Inventory issues are hurting the bottom line. It’s time for a hybrid approach to supply chains

August 15, 2022, 2:11 PM UTC
Supply chains are entering a new phase of their evolution as the operating environment becomes more unpredictable than ever.
George Frey - Bloomberg - Getty Images

As recent earnings reports have shown, many retailers were punished this year due to having higher inventory than necessary, which created a drag on profits.

The last 50 years of development within the global supply chain have been defined by incremental improvements in efficiency, timing, and connectedness.

Up until 2020, the world’s largest corporations relied on a best-in-class standard for process and supply chain management known as “just-in-time” inventory (JIT). However, COVID-19, geopolitical eruptions, and the rise of extreme weather events have turned JIT’s benefits into liabilities.

In 2021 alone, the cost of U.S. business logistics rose 22%. This represented eight percent of America’s economic output, the highest share since 2008. And it won’t get better anytime soon–because most business operations are stuck in the past. 

A lost equilibrium

Organizations that have eliminated all redundancy are now at risk of having a single point of failure. Streamlined and efficient processes that eliminate all slack and downtime now mean unforeseen disruptions can quickly cascade into operational catastrophes. JIT inventory cannot function without accurate demand forecasting. However, we live in a world where forecasting of any kind, especially in retail, seems impossible.

The chaos is unlikely to subside in the near future. Trade wars and political tensions are signaling a retreat of globalization, which could threaten the harmony that lean and modern supply chains need to operate. Vendor partners may no longer be as predictable as they once were if they operate across an international border.

Instead of solely focusing on reestablishing yesterday’s equilibrium, buyers would do well to enact structural changes to the way they procure or even manufacture their own products to minimize exposure to these new risks. This entails a shift to “just-in-case” inventory (JIC)­.

However, embracing JIC supply chain strategies does not mean ignoring the benefits of JIT, nor does it entail a return to the past. Effective backups in a post-COVID age mean more tech integration, more data tracking, and more communication than ever before. The iterative approach centered around incremental improvement and accurate process tracking pioneered by JIT should also be applied to optimize JIC practices.

The best of both worlds

The concept of JIT was first developed in Toyota’s factories in the 1970s. It ushered in a new age of efficiency that has allowed consumer goods to become more affordable and abundant than ever before.

JIT inventory allows for goods to be produced as they are needed, with minimal lag time between when products are created and when they are sent on to the next step in production or transport. These processes aim to clearly define the desired outcome, track current capacity and processes as minutely as possible, and refine any process that did not achieve these goals as quickly as possible.

Whereas JIT is defined by centralization and efficiency, JIC is defined by multi-source manufacturing and localization. It acknowledges the geographic realities that threaten the supply chain. A JIC approach to inventory comes down to planning ahead for different scenarios to position an organization to win should unexpected disruptions occur within production, transport, or storage.

An example of JIC in practice is a company relocating manufacturing operations closer to the market in which they are sold, frequently called reshoring or nearshoring. After the products are produced, brands can diversify the transportation portion of their supply chain and avoid having a single point of failure by partnering with more than one carrier or freight service. Additionally, there should be multiple routes that can bypass local weather events that are ideally optimized in real-time when necessary.

One drawback of a zero-redundancy JIT model is that unforeseen shocks in manufacturing can cause immediate stock shortages. This was the case early in the pandemic when lockdowns affected manufacturing the hardest.

JIC tactics bring their own problems. When no disruptions are actively occurring, JIC has higher associated costs than a pure JIT model. Keeping costs down is the entire reason JIT became the gold standard for supply chains in the first place. In today’s inflationary environment, keeping costs down should remain a priority even when JIC tactics are used. This will require a renewed focus on data and real-time tracking technology.

Vendors and retailers can no longer assume that we will live in a disruption-free world–but JIC is not a replacement for JIT. Rather, our supply chains are entering the next stage of their evolution.

Kal Raman is the president of CommerceIQ.

The opinions expressed in commentary pieces are solely the views of their authors and do not reflect the opinions and beliefs of Fortune.

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