For the most part, small businesses should avoid trying to run Just-in-Time (JIT) or Dell's Push-Pull. I’ve yet to meet a small business who could truly make JIT work the way it was intended. Now, I’ve heard many a small business owner say it works for them, but upon further inspection, it’s always been shown that it doesn’t. When a business says something “works”, it’s always relative to what they don’t see. Once they’re exposed to what it costs them to run this kind of supply chain strategy, this definition of it "working" goes right out the window.
What is JIT & Dell’s Push-Pull?
The idea behind Just-in-Time and Push-Pull is that companies are able to reduce their inventory costs by only using or purchasing what they’re guaranteed to ship or use themselves within a given period – typically a week or month. If these companies can only bring in what they need in a given month, and use it in that same month, then their monthly inventory costs will be reduced.
Ultimately, the purpose is for the company to pay its own vendors & suppliers around the same time it will be paid by its own customers. In this sense, the company is invoiced by its supplier but then invoices its own customer in the same month. This helps to better manage cash flow. Without inventory being held, the company’s inventory cost of ownership is reduced and it has more remaining capital for other business obligations. That’s the premise. Now, here’s why it doesn’t work for small businesses and why most should avoid this approach altogether.
Small Businesses Lack Purchasing Power & Economies of Scale
In order for JIT to work, the company must have considerable purchasing power and strong economies of scale. They must be their suppliers’ number one priority and as such, must be able to rely upon their suppliers retaining inventory only for them. In this sense, JIT works for large companies because they have the ability and clout to make it work. They reduce their purchasing costs by imparting their will on their suppliers. They dictate pricing by using their large volumes.
Ultimately, large companies can make JIT work because they have guaranteed contractual supply agreements in place. Small businesses typically have infrequent demand patterns and low volumes and are almost never their suppliers’ number one priority. In essence, small businesses are typically at the end of the line in terms of priorities – regardless of what their suppliers say.
Small Businesses Lack the Product Volumes
Companies that run Just-in-Time and Push-Pull not only have strong economies of scale, but they also have large demand spread across a small product line. So, their purchasing power is high with their suppliers not only because of the value of the business they provide, but because of the sheer volume of common parts they order.
Automotive manufacturers run Just-in-Time. They have 5 or 10 car lines but sell millions of those cars by focusing entirely on a fixed bill of materials. They require millions upon millions of common parts in manufacturing. JIT works for these companies because of the high volumes of common raw materials and parts they need.
Businesses with large product portfolios have a hard time making this supply chain strategy work. While they may have considerable business to offer, their demand with suppliers is fractured along multiple requirements for different parts and materials across a long list of products.
Small Businesses Don’t Have Linear Demand
JIT works because it relies upon a company’s ability to secure constant and linear demand. Companies that are successful running this inventory management approach are required to ship product daily, weekly and monthly. In some cases such as Dell, they ship product on the hour. This is the essence of linear demand. It’s constant and almost never seems to end.
Orders come in continually and product ships out. The reason why this supply chain strategy works is because the company’s orders force it not to hold inventory for extended periods. Most small businesses have cyclical and infrequent demand. While they may have periods of high demand, inevitably that demand declines and they’re left holding inventory.
Lower Volume = Higher Costs
When small businesses try to make JIT work, they invariably encounter the issue of lower volume equating to higher raw material, parts and per-unit freight costs. Essentially, because of their small product lines and small demand for those lines, they purchase only what they need to fulfill their current orders. Purchasing a lower volume always correlates to higher prices and higher per-unit freight costs on incoming parts.
Freight costs on parts are an extremely important aspect of a company’s inventory cost of ownership. So, while the small business may be making JIT “work”, all they’re doing is limiting their own purchasing power by not purchasing enough to lower their prices on parts and lower their per-unit freight costs.
When it comes to small business inventory, be sure to concentrate on matching your company’s approach to your business model. In every instance that I’ve come across a small business running JIT, I’ve exposed a myriad of high costs relative to the costs of parts and materials, and incoming freight costs.
In a number of instances, I’ve been able to capture high expedited freight costs when the small business had to rush parts and materials in to service customers, simply because they didn’t have the inventory. No inventory management approach is without costs, but small businesses are best to stay away from JIT.
Special Note: While Dell's Push Pull & JIT approaches to inventory management aren't ideally suited to small businesses, manufacturers can benefit from a portion of Dell's supply chain strategies. To read an updated post, please refer to Small Manufacturers Can Use Dell’s Push-Pull Supply Chain Strategy. This post includes the video below.
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