Just-in-time and safety stock require a careful balance
Empty grocery store shelves in April 2020 and bare car dealerships in 2021 led to a lot of finger pointing. And much of the blame fell on lean inventory or just-in-time supply chain management.
Industries have worked for decades to cut costs by lowering inventory levels. But it requires a careful balance. Inventory that's too low means lost sales when consumers can't find the item they want to buy. The empty shelves during the pandemic served as a wake-up call for businesses to carry more safety stock.
A Gartner survey published this year showed some interest among supply chain professionals in increasing safety stock. Still, others say the benefits of just-in-time are just too good for companies to give up on the practice.
And a look at some large companies' inventory levels shows that while they are higher in many cases, the companies have actually managed to return to a normal level when it comes to inventory as a percentage of sales. This simply means inventory has gone up, but so have sales, and companies are trying to keep up rather than build safety stock.
Inventory build-up or a return to normal?
Take Walmart as an example. The value of inventory the retailer reported in July was 6% higher than it was during the same quarter in 2019, but its sales had increased more than 8%. Its inventory as a percentage of sales was back to where it was in 2019 — with less than 1% difference — after falling more than 4 percentage points from 2019 to 2020.
In this context, Walmart's inventory buildup seems less like a buildup and more like an attempt to keep up. Still, executives at the retailer have also said they would like inventory levels to be higher than they currently are.
"We were happy to report in the second quarter that we had a lot more inventory than a year ago," Walmart CEO Doug McMillon said at an analyst conference in September. "In 2020, at the end of the second quarter, we were way too light in stores and on the e-commerce side. So we would take even more inventory if we could get it, especially in some categories."
Every company has been affected differently, though. Hasbro has had a hard time keeping its inventory afloat amid high demand. Sales surged more than 34% compared to 2019, but inventory is down 11% compared to the same period, which has led to its inventory as a percentage of sales dropping 20 percentage points.
"We're ... working to ensure product availability during the holiday season," Hasbro CFO Deb Thomas said on the company's last earnings call. "We may experience some shifts in delivery dates and timing of revenue, but we're leveraging our global footprint and scale to meet demand."
Just-in-time: Time to shine or rethink?
Lean inventory management or just-in-time inventory planning has been a way of thinking within the supply chain management world for decades, with Toyota often credited with pioneering the method. The automaker famously redesigned its supply chain after it experienced issues following a 2011 earthquake. In fact, Japan adopted lean practices a full decade before companies in the U.S., John Dalton, an economics professor at Wake Forest University, noted in a 2013 research paper.
The idea, which U.S. companies began to adopt, is simple: Businesses want to try and match their level of inventory to consumer demand as closely as possible. In a well-oiled supply chain, manufacturers can meet fluctuations in demand, and theoretically sell more while reducing inventory carrying costs, Dalton wrote.
But as the pandemic swept around the globe, bare shelves had people questioning the practice. With the global supply chain strained under the weight of the pandemic, the Biden administration set out to understand what was going wrong. A 250-page report released in June outlines some of its findings — and it points a finger at just-in-time.
The report from the Biden administration said just-in-time supply chain management increased risk in industries from auto manufacturing to drug making, as it reduced safety stock and companies' ability to quickly adapt to upticks demand.
"We would take even more inventory if we could get it."
"In contrast to early projections, vehicle demand recovered much more quickly than expected in the second half of 2020," the report reads. "This sharp rebound impacted the auto industry in part due to its just-in-time supply chains and limited visibility into upstream suppliers. When auto parts suppliers returned to place orders for chips to meet the unanticipated surge in vehicle demand, semiconductor manufacturers had reportedly already utilized spare capacity to produce chips for electronics devices."
Biden touched on this reality again recently, addressing port congestion and supply chain challenges more generally.
"Prior to the crisis, we shared the focus on lean efficient supply chains, leaving no buffer or margin for error when it comes to certain parts arriving just in time is needed to make a final product," he said during a recent press conference. He went on to note that there needed to be an investment in increased resilience without specifying what this would consist of.
A new era of supply chain planning
From the outside looking in, it appears that just-in-time supply chains have caused more problems than they've solved over the last year. But companies still seem interested in adopting the practice, experts said.
Paul Lord, a senior director analyst at Gartner, said he's fielded almost 10 calls over two to three months about companies that want to work toward a just-in-time supply chain.
"So the aspiration hasn't gone away, at least not completely," Lord said.
Dan Hearsch, a managing director in the automotive and industrial practice at AlixPartners, agreed that the interest in lean inventory has not waned among corporate supply chain planners. There could be some changes to supply chains going forward.
"I think the changes will largely be represented in the safety stock calculation," Hearsch said.
This will mean keeping more inventory of what manufacturers consider critical components. Figuring out what exactly will be considered critical will be an "art" for many companies and the definition will likely be broader than it was a couple of years ago, he said.
Part of the calculus is the number of alternative suppliers a component has. An example of a non-critical component would be polypropylene as it has a lot of different suppliers available, while something like xenon headlights have fewer suppliers and are closer to the critical end of the spectrum, Hearsch said.
"Prior to the crisis, we shared the focus on lean efficient supply chains, leaving no buffer or margin for error."
President of the United States
Companies might agree to order one or two years of stock from a supplier rather than 12 to 14 weeks to help ensure they have the products available. That doesn't change the just-in-time delivery aspect of the component, Hearsch said. The issue with committing to that much inventory is it cuts down on a manufacturer's flexibility.
"The supply chain planner is forced to compensate for shortcomings in agility, and resilience with additional inventory," Lord said.
And that's why, in reality, just-in-time has been and will always be an aspiration, Lord said. Uncertain lead times, squeezed shipping capacity and manufacturing shutdowns during the pandemic exposed the need for buffer inventories.
"When things get out of balance, you won't be able to predict and count on what you can and can't get," Hearsch said. "So you're gonna have to plan in a selfish manner."
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