There are two major types of parts inventory management: “just-in-time” and “just-in-case.” These strategies are opposite of each other, in that one strives to keep as little inventory as possible and the other relies on having plenty of surplus inventory. Each technique has its place, but companies rarely work strictly with one or they other; their inventory management usually falls somewhere between these two extremes.
Here is a closer look at these two types of inventory management.
Just-in-time parts inventory management is a management system that orders parts and products from suppliers only as required to meet the immediate customer demand. These items arrive from suppliers “just in time” to be immediately processed and shipped to fulfill customer orders. If you chose to work with this type of inventory management, and when it is working perfectly, you would have very little or no inventory on hand. Theoretically, any business that can pull this off successfully will “win” against a competitor that has their capital tied up in large inventories, because the just-in-time company uses their capital more efficiently and therefore has more cash on hand to invest in marketing and growth.
In order for a just-in-time management system to work, your demand forecasting must be extremely accurate. In addition, you must have a very high degree of coordination with your suppliers so that you can be certain that your just-in-time orders will arrive from your supplier exactly when necessary. Failing to forecast correctly and not having reliable suppliers will result in exactly what you don’t want as a company – back orders and unhappy customers.
While a just-in-time system is highly efficient and frees up capital, it isn’t ideal due to the uncertainties of business. No matter how well organized and reliable your supplier is, they may fail to deliver on time because of bad weather or traffic accidents. The price of fuel could make just-in-time ordering overly expensive; if fuel costs rise, the freight cost of daily shipping reduces profits. Extra large, unexpected customer orders will also disrupt the just-in-time system.
Just-in-case inventory management is the strategy of maintaining large inventories to reduce the risk of back orders in the face of supply and demand uncertainties. Large inventories make it possible to accommodate the factors that can plague businesses – supplier reliability issues, weather, traffic, fuel prices, unexpected customer orders, etc. – and keep them running without interruption. Highly accurate demand forecasting is also slightly less important.
As with just-in-time inventory management, just-in-case has its downsides. Its robustness and ability to stave off back orders and unhappy customers comes at a cost of tying up capital in inventory. As aforementioned, a perfectly running just-in-time company will often out-compete a business running a just-in-case inventory management system.
Inventory optimization is different for you than it is for your competitor, and you should choose the system that works best for you. That being said, remember that you don’t have to choose one of these types of inventory management practices and work solely with it. Most companies work successfully somewhere in the middle, perhaps by keeping just-in-case inventory on its most popular items while relying on just-in-time inventory to fulfill the customer requests that occur less often.
For more information on parts inventory management and the ins and outs of just-in-time and just-in-case inventory management options, contact Acumen Information Systems today. We can help!