Just-in-Time vs Just-in-Case Inventories
Just-in-Time inventories, or inventory systems designed to have supplies be delivered just in time for production, are the accountant’s dream come true. Just think of all the benefits. You have the lowest obsolescence risk, and your cash can be used in other parts of your business instead of kicking heels in your stockroom. Just-in-Case inventories are those that are fully equipped with a surplus of supplies.
Just-in-Time and Just-in-Case inventories can be put on a continuum and companies must decide which end of the continuum makes the most sense for them to position their business. The balance between just-in-time and just-in-case stock is driven by corporate strategy, customer expectations and the type of goods being delivered.
Historically, most manufacturing plants used the Just-in-Case model, such was the case for the production of Ford's Model T vehicle. Great stockpiles of each component of the vehicle could be found on site at all times. Slowly, business became aware of the benefits of the Just-in-Time model and some companies, such as Dell, Harley Davidson and Toyota really took this concept to heart. For example, some of Dell's manufacturing plants use the Just-in-Time model to the point where deliveries made by suppliers must (and do) arrive within a few hours of their goods' scheduled production. In the current economic climate every cent in idle inventory is money being wasted. Similarly, having a shortage of inventory that stops production or sales is also money being wasted.
Position in Supply Chain
The realities of unpredictable demand force us to hold a few days or weeks of inventory just in case we get an order and it is urgent. The actual quantity is forced by availability in the supply chain and urgency among consumers. The manufacturer and shopkeeper have at least one thing in common; that they are squeezed in both directions. A firm's position in the supply chain also has a bearing on inventory levels as noted by the Bullwhip effect (where there can be larger swings in inventory in response to changes in customer demand as one looks at firms further back in the supply chain for a product). However, production and inventory forecasting software are available that can help suppliers with inventory forecasting throughout the supply chain. Such software require users to enter their average demand and the typical fluctuations in demand over time (the standard deviation of demand).
An Example in Retail
In retail, inventory is stock in hand. For most goods, few customers are prepared to wait for fast moving consumer goods to come in, although they may be willing to wait a few days for a specialized order. Hence the shopkeeper is in charge of stock levels, to some extent at least, and will typically need to have at least some excess inventory to keep up with potential customer expectations and unpredictable consumer behavior.
In conclusion, there isn't a perfect ideology when it comes to managing inventory systems. Both Just-in-Time and Just-in-Case inventories have their advantages and companies should determine where along the Just-in-Time-Just-in-Case continuum makes the most sense for their unique circumstances. Inventory management is not an exact science; educated estimates based on precedence is a good way to begin inventory management. The important aspect is to diligently manage inventory, regardless of which method is used.