Not long after global supply chains were jolted by a once-in-a-lifetime disaster, Charla Griffy-Brown, Ph.D., wrote that the event might make organizations consider that, as risks have evolved, so should a long-standing delivery and inventory philosophy.
Griffy-Brown, a professor of information systems and technology management at the Graziadio Business School at Pepperdine University in Malibu, California, advocated for a transformation from the just-in-time (JIT) practice, where materials are received as needed for production, to the just-in-case (JIC) model, where larger inventories are maintained as a risk-management measure. She wrote that though the disaster was “statistically an outlier in terms of probability of disruption, events of this magnitude should serve as a wake-up call. … (E)ven the existing formal continuity plans do not cover the full supply chain or even enterprise supply chain resources.”
The Graziadio Business Review journal entry was published in 2003, and the event Griffy-Brown referenced was the terrorist attacks of September 11, 2001. That’s a testament to the endurance of the JIT- versus-JIC discussion, though the former has remained the preferred model even as risks — including the 2008 global financial collapse, earthquakes and hurricanes, cyber threats, geopolitical turbulence and trade wars — have evolved and multiplied. The coronavirus (COVID-19) once-in-a-century pandemic appears to be the break-glass-in-case-of-emergency crisis that has finally changed the conversation.
“It has to (change),” Griffy-Brown says. “In this century, we have lived in a world where the two defining factors are risk and agility. Those things must live in tension with each other, but they’re central issues that define everything in business, including supply chain. How enterprises address those will determine their position for a sustainable competitive advantage. And when it comes to supply chain, I think the whole model has shifted … because multiple massive crises have amplified trends that were already occurring.”
The U.S.-China trade war elevated the need for risk management, particularly finding alternative manufacturing and sourcing operations, that JIC advocates tout as a key tenet of the model. The pandemic contracted economies around the globe, led to shortages of critical medical supplies and had greater direct impact on consumers than previous crises. As a result, more companies are on what Jim Fleming, CPSM, CPSD, Program Manager, Learning Solutions at Institute for Supply Management® (ISM®), calls the “inventory seesaw,” weighing the investment of stockpiling inventory versus the risks of a stockout.
“This virus that came out of the blue raised people’s awareness of supply management, because it not only hit pocketbooks, it hit the inside of people’s houses with the availability, or lack of, certain commodities,” Fleming says. “I think companies and supply managers have realized that they can’t just sit back and say they’ll eventually work through it. The magnitude was huge, and emerging technologies have made it easier to implement potential solutions, to get ready for whatever the next big disruption is. Because at the end of the day, nobody wants to run out of toilet paper.”
One Debate, Many Questions
The JIT-versus-JIC discussion prompts such questions as: Which industries can benefit from a shift? For which products or parts? How can warehouse automation help defray costs of building inventories? How can demand forecasting be improved? And after the dynamics are debated, will a hybrid of the two models be the result?
“One event shouldn’t cause companies to swing completely from JIT to just in case,” says Tracey Smith, MBA, MAS, CPSM, president of Numerical Insights LLC, a boutique analytics firm in Charlotte, North Carolina. “A complete shift would substantially impact cash flow and reduce companies’ abilities to make ongoing investments in growth and innovation. A systematic analysis needs to be done on the parts or products carried to determine which need to be just in case and which can remain JIT.”
Such an analysis, Smith says, is similar to product and part evaluations used to determine the (1) number of suppliers, (2) supplier locations and (3) minimum stock levels. However, she adds, there’s an external problem: Procurement departments are primarily measured by cost savings, and cash tied up in inventory is one of the key metrics investors use when evaluating companies. “Procurement is not rewarded for risk analysis and seeking higher inventory levels to offset the risk,” Smith says. “It’s judged by taking costs out of inventory.”
Griffy-Brown says that in the most up-to-date definition of JIC, inventory is just one part of the equation — and not even the most critical one. She prefers a more holistic view that incorporates risk and agility elements that have become more prominent since the start of the trade war, including matching supply-push and demand-pull forces, developing alternate supply sources, and leveraging data and technology.
“It’s not about the traditional thinking of supply,” Griffy-Brown says. “This issue is no longer inventory — it’s about demand pull and the efficiencies you use to address it. Look at Amazon: The logistics is driven almost completely by demand, so inventory is almost a non-issue. The concern is accurately understanding and influencing demand.”
The Dynamics of Demand
In normal economic conditions, demand variability — the difference between a demand forecast’s purchase projections and the amount of a product shipped — is one of the biggest challenges, even for the most efficient supply chains.
In an August earnings call, John J. Mulligan, executive vice president and COO at Target Corporation, said that the company’s demand forecasts are usually wrong, and that the key is being flexible as data comes in. “Demand forecasting is difficult right now, both for us … and our (suppliers), who have long lead times as well,” Mulligan said. “We’re working on joint business planning with them, just being sure we’re both aligned and that we’ve built flexibility and agility in what we want to do.”
This setup enables Target to quickly “chase demand through other avenues” if needed, Mulligan said.
Such collaborative relationships between a company and its suppliers are another component of the new JIC model, Griffy-Brown says. She described the concept as “playing basketball instead of soccer” to raise an entire supply chain. “We’re only as strong as our weakest link,” she says. “In basketball, you can invest in a good player and continue to win. But what we’ve learned through COVID-19 is no, we’re playing soccer, and the weakest link can bring you down. And in soccer, if you have a weak player, that’s who gets targeted. And that can hinder your ability to be competitive.”
The data Target relies on is indicative of emerging technologies that provide visibility into potential risks and demand swings, Fleming says, enabling companies to make better-informed decisions on using multiple sources or stockpiling inventory. Many of those choices are still not easy, however, with cost savings and profit margins as measuring sticks.
Smith elaborates on the dilemma some organizations face: “The greater the swings in demand, the more it may be worth carrying additional inventory,” she says. “However, the value of each item impacts the decision of how much extra inventory a company is willing to carry. It’s easy to carry 5,000 extra washers worth 10 cents apiece. It’s a more painful decision to carry an extra 5,000 transmission casings that cost substantially more.”
The Prognoses for Industries
Health care is considered among the most ideal industries for a JIC model, as hospitals have scrambled to source personal protective equipment (PPE) and other medical supplies — most of which are produced in China — since March. Some hospitals that once stocked six days of coronavirus-treatment supplies now have 100 days of inventory on hand.
Nancy LeMaster, MBA, Chair of the Hospital ISM® Report On Business® Survey Committee, says that some of the larger health-care systems are adding warehouse space to keep more supplies like PPE and IV fluids on hand for at least 12 months. However, LeMaster adds, nothing in the Hospital PMI™ data indicates facilities are stockpiling high-cost or elective-procedure supplies. “For (some hospitals), where they will put all of those supplies, PPE or not, is a big question,” she says.
In August, the Alexandria, Virginia-based Health Industry Distributors Association wrote to New York state officials, advocating against a proposed 90-day stockpile requirement of PPE and other supplies, indicating it would worsen supply shortages and disruptions. The letter noted that a three-month supply requires 5,700 square feet of storage space for a 350-bed hospital, and 81,400 square feet — or 1½ football fields — for a 5,000-bed facility system.
“The issue for hospitals: Is stockpiling sustainable?” LeMaster says. “I believe cost pressures will ultimately counterbalance the push to carry large cushions of inventory. Also, the issue of expired materials and waste will be magnified with those stockpiles.”
As for other industries that could potentially adjust models, Fleming says that automotive manufacturers have the factory-automation and R&D capabilities to offset increased sourcing and inventory costs. In retail, many 80/20 in-store/online sales ratios were quickly reversed by COVID-19, and Smith says some of her clients are considering measures to be prepared for the next massive disruption.
Best of Both Worlds
Moving forward, organizations are likely to continue risk-mitigation practices started during the trade war, determining that some products might be suited for an inventory shift, and tap data and technology for greater supply chain visibility. Such a JIT-JIC hybrid is likely the model of the future.
“I’ve always thought JIT is a bit of a misnomer because someone is carrying inventory somewhere, and as visibility improves, companies will have a better understanding of the risks,” says Michael Zimmerman, a New York-based partner in the strategic-operations practice of Kearney, a global management consulting firm in Chicago. “(Manufacturers) want to have contingency plans against future supply stops. That could take the form of dual-sourced supply, just in case-style greater inventories, or something else.
“The insight is that companies will require risk mitigation. It’s a question of whether it’s more economically viable to buy diversified capacity or carry inventory buffers.”
One option, Fleming says, is third-party inventory stockpiling and distribution. That and other risk-mitigation strategies, he adds, will increase costs in the short run, until such potential cost-saving technologies as warehouse automation and visibility software become more widespread. “Large companies and manufacturing facilities are already making those kinds of investments,” Fleming says. “So, there are ways to offset it. It just takes time and investment — and it’s going to take some courage.
The speed of that evolution is the moneyball issue. Disruptions will continue, Smith says, but companies’ access to cash is finite. An example of this dynamic: Surveys by ISM and other organizations have found that most companies have not been in a rush to move production and sourcing operations from China, whose supply chain assets are deeply embedded.
“Whether it’s a pandemic, natural disaster, rapidly changing trade agreements or volatile political environments, it should be expected that these risk factors will always exist,” Smith says. “The question: How much risk can a company afford to offset with its supplier and inventory strategies?”
A COVID-19 Game Change?
The JIT-versus-JIC discussion has intensified because the coronavirus has changed the sourcing and inventory stakes. “Unlike hurricanes or other natural disasters, COVID-19 has impacted global markets in a way I haven’t seen before,” LeMaster says. What’s more, risk- management analysts have pointed out that — even if the pandemic is removed from the equation — 2020 has been a historic year for supply chain threats.
Many companies’ operational models continue to operate, Griffy-Brown says, “until they simply can’t anymore.” The coronavirus pandemic will likely not end the JIT sourcing and inventory model that has been a supply management gold standard since the 1980s, she says, but it might change as the profession braces for a “new normal” of other once-in-a-lifetime events, as well as the constant disruptions in between.
“We used to say that we’ll wait until the near future — when things settle down. Well, things are probably never going to fully settle down,” Fleming says. “Everything is happening at an exponential rate. A few months from now, hopefully, COVID-19 will settle down. But chances are something else will occur, and that’s going to keep things up in the air and supply managers juggling more balls and facing multiple challenges.
“And the days of finding time to ponder scenarios and solutions, those days are gone.”