Companies love Just in Time supply chains: Minimal inventory counts, low cost of capital and the ability to match receivables to payables are just some of the benefits of a pull strategy whose primary goal is to reduce inventories within the value stream. So, does that mean JIT doesn’t need a safety stock?
Answering that aforementioned question comes down to understanding exactly how this pull strategy works. At its core, it’s a lean manufacturing principle that espouses minimizing "waste". That waste is defined by excess inventories, or stock counts that are not needed in order to support current demand.
Understanding Internal and External Demand
For whatever reason, JIT has been linked with the premise that a company only carries what it needs to sell – no more, no less. However, the pull process doesn't just account for customer demand: It must also account for the demand within the value stream. This demand is defined by the individual operations that are needed in order to produce finished goods.
Each operation in the value stream must account for its standard inventory counts: This inventory is needed in order to make sure that the next operation in the process isn’t left idle because of a lack of parts or materials. In essence, demand is defined by downstream customers within the value stream, and external customers purchasing finished goods.
When companies encounter increased demand for products, the pull process is seamless; inventory comes in and goes out immediately. This is why the assumption is made that a safety stock isn’t needed – when in fact, it’s often a critical portion of the JIT process.
Unfortunately, the companies that run this strategy best (automotive manufacturers) are ones that operate in linear markets. Companies emulating them are left with the idea that the pull process requires no buffer inventory, and that’s just not the case.
The Kan-Ban Process
The best way to understand the importance of safety stock within JIT is to review how a Kan-Ban manufacturing process works. In this case, work-in-process inventory is held in stasis waiting for customer demand. Once the finished goods count reaches zero, the internal demand within the value chain forces the previous operation to complete its assembly.
Each operation holds work-in-process inventory waiting to replenish the next chain in the process. This requires maintaining minimal inventory counts in order to make sure that the downstream operation is maintained.
The following diagram and video explain how work-in-process and semi-finished inventory is held in each individual operation waiting for customer demand on finished goods to pull requirements through the value stream.
The above video and image are taken from the post: Kan-Ban Manufacturing: Lean Strategies for Demand-Driven Industries
It is by no means an easy process. However, its success is entirely dependent upon having some just-in-case inventory. The idea that this pull system doesn’t require a safety stock isn’t just wrong – it’s completely wrong. Maintaining a buffer stock is critical to making sure your company has the ability to react to sudden increases in customer demand. The reality is that very few companies operate in linear markets, which makes running this strategy fairly difficult.
In the end, inventory is best defined by two cost drivers: There are costs of holding inventory during low demand and there are costs of not having inventory in high demand. One is measured by carrying charges and the other is measured by lost sales, lost profit, lost customers and lost market share. Regardless of what strategy you run, maintaining a safety stock is likely your best option.
To learn about the strategies described above, please go to: Determining Safety Stock & its Impact on Inventory Holding Costs