In a November survey, 77% of merchants shared that they already were affected by increased freight costs. At that time, 31% had raised prices on end consumers to offset the negative impact. Further, 18% had re-routed freight or re-negotiated with carriers – and 12% absorbed the extra cost.
About 9% even had stopped offering free shipping to recover costs, while 7% held off on ordering peak inventory to see if prices would level off.
Experiencing the negative effects of overextended supply chains and lean manufacturing, merchants are looking to forge a balance between JIT and JIC purchasing models that reduces risk and maintains profit margins. As a result, procurement must decide when and whether to rely on just-in-time or just-in-case models for purchasing and managing stock.
Below we look at the advantages and disadvantages of JIT and JIC strategies and examine the benefits of taking a hybrid approach.
What is just-in-time procurement?
Just-in-time (JIT) procurement is a management strategy where parts, product, and components are ordered from suppliers to meet immediate fulfillment and customer demands. Designed to maximize the efficiency of capital, the success of JIT hinges on highly accurate demand forecasting and seamless coordination with supplier partners.
In short, JIT is designed to minimize inventory and boost efficiency – relying heavily on short cycle manufacturing (SCM), steady production, reliable suppliers, and predictable sales cycles. However, as we’ve seen during the COVID-19 global pandemic, unexpected disruptions to supply and demand creates major issues.
The automotive industry, for example, has famously relied on a JIT manufacturing strategy (or lean manufacturing) since the 1950’s. It relied on suppliers that could turn around restock orders on short notice so parts could be ordered only when needed. While this approach certainly drove up profitability in the automotive industry, it proved challenging when a microchip shortage slowed production for many vehicles.
What is just-in-case procurement?
Just-in-case (JIC) procurement calls for excess or buffer inventory to reduce the possibility of backorders amid supply chain, demand, and other economic uncertainties. Running a JIC strategy, companies risk tying up working capital in inventory, but the risk of stockouts is lower. Plus, merchants can pivot quickly to overcome weather, fuel prices, traffic, port congestion, and other supply chain uncertainty.
Consequently, this procurement strategy works best for companies with unpredictable consumer demand or massive surges in demand. As a result, these businesses are willing to pay higher inventory holding costs, including greater warehousing storage and labor fees, in return for not losing repeat business due to stockouts.
As we’ve seen during COVID, hospitals are a good example of JIC buyers. They should maintain large inventories of critical supplies because pandemics and emergencies can happen at any time, and waiting for suppliers to ramp up production would result in deaths.
What Are Just-in-Time Procurement’s Advantages and Disadvantages?
JIT has several advantages over traditional purchasing and production models:
Ultimately, just-in-time helps companies make bigger profits by not maintaining inventory that nobody wants to buy, along with requiring less warehouse space and labor.
- Supply chain disruptions
- Supplier breakdowns
- Unexpected increase or decrease in orders
JIT improves cash flow while substantially increasing supply chain risk. Without contingencies in place, even the smallest disturbance will reverberate upstream and downstream, stalling production or delaying delivery of finished goods.
Want to learn more about risk tolerance and revenue potential? Read Samantha Smith’s Expert Insight on digitizing your procurement specialist.
What Are the Pros and Cons of JIC Procurement?
JIC may be more costly than a just-in-time procurement strategy, but it provides multiple benefits than JIT doesn’t.
- Avoids stockouts and maintains customer relationships during economic turmoil
- Reduces unit purchases by buying in bulk and negotiating larger discounts
- Ordering stock less often reduces purchasing and clerical costs
During supply chain disruptions, a JIC procurement strategy is much better at maintaining production and customers’ expectations for fast, affordable delivery. For some merchants, maintaining excessive storage may even be more cost effective than running a JIT system.
The danger of small-and-medium-sized businesses (SMB’s) lacking vast cash reserves running a just-in-case procurement strategy is tying up capital in storing inventory rather than investing it back into the business.
Is just-in-Time or Just-in-Case Procurement the Best Strategy for eCommerce Sellers to Implement Post-Pandemic?
Even under normal conditions it would be hard to say whether SMB’s should use a JIT or JIC procurement strategy. The answer isn’t straightforward because every business has specific needs and SMB’s especially deal with uneven customer demand, fluctuating inventories, limited human capital, and a need for steady cash flow.
For this reason, most merchants opt for a hybrid model where they strike a balance between the flexibility of just-in-time and maintaining the extra inventory levels of just-in-case.
Toeing this line amid a pandemic is difficult, which is why most merchants are considering a hybrid procurement model and taking the following steps:
- Re-Evaluating Supplier Relationships – Are you over reliant on one or a few suppliers for essential components? Now more than ever, backup suppliers must be ready. Any delivery failures can lead to expensive stockouts and production delays. Align with suppliers committed to minimizing risk.
- Increasing Inventory of Essential Items – Maintaining buffer stock of crucial raw materials and popular goods allows merchants to deliver an optimal customer experience during hard times. Additionally, because these items are fast moving, they won’t sit on warehouse shelves long and inflate inventory carrying costs even during normal sales periods.
- Re-Evaluate Long Supply Chains – Rethink where materials are sourced and the associated vulnerabilities that come from importing essential components from Asia. Given the continued uncertainty of arrival times, source crucial supplies closer to factories and customers.
- Implement Supply Chain Technology – Leveraging technology improves supply chain efficiency and reduces risk. Integrated end-to-end supply order management systems (OMS) and warehouse management systems (WMS) help merchants take advantage of demand forecasting to improve profitability, while mitigating against the risks associated with a just-in-time purchasing strategy.
- Outsource Fulfillment to an Expert – Fourth-party logistics (4PL) providers have the expertise required to minimize costs, delays, and disruptions in eCommerce shops’ supply chain models. This includes putting optimal routing and contingency plans in place ahead of time to increase the likelihood that products will reach their final destinations during supply chain disruptions.
The Bottom Line
Ware2Go is a 4PL created by UPS to help fast growing businesses across many industries navigate today’s supply chain challenges. To learn more about how Ware2Go can help you optimize your just-in-time and just-in-case procurement strategies to guarantee 1-2-day shipping nationwide, please reach out to one of our fulfillment experts.