There are two main ways to optimise your procurement strategy in inventory management: Just-in-Time (JIT) and Just-in-Case (JIC). But why is this important now? How can these strategies help you today?
Each of these strategies has its benefits and risks. It is therefore essential for a company to assess its needs and align its strategy with them.
What is just-in-time?
Just-in-time procurement involves receiving stock only when it is needed. For example, you make pies that are sold in retail outlets. And, according to your planning, you will start a production of pie dough on Monday morning. So you order your flour to arrive on Friday afternoon.
Just-in-time procurement is a lean approach that focuses on efficiency and waste reduction. With just-in-time procurement, companies seek to minimise the amount of stock they hold in order to reduce the value of inventory, reduce stock movement and breakage, and free up cash. This is achieved by ordering stock only when it is needed, ideally just before it is needed.
The benefits of just-in-time procurement
One of the main benefits of just-in-time procurement is that it offers significant cost savings. By reducing the amount of inventory held, companies can save on storage and maintenance costs. In addition, just-in-time can help companies optimise their production processes by ensuring that materials arrive at the right time to support production.
Another benefit of just-in-time procurement is that it allows companies to be more responsive to changes in demand. By ordering stock only when it is needed, companies can quickly adapt their production schedules to changes in demand, avoiding overproduction and the costs associated with it.
The risks of just-in-time
However, just-in-time procurement also carries certain risks. As stocks are only ordered when they are needed, companies need a reliable and stable supply chain to ensure that materials arrive on time. Delays in the supply chain can lead to production delays and lost revenue. In addition, because stock levels are kept low, the margin for error is small. Any unexpected increase in demand can quickly deplete stocks, leading to stock-outs and lost revenue.
The essentials of just-in-time
The principle of just-in-time is based on three essential elements. The first is the identification of the forms of waste that we want to and can reduce. The second is the use of resources, the volume of activity required, the work overload imposed on both employees and production equipment. Finally, just-in-time supply requires a certain predictability in the variations of demand. It is this predictability that has been completely lost with the pandemic situation of the last few years, which has caused many stock-outs in many industries. For more information on these three elements, please see our article The balanced approach of lean management.
Finally, just-in-time procurement should be used for suppliers with whom the company has a reliable partnership and whose processes and transportation have little variability. Reducing the inventory volume of certain components or raw materials makes one much more dependent on these suppliers, hence the importance of a strong relationship and excellent communication between the organisations. The supplier must have visibility on sales in order to be able to respond to variations in demand.
Just-in-case procurement
Just-in-case procurement, on the other hand, takes a more conservative approach to inventory management. With just-in-case procurement, companies order stock in anticipation of future demand and beyond the levels of safety stock. This allows them to maintain higher inventory levels, which in turn allows them to protect against unexpected increases in demand or supply chain disruptions. This approach is often used to protect against losses, such as revenue, clients, and suppliers. Traditionally, this approach was followed by healthcare government organisations and by the military, where the main reason for using JIC is to avoid the loss of life.
The benefits of just-in-case
One of the main benefits of just-in-case procurement is that it can help companies avoid stock-outs, production stoppages and lost sales. By maintaining higher inventory levels, companies can ensure that they have enough stock to meet customer demand, even during unexpected peaks.
In addition, just-in-case procurement can help companies to reduce delivery times. With stocks already available, companies can respond quickly to customer orders without waiting for materials to arrive.
The risks of just-in-case procurement
However, just-in-case procurement also carries some risks. Maintaining high inventory levels can be costly, as companies must pay for storage, maintenance and insurance. In addition, holding excess inventory can tie up cash, making it more difficult for companies to invest in other areas of their business.
Another risk associated with just-in-case procurement is the risk of inventory obsolescence. As stocks are ordered in anticipation of future demand, there is always a risk that this demand will not materialise. This can result in excess inventory that becomes obsolete, causing losses to the business.
Optimising your procurement strategy
So what procurement strategy is best for your business? The answer depends on a number of factors, including your industry, your customer base, your suppliers and your production processes.
The right answer is probably also a mixture of both. That is, a hybrid strategy will allow you to benefit from the advantages of both methods and minimise the risks.
Contact us, we can help you determine the best procurement strategy for your business!
