Beware the Swinging Pendulum on Supply Chain Inventory Practices
Supply shortages resulting in empty shelves or parking lots of WIP inventory represent a spectre causing supply chain leaders to reconsider supply chain inventory practices. Opinion of just-in-time (JIT) as a practice has taken a battering and inventory is rising. Calls are increasing for a return to just-in-case (JIC) policies, with some citing this trend as a risk. Because switching from JIT to JIC is at best only a tool to address short-term problems and risk. planning offers an alternative to swinging the pendulum and as the strategy that provides the supply chain resilience leaders seek.
My great-aunt Ione, who lived to be 103, quit smoking at 97, which prompted the question “why now?” One night, absorbed in two favorite activities – reading her mysteries and smoking – she ran out of cigarettes. She considered where she could get more, factoring in that it was Saturday night at 10:00 pm, she lived alone in Kansas City, and she’d be driving by herself. Weighing these factors, she decided this situation was ridiculous – she had changed (Ione was an elderly widow) and the world around her had changed (Kansas City’s population was declining and the crime rate increasing). Ione resolved on the spot to quit and never smoked again, illustrating it is never too late to change.
Is supply chain inventory the problem?
Why tell this story? If insanity is doing the same thing and expecting different results, futility is doing the same things and expecting the same results, even when you and the world have changed. Change can creep imperceptibly, so sometimes it takes a major event to wake us up. My great-aunt had her Saturday night epiphany, just as supply chains face today are confronted by the pandemic, which exposed long-standing weaknesses. As you evaluate strategies to mitigate risk and build resilience, beware of headlines blaming JIT inventory practices and recommending a move to JIC. Because inventory can smooth out short-term disruptions but won’t yield long-term resilience like concurrent planning can.
Supply chains depend on the flow of information to facilitate the flow of goods, but since information is never perfect supply chains must be trade-off machines, constantly weighing cost against quality, cash, and increasingly carbon. JIT is a comprehensive philosophy designed to reduce defects, improve quality, and increase customer satisfaction, supported by practices like minimizing inventory to be as “lean” as possible. As MIT professor Yossi Sheffi has argued, less inventory in the system makes a company more flexible, actually building resilience. When the pandemic triggered rampant shortages, companies mitigated information latency and uncertainty with inventory – building up stock “just-in-case.”
When supply is disrupted, first ask whether underlying demand has changed. If it has, newer AI-powered forecasting approaches can improve demand estimates, providing planners inputs into how persistent that change will be using demand sensing. If demand is stable and supply alone is impacted, increasing inventory now (JIC) risks the sting of the bullwhip effect later. Building up inventory is a short-term fix, but today’s combinatorial supply chain problems have long-term consequences. JIT isn’t the main problem, and JIC isn’t a solution.
Concurrent planning provides robust information and resilience
Companies knew this, which is why 93% of senior supply chain leaders surveyed in May 2020 by consulting firm McKinsey planned to increase inventories of key products and materials while also diversifying their supply base and localizing or regionalizing both supply and production. A year later their survey revealed that companies were more likely to have increased inventory than originally planned and less likely to have made other planned changes to suppliers and networks. Increasing critical parts inventory can be a smart strategy (e.g. a stockpile of chips), but if disruption persists safety stock can run out and is still vulnerable to other chokepoints, like logistics and labor shortages. Supply chain resilience needs robust information to minimize risk and lethargy of response.
You can drown in information, so adding more isn’t enough. Supply chains are aptly named – but the problem historically is disconnected links that “grew up” as separate silos of information and planning. Shouldn’t a change in one link on the chain directly impact the others? Concurrent means to “happen at the same time,” so applying this principle to the supply chain, any change, to any input across the supply chain can be considered and evaluated by demand, supply, distribution, capacity, and purchasing; in real-time.
Concurrency provides robust information and enables transparency across your entire supply chain network, which is far more valuable than mere visibility. A change to one link (e.g. increased materials lead times) triggers the impact across the rest of the chain (e.g. on-time delivery). But you don’t just have to wait to see what has happened; planners can proactively create scenarios to simulate decisions and weigh trade-offs on the metrics that matter across the network, not just one link at a time. This capability gives them far better speed to detect, speed to correct, and speed to connect.
Speed to detect, speed to correct, speed to connect
The sooner you know about an impending disruption the quicker you can respond, minimizing latency and its resulting instability. Biopharmaceutical company Ipsen avoided any stockouts in 2020, in spite of up to 70% demand spikes, transportation constraints, and temporary factory shutdowns. The transparency from concurrent planning allowed them to analyze demand by country and inventory in various locations to prioritize production capacity where inventory was lower or demand signals more erratic. They focused on products for markets most at risk so patients who depend on their life-saving drugs would not face a stockout. And they did so without significant buffering, because concurrency gave them speed to detect and correct supply and demand imbalances.
Technicolor Connected Home, a division of Technicolor based in France, used speed to connect to ensure their teams could plan collaboratively. When each unit operated in independent siloes, sales adding customer requirements created consequences they couldn’t see for inventory and operations. Finance just “prayed for margins” in the hopes that visible top-line data would result in the profitability needed. With concurrent planning, teams make more effective decisions based on a unified view of supply chain data across units and functions and the impact of decisions on the company. For example, they reduced inventory planned for first quarter 2022 by $120M due to more accurate estimates of levels needed.
Undoubtedly your company has grown and its competitive landscape have changed over the years. The pandemic has created a great reset for the future of supply chains, so the world is a very different place than it was only two years ago. As we evaluate inventory practices that worked before, it is no wonder that they are causing problems now. The answer isn’t to eliminate JIT and switch to JIC. We can’t keep doing the same things and expect the same results. We need a different approach. Supply chains have never been more top of mind and have proven their ability to make or break a company. Concurrent planning provides the robust information needed for the resilience supply chains are expected to have to deliver the goods – literally and financially.
Polly Mitchell-Guthrie is the VP of Industry Outreach and Thought Leadership at Kinaxis, the leader in empowering people to make confident supply chain decisions. Previously she served in roles as director of Analytical Consulting Services at the University of North Carolina Health Care System, senior manager of the Advanced Analytics Customer Liaison Group in SAS’ Research and Development Division, and Director of the SAS Global Academic Program.
Mitchell-Guthrie has an MBA from the Kenan-Flagler Business School of the University of North Carolina at Chapel Hill, where she also received her BA in political science as a Morehead Scholar. She has been active in many roles within INFORMS (the Institute for Operations Research and Management Sciences), including serving as the chair and vice chair of the Analytics Certification Board and secretary of the Analytics Society.
The post Beware the Swinging Pendulum on Supply Chain Inventory Practices appeared first on Logistics Viewpoints.