Just-In-Time In 2024
AUTHOR
Deana Claessen
Content Manager
This article deep dives into why the entire JIT operating model can only be feasible in 2024 with better purchase order management.
We hope to show management teams are left with 2 major options in responding to the increased supply volatility
Change their entire operating model, sourcing strategy and inventory model which will reconfigure their balance sheets to an unfavourable just-in-case position
Adopt better purchase order management capabilities to gain visibility, control and early risk detection capabilities whilst keeping lean inventory
Summary
Just-in-Time Efficiency: For over five decades, Just-in-Time (JIT) operating models have optimized efficiency in manufacturing supply chains and reduced costs by over 35% (click here). While always carrying inherent risk due to minimal buffers and tight deadlines, these vulnerabilities of JIT remained largely unexposed in the past.
New World Disruptions: The advent of a more volatile, uncertain, complex, and ambiguous (VUCA) global trade environment has intensified supply chain disruptions, exposing the vulnerabilities of JIT. Executives face the challenge of weighing the cost-efficiency yet fragility of JIT against the stability but cost-inefficiency of Just-in-Case (JIC) models.
Just-In-Case Stability: In contrast to JIT, Just in case (JIC) operating models seek to guarantee continuous operations by holding larger inventories to handle unexpected disruptions. This operating model comes at significant costs including; inventory holding, interest payments, transportation and most critically, tied up working capital.
Financial Pressure: In 2023, supply chain leadership is under pressure from CFOs to maintain cost-efficiency. Carrying significantly larger inventory (Just-in-Case) is financially unviable for most companies. Therefore, Just-in-Time is the only feasible option BUT companies must simultaneously build advanced supply chain visibility and stringent risk management capabilities to counter the increased frequency of supply disruptions and sustain JIT in 2023.
Purchase Order Management: Companies cannot afford weak inbound order manager capabilities as this disrupts the entire JIT model. Kavida’s Purchase order management system therefore becomes critical for sustaining JIT operations with lean inventory as it provides complete visibility of inbound orders, early alerts for risk detection and automation.– all without impacting the balance sheets like a just-in-case strategy would.
The Problem: JIT is Efficient by Vulnerable
What is the JIT operating model
Just-In-Time (JIT) is an inventory management model focused on ordering and producing goods only as needed, which minimizes costs and waste.
Its wide adoption can be attributed to its ability to keep inventory levels low, which in turn leads to better balance sheets and less tied up working capital, crucial benefits that enhance financial stability and operational efficiency of businesses.
Costs avoided by JIT
Cost Avoided | Why |
Holding Costs | Reduced due to lower inventory levels. |
Obsolescence Costs | Minimized as inventory is fresher. |
Ordering Costs: | Often lower due to streamlined processes. |
Storage Space Costs: | Reduced need for storage space. |
Insurance Costs: | Lower inventory values lead to lower insurance costs |
Loss Due to Depreciation: | Minimized as goods aren’t held long. |
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The Cost of Just in Time
Profits lost due JIT
However, operating with a Just-In-Time (JIT) model increases risk due to its dependency on timely delivery, making it vulnerable to supply chain disruptions. These disruptions have increased in both frequency and severity since the pandemic leading to 87% of supply chain leaders planning to invest in resilience within the next 2 years (CLICK HERE)
A study by Mckinsey reveals that the impact with companies expected to lose 42% of a firm’s Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) every decade due to JIT operations in the new volatility supply environment.
Revenue lost due to JIT – insert 3 setences of the top line impact of JIT
New Volatile Supply Environment Is Exposing JITs Vulnerabilities
Supply chain disruptions have escalated in both frequency and severity due to various factors such as geopolitical tensions, natural disasters, and pandemic-induced challenges.
This operating environment is now characterized by VUCA (Volatility, Uncertainty, Complexity, and Ambiguity), demanding a more agile and robust approach to supply chain management to navigate the unpredictable landscape.
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Options Available: Balancing JIT with JIC
The new volatile supply environment is forcing procurement leaders to find the right balance between Just-In-Time (JIT) and Just-In-Case (JIC) strategies to ensure smooth while minimizing costs.
| Benefits | Costs |
Inventory Levels | Lower in JIT, reducing holding costs | Higher in JIC, increasing holding costs |
Working Capital | Frees up capital in JIT | Ties up JIC |
Supply Chain Flexibility | Higher in JIT with closer supplier ties | Lower in JIC due to bulk purchasing |
Risk Management | JIC provides buffer against disruptions | JIT is vulnerable to supply chain disruptions |
Just in Case Balance Sheet
Carrying significantly greater levels of inventory is not financially viable for most companies. Just-In-Case can negatively impact a company’s balance sheet through increased holding costs and tied-up capital, which may reduce cash flow and financial flexibility.
Inventory Holding Costs | Increased holding costs reduces net income |
Working Capital | Higher tied up capital in inventory |
Cash Flow | Reduced due to tied up capital |
Asset Value | Increased asset value due to high inventories |
Liability | Potential increases in liability |
Equity | May be affected due to changes in liability |
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“Better purchase order management is the only way lean inventory strategies can work in 20203. Procurement needs greater visibility and control to remaining financially competitive”
Alex Hardwick
Head of Procurement
Benefit 1: Complete visibility of production status of orders to increase flexibility and capacity for mitigation decisions
Benefit 2: Complete visibility of logistics
Benefit 2: Complete visibility of logistics
AUTHOR
Deana Claessen
Content Manager
Resources
Business Case
Improving Customer Satisfaction
Business Case
Reducing the cost of disruptions
Business Case
ROI of Using Kavida
