Do you rely too much on outside influences when it comes to assessing your supply chain’s effectiveness? Do you rely too much on what you’ve read, too much on what you’ve heard, or too much on the insight of new employees, ones who claim that what worked in their previous company, should easily work for yours? One of the problems of being a business owner is that you rarely, if ever, have the time to perform a thorough analysis on how best to run your day-to-day operations, your supply chain, or to ensure that your strategies match the needs of your market, your business cycles and most importantly, your business model.
Supply chain issues often come down to a company adopting a doctrine that is contradictory to their own needs, and a strategy that is outside the realm of their own operational capacities. Why does this happen? Because too many companies rely upon outside influences, ones that lead them to pursuing an inventory management doctrine that doesn’t reduce the two main costs of inventory; carrying costs and lost sales. In fact, most companies think that inventory only costs money when you hold it without sales. Very few understand that low inventory is equally as expensive. After all, low inventory equates to stock outs and lost sales.
Both of these aforementioned cost drivers are affected differently by the type of inventory strategy your company adopts. However, no decision should ever be made until you’ve clearly distinguished what your market needs. This is ultimately where most companies fail. They make assumptions, not factual assertions, about what their customers need and how best to give it to them.
Understand Your Operational Capabilities
There are a number of resources on this site that provide guidance on how best to run JIT, Min Max or even Dell’s Push-Pull. However, each of these inventory strategies must be matched to your company’s business model, not vice-versa. If your model isn’t conducive to a philosophy, then nothing you do will make it work. It just won’t.
For instance, if your company operates in an industry that has cyclical and seasonal demand patterns, and one where maintaining a safety stock is the surest way to close sales, then running “Just in Time” simply doesn’t make any sense, no matter how well it works for other enterprises in other industries. Or, if you have a vast product line, manufacture custom-made parts, and or sell to customers in and “after-sales service market”, then JIT isn’t a good fit. Just in Time requires that your company be your vendor’s priority at all times. It requires a purchasing power that allows you to dictate when and how shipments will be received. It forces your suppliers to enter into contractual supply agreements, ones that allow you to decide when product is shipped, and in some cases invoiced – see consignment inventory. Most importantly, it requires that your suppliers are all in close proximity to your physical location and that the turnaround time on deliveries is minimal. Automotive manufacturers run JIT. Why? Because automotive manufacturers have a small product line (5 cars), but, they have huge volumes across those lines. They have a fixed bill of materials and never deviate from what they manufacture. Their goal is to increase production throughput, or to match that throughput to existing demand.
The above video is from the post: Choose the Right Supply Chain Strategy: Make it an Easy Choice
Companies with a large product offering, and ones that are unsure of exactly when an order will be received, are companies that must maintain a safety stock in order to close on opportunistic deals. Any company in this situation can not possibly make JIT work. They’ll try, but once you review your inventory costs, it simply doesn’t add up. Do go with what you’ve read. Don’t go with what someone has seen work in another industry. Try to ignore outside influences. Instead, start by defining your market, your customers and your company’s structure. Next, define your inventory costs. Are you holding inventory for too long before making sales, or are you losing sales because you don’t have enough inventory?
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