Replacing Just-in-Time and Just-in-Case with Agile Inventory Management

The quest to find the Holy Grail of inventory management has led many companies to settle on one of two approaches—just-in-time or just-in-case—or to bounce back and forth from one to the other.

Both strategies have served supply chain managers well through the years, but the decision typically is driven by a pre-pandemic model that’s based on product types and the quest for supply chain efficiency. In today’s ever-changing and unpredictable world, neither strategy is enough.

It’s time for a new, more agile approach—one that begins with the assumption that everything involved in the supply chain is subject to change as quickly as the waters of a swift-flowing stream. Inventory management that doesn’t monitor the currents and conditions and respond accordingly is dead in the water.

We aren’t suggesting that just-in-time or just-in-case have become irrelevant, but that neither approach in extreme will produce the consistent results that managers want and customers demand from today’s supply chain. What is needed is a strategy that anticipates change and pivots with the circumstances so that inventories are available when needed and never stockpiled when they are not—one that goes with the flow.

We call this strategy risk-adjusted, agile inventory management.

The Just-in-Time Advantage

In the idyllic world of just-in-time inventory management, manufacturers receive materials and retailers get their products just when they are needed—no sooner and no later.

When it’s time to make bars of soap, for instance, the raw ingredients arrive just in time to go into the production process. And when consumers are ready for more soap, it is readily available on the shelves of their favorite retailer. The efficiency of the strategy means everyone cleans up, so to speak.

In the traditional view, as laid out in the iconic 1997 Harvard Business Review article by Marshall Fisher, functional products that have predictable demands and reliable suppliers lend themselves to a just-in-time approach. And, thanks to advances in technology and data collection, buyers are far better informed about what they need and when they will need it because they have insight into shoppers’ buying habits.

A wide range of ever-changing risk factors—from geopolitical issues to hurricanes to the influence of a 12-year-old’s TikTok video—can undermine the efforts of a just-in-time strategy.

The Just-in-Case Protection

When the demand or lead time is hard to predict and suppliers are less reliable, a just-in-case strategy provides some protection against unavailable materials and out-of-stock products.

With this approach, companies hold stock in reserve to ensure they have what they need when they need it. The raw materials for making soap are stored and waiting for their production journey, or the bars of soap are warehoused, just in case of a sudden rise in consumer demand.

This works best when materials are low cost, easy to procure and nonperishable. In addition, just-in-case can lead to high inventory levels throughout the supply chain, resulting in sluggish response to change.

But the cost of storing materials or products drives up prices throughout the supply chain and can lead to a bullwhip effect that tempts decision makers to overcompensate in one direction or the other. In addition, overestimating demand can lead to the need to offload inventory at steep discounts, as was seen with patio furniture in 2022.

The Risk-adjusted, Agile Inventory Management Alternative

Of course, the idyllic world doesn’t exist. But the stability that once was common for some materials and products is now a thing of the past, even for something as simple as Fisher’s example of a can of soup.

Consider, for instance, the dilemma faced by a global food producer that found itself short on a key perishable raw material. The item is used in multiple products and the shortage forced decisions the producer had not faced prior to the pandemic. Most notably: Should the inventory be used in high-margin items or on a brand with lower margins but strong growth potential?

In this case, the firm decided to buy as much of the product as possible and quickly adapt to ensure the robust-growth brand maintained its momentum. The producer gave up potentially higher revenue to actually leverage the industry-wide shortage to gain market share and become the product of choice into the future. Thus, a common food ingredient going into products once considered functional and stable enough to do well with a just-in-time strategy no longer could depend on a passive approach.

Meanwhile, products that once seemed a perfect fit for just-in-case are finding that’s, well, just not the case. Going into 2022, for example, the forecasts for outdoor furniture were miscalculated. As consumers adapted to the new realities of the pandemic and travel resumed, the demand for patio furniture was far weaker than expected. Warehouses were filled with outdoor tables and chairs in anticipation of more sales; however, changes in demand patterns had created an oversupply.

The need for more flexibility in inventory management began even before COVID-19 disrupted supply chains, because technological advances already were sending the speed of change into hyperdrive. These factors are in addition to the usual suspects when it comes to supply chain chaos—labor issues, inflation, trucking shortages, fuel prices, wars in countries with key suppliers, weather that wipes out crops and government policies with unintended consequences.

The risks associated with inventory management now apply across the board to products of just about every type in practically every industry, which is why flexibility must be the core component of any modern strategy. Risk-adjusted, agile inventory management is a dynamic process that requires constant monitoring of the risks and other related factors that will drive decisions.
Considerations

Leaders need to consider a number of factors when taking an agile approach, but we can boil them down to the following three.

• Inventory levels.
• Data from analytics that predict demand and risk.
• Supplier reliability and agility.

Companies need to be ever vigilant and adaptive with their inventory strategies. Safety stock should not be a static number; rather, firms should use technology to constantly adjust safety stock and inventory locations based on risk factors and fluid events in the supply chain.

Tying into inventory levels requires an unrelenting focus on understanding and even predicting events that threaten to cripple the supply chain. Advances in artificial intelligence (AI) could allow companies to not only monitor risks but anticipate what will happen so they can prepare for it.

Supplier reliability and an adaptive supply base design is the third area that needs constant consideration. For instance, choosing a China-based supplier five years ago might have been brilliant. But the low costs that drove the decision might now be offset by lengthy order delays, so perhaps it’s time for a new supplier or multiple suppliers. Measuring cost versus predictability and cost versus reliability can drive such changes.

Ultimately, the goal for managers is still to create the most efficient supply chain possible for their inventory management. Rather than committing to just-in-time or just-in-case, an unpredictable world demands that managers mitigate risks by always being agile.