Back orders and unhappy customers — two of the worst case scenarios for a supply chain manager to deal with. However, stocking any number of months of inventory in advance to avoid these issues raises your costs significantly. It’s the classic supply manager dilemma.
This dilemma often results in a choice between two extremes — just-in-time or just-in-case inventory management. While most companies tend to fall somewhere in between, the overwhelming myth is that lower inventory inherently means lower service levels.
Luckily, our research in Inventory Optimization: Juggling the Tradeoffs Between Service Level and Inventory, found that best-in-class organizations have debunked that myth.
The Problems with a Just-in-Time vs. Just-in-Case Debate
Technology innovation in the 1990s made it possible for supply chain managers to start tracking even their largest inventories at a granular level. This made a just-in-time inventory management strategy seem possible as supply chain managers ordered parts and products as necessary to meet customer demand.
A just-in-time approach helps companies use capital more efficiently, but the reality is that any misstep in forecasting demand can lead to significant problems with back orders and customer dissatisfaction. Amazon has found a way to make just-in-time inventory management to work and is reaping the benefits— but it’s not fair to hold most companies to Amazon’s standards in terms of supply chain management.
This leaves most companies with a cost-prohibitive just-in-case approach to inventory management. In this case, you have all of the inventory necessary to withstand supplier reliability issues, fuel price fluctuation, unexpected demand, and more — but you’ll pay the price in carrying costs, obsolescence costs, and working capital that is tied up in inventory.
Debating between these two strategies is a double-edged sword as companies face business pressure to increase service levels while balancing B2B convergence efforts. If you want to succeed in inventory management, don’t fall into the trap where you think increased service levels means increased supply—inventory optimization offers a practical middle ground.
Inventory Optimization Mitigates the Classic Dilemma
With inventory optimization, supply chain managers can right-size their inventory to balance the tradeoffs between just-in-time and just-in-case strategies. Rather than dealing with headaches from pressure to improve service levels while maintaining/increasing gross profit margins by reducing inventory costs, supply chain managers can achieve new inventory process capabilities:
- Determine safety stock targets for inventory at critical nodes in the supply chain
- Measurement of customer service levels during the execution phase
- Ability to replenish inventory into distribution buffers based on customer demand
- Availability of end-to-end inventory data for performing inventory management functions
Specifically, inventory optimization achieves visibility on the demand side that supply chain managers can’t gain manually. Through operation at the SKU level, an inventory optimization solution can normalize the variability of demand to set safe levels of inventory — the middle ground between just-in-time supply and just-in-case stocking.
While not every best-in-class organization has implemented inventory optimization, there is a direct relationship between implementing inventory optimization and succeeding in balancing service levels with supply concerns.
If you want to learn more about how best-in-class organizations solve the classic supply chain dilemma, download our free white paper, Inventory Optimization: Juggling the Tradeoffs Between Service Levels and Inventory.