Telling the truth about SME life today

Inventory Management: From Just-in-Time To Just-in-Case & Implications On Your Cash Flow

Stefano M

From a pandemic-induced supply shock to a ship stuck in the Suez Canal, the past few years severely put the traditional Just-in-Time (JIT) approach to inventory under strain. Given the impossibility of creating a second China as a backup, what can SMEs do to avoid just stocking up on excess inventory with the hope that it will be needed in the future or disappointing their most valued customers? The answer is to adopt a Just-in-Case approach.

Keeping the cost of inventory under control is essential for any business, no matter its size. While small companies may have the advantage of knowing their customers on a first-name basis and creating more personalized products, they can’t let that intimacy with their clientele get in the way of keeping an eye on costs. Excess inventory can be costly, whether you operate out of your home or run a large corporation. Luckily there are ways to manage your stock to save money and reduce risk while still meeting customer demand.

 

What is a Just-in-Case Inventory?

Just-in-Case Inventory (often abbreviated as JIC) is a type of inventory management process that reduces costs by lowering the quantity of goods you keep on hand. Think of JIC as insurance against being unable to meet expected demand due to a sudden spike in sales, supplier issues, or other issues related to fulfilling customer orders.

JIC helps businesses keep just what they need to fill future orders. Using JIC, you’ll have only as much stock as you need for upcoming production cycles, with no more and no less.

It gives businesses the ability to anticipate demand and reduce costs by only ordering new raw materials or intermediate goods when their inventory gets low enough to meet expected demand.

 

Inventory to Meet Known Demand

This type of inventory is often referred to as safety stock and is a common practice among manufacturers, wholesalers, and retailers. It refers to keeping more stock on hand to meet expected demand without maintaining a large amount of unsold inventory. This way, you can avoid the costlier and riskier practice of keeping extra stock on hand without knowing how or when it will sell. For example, suppose you expect customers to order a specific item in large quantities. In that case, you may want to keep enough inventory, such as raw materials or partially manufactured items, to meet that demand. You may want to keep 100 finished units on hand to deliver the product to 100 customers without spending the time and cost to make 100 units from scratch.

 

JIC Inventory for Expected Demand

Expected demand inventory refers to keeping a larger amount of stock on hand that you expect to sell but don’t know when. This type of inventory is often referred to as supply inventory. Wholesalers, distributors, and retailers often use it to reduce the risk of running out of a product and losing customers due to a lack of supply.

If you keep a small inventory to meet expected demand, you risk being unable to fulfil orders if a supplier unexpectedly runs out of stock or experiences some other issue. Keeping a larger inventory can help you avoid this problem, but it is essential to ensure that you don’t overstock and end up with unsold inventory you can’t sell.

Expected demand inventory is a riskier practice than keeping inventory to meet anticipated demand because it involves keeping a more significant amount of inventory on hand. It means you risk having unsold inventory that costs you money and takes up space. However, it can also give you the advantage of meeting customer demand and reducing your risk of losing customers due to a lack of supply.

 

JIC Inventory as a Risk Reduction Strategy

Keeping expected demand or JIC inventory reduces risk by keeping an extra stock on hand. However, JIC inventory goes one step further by being additional inventory that you don’t expect to sell. Although it carries some risks, it can be an effective risk reduction strategy. You can include it in your overall inventory management strategy, e.g., as a substitute for what you usually expect to sell, such as extra raw materials in place of finished goods or in the form of supplementary products that are often sold together. Keeping JIC inventory on hand can help reduce your risk of running out of a critical part of your product or being unable to find a supplier when needed.

 

JIC Inventory to Utilize Existing Assets

Another benefit of keeping JIC inventory is that it gives you more flexibility with your existing assets. You can use JIC inventory to leverage existing assets such as tools and equipment. This way, you don’t end up paying for things you don’t use or need. Keeping a small amount of JIC inventory on hand is a way to utilize existing assets that protects your bottom line while still meeting customer demand.

 

Yes, but how does it work in practice?

The key to a JIC approach to inventory is to focus on your current relationships and build a robust ecosystem with Clients, Suppliers, and staff.

Talk to your Clients to get the most profound insight into their needs, and make your salespeople work with them to get at least a sensible forecast, if not a scheduled order and planned deliveries for the year. You will be surprised how customers appreciate this approach and collaboration, especially in the current climate.

Make sales information available in real-time to product and procurement. They will use it at best to estimate what you will need from your Suppliers. Are there products you buy in large quantities? Are there recurring purchases, those you always buy even in small amounts – can you create a process to keep, say, 3/4 months of inventory of those products?

Do you have in your inventory something lying forgotten that you might resell? For how long are you keeping your stock? Work out your “Days Holding Inventory” – is it a very long timeframe? Probably 6-8 months of inventory might be enough to survive another pandemic or a Suez Canal block.

Plan your Production accordingly. If you have a sensible forecast, scheduled order, and raw materials available at the right time, there is no reason not to anticipate the Production if you have spare capacity.

Talk to your Suppliers: Work on your inventory and supplier base. Can you renegotiate with two/three key suppliers? Can you find at least one alternative supplier for whatever you buy? Pay your suppliers on time! You can negotiate better terms, prices, and payment terms with your suppliers if you keep the word afterward (and with a reliable forecast, you can!). You can keep your suppliers in fair competition without ruining relationships.

 

Conclusion

Regarding inventory management, most businesses know that excess stock is one of the highest cost drags on their bottom line. But coming up with a solution isn’t always easy. Reducing inventory is like dieting: It’s simple in theory, but it’s not as straightforward as you might think.

Keeping too much inventory on hand is a costly practice. However, keeping too little stock can be just as expensive. JIC management techniques can help you spend better and reduce inventory costs while still meeting customer demand.

 

Biography

Action- and delivery-focused “efficiency geek” with an entrepreneurial spirit, able to link thoughts and actions, can anticipate and manage the tornado caused in operations by a butterfly flapping its wings in sales. Aware of the boundary between disciplined operations and bureaucracy, he can work “one level up and two down” if needed without fear of getting his hands dirty.

He has a background in the ICT industry, where he worked for blue chips and FTSE250 companies. Subsequently, He further developed and diversified his experience working closely with a portfolio of growing companies and start-ups in technology-intensive and innovative sectors, such as IT, Technology Manufacturing, Drones, IoT, AI, GreenTech and Insure/FinTech.

Stefano is the Founder of Eggcelerate. If you are a CEO of a small B2B business experiencing flat-lined results, Eggcelerate’s FlexCOO service will help you achieve focus and sustainable growth and bring your business back on track.

He has P&L management, international expansion experience, and international and intercultural expertise in managing, developing and leading cross-functional teams in complex environments.

Stefano is an Executive MBA graduate of the London Business School and a published author (Forbes, The Guardian, The Telegraph, and various SME-focused publications) on topics from Strategy to People and Operations.

Home – Strategy Activation for B2B SMEs and Start-Ups (eggcelerate.com)

Trending

Topic

Related Stories

More From

Most Read

Trending

If you enjoyed this article,
why not join our newsletter?

We promise only quality content, tailored to suit what our readers like to see!