distributor of supplier #C2 in the future

Similarly; to counter any potential supply constrains of part D; the manufacturer may apply the same JIC principle in the form of bulk ordering to create a cushion inventory for the entire category

Put another way; when the manufacturer faces (or predicts with high probability) a shortage of crucial parts across their supplier &/or distribution networks (due to internal production, financial issues, et al.); they may actually see a value in creating a cushion inventory that could help offset any risks associated with production & demand fulfillment
3

Draw on cushion inventory (parts C & D) as needed

The manufacturer could draw on their cushion inventory – particularly for parts C & D – to ensure production lines keep on rolling and sales orders are being fulfilled as per plan (prevent operational disruptions)

Additionally; maintaining this cushion inventory – either on-premise or through a 3rd party managed storage provider – could also enable the manufacturer to effectively address any sudden spike in demand across their entire portfolio

Thus in this case; the manufacturer may actually see a net benefit in developing a hybrid JIT/JIC inventory strategy that features a hallmark of JIC practice (stockpiling) – even at the expense of holding the cushion inventory either in-house &/or at a 3rd party storage facility

In the above scenario, although parts C & D were identified as ‘ideal candidates’ where hybrid JIT/JIC inventory strategy could be implemented, the manufacturer may also apply the strategy to other parts categories; in line with their demand/forecast risk modeling

So…

The aforementioned scenario is a simplified representation of some of the key JIT inventory risks as well as a corresponding hybrid JIT/JIC inventory strategy that the manufacturer could develop in addressing those risks

For JIT-aligned manufacturers; who have been perfecting their minimal-zero inventory; any disruption (beyond forecast levels) in securing key parts could mean a host of potentially risks (existing order cancellations, revenue loss, weakened competitive position, et al.)

Thus JIT-aligned manufactures may benefit from integrating a hallmark feature of JIC practice – stockpiling of critical parts & components; even at the cost holding inventory to help offset these risks

For some manufacturers; integrating JIC inventory practices may just be a short term strategy until the ongoing adverse conditions (pandemic, et al.) subsides

…whilst for some others building a robust hybrid JIT/JIC inventory model may actually be a part of their long term strategy to be adequately prepared for any potential high-impact unpredictable scenarios in the future

A myriad of digital, cloud & IoT technologies are supporting businesses build more intelligent & resilient inventory management strategy

Forthcoming topics will aim to explore these key supporting tech enablers in further detail; including various opportunities & challenges presented within

Stay tuned!

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